BCAJ | Bombay Chartered Accountant Journal

Service Tax

I. TRIBUNAL

7 Interface Communication Pvt. Ltd. vs. Commissioner of CGST [2021-TIOL-708-CESTAT-Mum] Date of order: 25th October, 2021

Without any allegation of fraud, suppression, wilful misstatement, collusion, suppression or contravention of facts with an intention to evade payment of tax, longer period of limitation cannot be invoked

FACTS
The assessee is in appeal against the order of the Commissioner (Appeals) wherein interest was confirmed on delayed payment of service tax through CENVAT Credit Account. Interest is proposed to be levied for the period from October, 2006 to September, 2010 and the notice was issued on 19th March, 2012, during which period the Department was only empowered to demand tax due for a period of one year unless there is allegation of fraud, misrepresentation, collusion, misstatement, suppression of fact or contravention of the provisions of the Finance Act, and is made with a proposal for penalty u/s 78 of the Finance Act, 1994.

HELD
The Tribunal primarily noted that there is no allegation of wilful withholding of payment of service tax on any of the grounds of suppression, fraud or contravention of provisions of the Act. There is no requirement to give a finding that u/s 75 of the Finance Act interest is a natural corollary and consequence for any default of payment of service tax within the stipulated time. On the contrary, the tax liability or its interest component can never be enforced and recovered from the assessee beyond the period from one year without any allegation of wilful non-payment on the ground of fraud, misstatement or collusion. The appeal was accordingly allowed.

8 M/s Terex India Pvt. Ltd. vs. The Commissioner of GST&CE [2021-TIOL-696-CESTAT-Mad] Date of order: 11th October, 2021

Payment of tax under reverse charge on pointing out by the audit officers cannot be considered as payment consequent to assessment / adjudication proceedings – Input tax credit / refund is allowed of the said tax payment

FACTS
On four dates, viz., 11th, 12th, 21st and 22nd December, 2012, the appellant had received services from its parent company in the USA. It appeared that the appellant is liable to pay service tax on the amount paid to the parent company under Reverse Charge Mechanism. It paid the service tax with interest and applied for a refund. The original authority rejected the refund claim holding that as per section 142(8)(a) of the CGST Act, 2017 credit is not admissible and therefore not eligible for refund
in cash.

HELD
The Tribunal noted that the Department has considered the said payment as consequent to assessment / adjudication proceedings and as recovery of arrears of tax not eligible for ITC / refund. However, as the said payment is made on pointing out by the audit officers, such payment does not fall under the category of arrears of tax by an assessment / adjudication proceeding. The claim is only for refund and not proceedings for assessment or adjudication. In this scenario, rejection of refund is unjustified and the impugned order is set aside.

9 Pradeep Deviah and Associates Pvt. Ltd. vs. Commissioner of Central Tax, Bengaluru East [2021-TIOL-653-CESTAT-Bang] Date of order: 22nd March, 2021

Once proportionate credit is reversed as per Rule 6(3A) of the CENVAT Credit Rules, 2004, reversal of credit at 6% / 7% cannot be enforced

FACTS
The appellant is engaged in rendering both taxable and exempt services. The sale of space in print media is considered as an exempt service by the Department and therefore reversal of credit is sought. At the time of audit itself, they reversed proportionate common credit attributable to both taxable and exempt services. However, an SCN was issued for reversal of credit at 6% / 7% of the exempted turnover. Accordingly, the present appeal is filed.

HELD
The Tribunal primarily noted that the activity of sale of space or time for advertisement in print media is specifically covered under the negative list in terms of section 66D of the Finance Act, 1994 and therefore the same cannot be said to be an exempted service and the provisions of Rule 6(3) are not applicable to an activity which is in the negative list. It was also noted that proportionate credit is already reversed as per Rule 6(3A) of CCR, 2004, therefore, it was not incumbent on the Department to issue a show cause notice demanding reversal of 6% / 7% of the exempted turnover. The appeal is accordingly allowed.

10 Uttaranchal Cable Network vs. CCE&ST [2021] 132 taxmann.com 95 (New Delhi–CESTAT) Date of order: 13th October, 2021

The unutilised CENVAT credit as on 30th June, 2017 not carried forward into GST regime by filing TRAN-1 is permitted to be adjusted against the pre-GST demands as there is no bar in section 142 on the same

FACTS
The appellant was registered in the service tax regime for providing cable operator services; however, it did not carry forward the CENVAT credit balance as on 30th June, 2017 in the GST regime. A show cause notice was issued to the appellant for the pre-GST period u/s 73(1) of the Finance Act, 1994. The appellant did not contest the demand on merits but offered that the amount of CENVAT credit lying in its favour (credit) as on 30th June, 2017 may be allowed to be adjusted against the demand payable since it was not carried forward to GST in Form TRAN-01. The Adjudicating Authority disallowed such adjustment on the ground that credit account cannot be adjusted because CENVAT Credit Rules, 2004 are no longer applicable and that section 140 of the CGST Act read with Rule 117 of the CGST Rules specifically provides the procedure for carry-forward of CENVAT credit. If the appellant did not follow the same, the unutilised amount cannot be permitted to be adjusted. Aggrieved by this, the appellant filed the appeal.

HELD
The Tribunal held that there is no bar or disability u/s 140(1) read with section 142 of the CGST Act, 2017 on an assessee for claiming adjustment of the tax demand from the unutilised CENVAT credit (lying to the credit as on 30th June, 2017) which has not been carried forward to the GST regime and allowed the appeal directing the Adjudicating Authority to grant adjustment of the unutilised amount against the demand payable by the assessee.

11 Atul Ltd. vs. CCE&ST [2021] 132 taxmann.com 165 (Ahm-CESTAT) Date of order: 9th November, 2021]

The assessee is entitled to refund of Education Cess and Higher Education Cess lying unutilised as on 30th June, 2017 as the said cess is ‘cenvatable’ in terms of Notification No. 12/2015 dated 30th April, 2015 and section 142 of the CGST Act provides a refund for the same

FACTS
The assessee claimed refund of Education Cess and Higher Secondary Education Cess as was in the balance as on 28th February, 2015 and carried forward till 30th June, 2017 by an application dated 5th February, 2018. The said refund was rejected on the grounds that once the amount stands lapsed, the question of its refund even under the provisions of the CGST Act does not arise.

HELD
The Tribunal noted that these cesses were leviable up to 28th April, 2015. However, with effect from 1st March, 2015, EC and SHEC paid on imports of capital goods received in the factory of the manufacturer of the final product on or after 1st March, 2015 were permitted to be utilised for payment of duty of excise leviable. Similarly, by Notification No. 12/2015 dated 30th April, 2015 the assessee was permitted to utilise the credit of EC and SHEC for payment of duty of excise for such inputs or capital goods received after 1st March, 2015. It also noted that the said refund in question would not have been allowed to be claimed in TRAN-1 for want of any column in the requisite form to carry forward the balance of such cess and the Department in its verification report also stated the same. The Tribunal also observed that the refund is claimed in time and there is no unjust enrichment. It held that EC and SHEC were ‘cenvatable’, the credit whereof was allowed even for such inputs and capital goods which were received by the manufacturer even after 1st March, 2015. The appellant had accumulated credit of EC and SHES which could not be utilised till 30th June, 2017. The unutilised amount is the assessee’s money and accordingly has to be refunded to it.

Referring to the decision of the Supreme Court in the case of Eicher Motors Ltd. vs. Union of India, 1999 taxmann.com 1769 (SC) it was held that right to credit becomes vested and duly crystallised in favour of the assessee the moment input goods / services are received and by virtue of assessee paying the duty thereon by reimbursing the said amount to the supplier of the goods. The Tribunal set aside the order of the Adjudicating Authority on the ground that he has made a wrong interpretation of Notification No. 12/2015 that such EC and SHEC could not be utilised for payment of excise duty despite the specific permission for the same in the said Notification and the subsequent amendment in CENVAT Credit Rules in 2015 permitting the utilisation of credit on cess. The Tribunal further noted that with effect from 1st July, 2017 with the introduction of GST, the utilisation of the said credit became impossible. However, in terms of section 142 of the said new Act, the amount is made refundable to the appellant in cash. Accordingly, the appeal was allowed.

BCAJ Admin

GOODS AND SERVICES TAX (GST)

I. SUPREME COURT

18 Union of India vs. Bharti Airtel Ltd. and Ors. [2021-TIOL-251-SC-GST] Date of order: 28th October, 2021

Assessee cannot be permitted to unilaterally carry out rectification of his returns submitted electronically in Form GSTR3B – Matching and correction process happens on its own as per the mechanism specified in sections 37 and 38 – Once the return is submitted, any changes thereto will have a cascading effect and therefore rectification of errors and omissions have to be done as per the scheme of the law only

FACTS
The assessee alleged that there has been excess payment of taxes by way of cash due to non-operationalisation of Forms GSTR2A, GSTR2 and GSTR3 and the system related checks which could have forewarned about the mistake. Since there were no checks in the Form GSTR3B, the excess payment of tax went unnoticed; therefore, the petitioner desired to correct its returns, but is being prevented from doing so as there is no enabling statutory procedure implemented by the Government. The Delhi High Court held that the benefit of rectification cannot be denied due to the fault of the Government in not developing the relevant infrastructure. The facility of Form GSTR2A was not available prior to 2018 and as such the scheme envisaged was not implemented during the period from July to September, 2017. The Court accordingly held that the assessee has a substantive right to rectify / adjust the input tax credit (ITC) for the period to which it relates and the correction in the subsequent return when the error is noticed is against the scheme of the Act. The Revenue is in appeal against this order.

HELD
The Court primarily noted that there is no provision in law regarding refund of surplus or excess ITC in the electronic credit ledger. An assessee who has discharged liability by paying cash cannot later on ask for swapping of the entries, so as to show the corresponding output tax liability amount in the electronic cash ledger from where he can take refund on the ground of non-availability of the relevant infrastructure. Form GSTR2A is only a facilitator for taking an informed decision while doing self-assessment. Non-performance or non-operability of Form GSTR2A, or for that matter other forms, will be of no avail because the dispensation stipulated at the relevant time obliged the registered person to submit returns on the basis of such self-assessment in Form GSTR3B manually on the electronic platform. The Court held that there is no denial of ITC and it is only postponement of availment of credit. The credit can be availed in the next return, including the return of September of the next financial year. Further rectification of a particular month’s return would not only be an illegality but in reality would simply lead to a chaotic situation and collapse of the tax administration of the Union, States and Union Territories. The appeal of the Revenue was accordingly allowed.

II. HIGH COURT

19 BMG Informatics (P) Ltd. vs. UOI [2021 130 taxmann.com 182 (Gau)] Date of order: 2nd September, 2021

Provisions of paragraph 3.2 of the Circular No. 135/05/2020-GST dated 31st March, 2020 providing that even though different tax rates may be attracted at different points of time, but the refund of the accumulated unutilised tax credit being not available is contrary to section 54(3)(ii) of the CGST Act of 2017 and should be ignored – Refund will be available once the rates are different and result in accumulation of credit

FACTS
The assessee filed a refund claim u/s 54(3)(ii) of the CGST Act under inverted duty structure which was denied by the authorities on the ground that the amount of ITC claimed for refund was accumulated out of the trading activity where the input and output were the same; although in the assessee’s case output supplies attracted different tax rates depending upon the class of buyer, it would not get covered under the provisions of section 54(3)(ii). The Department also relied upon para 3.2 of the clarificatory Circular No. 135/05/2020-GST dated 31st March, 2020. On appeal, the First Appellate Authority decided the matter in favour of the assessee on the ground that the adjudicating authority has travelled beyond the show cause notice. Hence, the Department is before the High Court. At the same time, the assessee is before the High Court challenging para 3.2 of the said Circular.

HELD
The High Court observed that the clarifications incorporated by Circular No. 135/05/2020-GST dated 31st March, 2020 were made in exercise of the powers under section 168(1) of the CGST Act of 2017. It held that issuing orders, instructions or directions to bring in uniformity in the implementation of the Act and altering the particular provision of the Act itself would be two different acts and for the latter the Central Board of Indirect Tax and Customs had not been empowered under the provisions of section 168(1) of the CGST Act of 2017. Referring to paragraph 3.2 of the Circular No. 135/05/2020-GST dated 31st March, 2020, the Court held that the paragraph provides that although the input supplies and the output supplies may attract different tax rates at different points of time, such differences in the tax rates are not covered u/s 54(3)(ii) of the CGST Act of 2017. The Court held that a conjoint reading of the said paragraph with the provisions of the Act suggests that while section 54(3)(ii) provides that refund of unutilised ITC shall be allowed in cases where the credit has accumulated on account of the rate of tax on inputs being higher than the rate of tax on output supplies, on the other hand, the CBIC in their impugned Circular provides that such refunds will not be available in the event that the input supplies and the output supplies are the same, even though there may be a difference in the tax rates on the input supplies and the output supplies.

Hence, such declaration / provision / clarification by CBIC in para 3.2 appears to be in conflict and provides for the contrary to the provisions of section 54(3)(ii) of the CGST Act of 2017. In the facts of the instant case, the Court noted that the buyer availed specific partial exemption given under Notification No. 45/2017-GST (Rate) dated 14th November, 2017 and is neither a case of Nil rate nor is it a case of full exemption, hence, the refund provided u/s 54(3)(ii) would be applicable as there is difference between the rate of tax of input supplies and the rate of tax on output supplies and output supplies not being fully exempted or chargeable at Nil rate. The Court accordingly remanded the matter to the refund officer to decide the refund on the factual basis as regards the different rates of taxes on inputs and outputs in the present case.

20 Jyoti Construction vs. Deputy Commissioner of CT&GST [2021 131 taxmann.com 104 (Odi)] Date of order: 7th October, 2021

The Court held that it’s not permitted to use the amounts lying in electronic credit ledger for paying 10% pre-deposit u/s 106(7) of the CGST Act

FACTS
The writ petitions were filed challenging the order passed by the first Appellate Authority u/s 107(1) of the CGST Act rejecting the appeals filed by the assessee, holding that the appeals filed are defective since the petitioner had made payment of the pre-deposit, being 10% of the disputed amount under the IGST, CGST and SGST by debiting its electronic credit ledger and did not pay it from the electronic cash ledger and furnished the proof of payment of the mandatory pre-deposit, and that this was in contravention of section 49(3) of the OGST Act read with Rule 85(4) of the OGST Rules, 2017. The Department contended before the Court that u/s 49(4) of the OGST Act, the amount available in the electronic credit ledger could be used for making ‘any payment towards output tax’ under the OGST Act or the IGST Act ‘in such manner and subject to such conditions and within such time as may be prescribed’.

Under Rule 85 (4) of the OGST Rules, the amount deducted u/s 51 or collected u/s 52, or the amount payable on a reverse charge basis, or the amount payable u/s 10, or any amount payable towards interest, penalty, fee, or ‘any other amount under the Act’ shall be paid by debiting the electronic cash ledger maintained under Rule 87 and the electronic ledger liability register shall be credited accordingly. It was submitted that the pre-deposit cannot be equated to the output tax. It was further submitted that as per section 41(2) of the OGST Act, ITC can be utilised for payment of ‘self-assessed output tax as per the return’ and in no other cases can ITC credit be utilised to discharge any liability. The petitioner argued that section 107(6) of the CGST Act is a machinery provision and that it must be interpreted purposively to sub-serve the purpose of collecting the pre-deposit amount which could be done even by debiting the credit ledger.

HELD
The Court held that ‘output tax’ as defined u/s 2(82) of the OGST Act could be equated to the pre-deposit required to be made in terms of section 107(6) of the Act. The Court concurred with the interpretation placed by the Department that the proviso to section 41(2) of the Act limits the usage to which the credit ledger could be utilised and that it cannot be debited for making payment of pre-deposit at the time of filing of the appeal in terms of section 107(6) of the Act. The Court further held that it is not possible to accept the plea that section 107(6) of the OGST Act is merely a ‘machinery provision’.

Note: The author is of the view that section 41 only deals with utilisation of the ‘provisional ITC’ and hence section 41(2) cannot be interpreted as placing an absolute embargo on the manner in which the balance in the electronic credit ledger is to be utilised. Further, section 49(7) provides that ‘all liabilities’ of a taxable person under this Act shall be recorded and maintained in an electronic liability register in such manner as may be prescribed. Rule 85(1) provides that the electronic liability register specified under sub-section (7) of section 49 shall be maintained in Form GST PMT-01 for each person liable to pay tax, interest, penalty, late fee or ‘any other amount’ on the common portal and all amounts payable by him shall be debited to the said register. Rule 85(3) permits the payment of liability by debiting an electronic credit ledger. Note 5 of Form GST PMT-01 Part II clearly indicates that the said electronic liability ledger can also be used for depositing the amount of pre-deposit and hence provides for refund thereof. Hence, with great respect, it appears that the aforesaid decision needs reconsideration.

III. AUTHORITY FOR ADVANCE RULING

21 M/s Kamdhenu Agrochem Industries LLP [2021-TIOL-248-AAR-GST] Date of order: 2nd November, 2021 [AAR-Maharashtra]

Separate registration is not required in every State where the goods are imported for further supply delivered directly from the container freight station without being cleared for home consumption

FACTS
The applicant seeks to know whether it is required to obtain registration in importing States other than Maharashtra if goods are imported, sold and delivered directly from Container Freight Station / Direct Port Delivery which is under the Customs Boundaries to customers in those States.

HELD
The Authority noted that since the applicant will be selling the goods before clearing the same for home consumption from the port of import, the ‘place of supply’ shall be the place from where the applicant makes a taxable supply of goods which, in this case is the Maharashtra office. Hence, goods can be supplied on the basis of invoices issued by the Maharashtra office and, therefore, it need not take separate registration in importing States other than Maharashtra.

22 Kanahiya Realty Pvt. Ltd. [2021-TIOL-230-AAR-GST] Date of order: 30th September, 2021 [AAR-West Bengal]

Goods given under promotional schemes will be taxed at the rates applicable to such goods – Also, ITC cannot be denied on such goods sold for nominal prices

FACTS
Whether the supply of goods such as gold coins, refrigerator, mixer-grinder, cooler, split air conditioner, etc., at nominal price to retailers against purchase of specified units of hosiery goods pursuant to a promotional scheme would qualify as individual supplies taxable at the rates applicable to each of such goods as per section 9 of the Act, or mixed supply taxable at the highest GST rate as per section 2(74) read with section 8(b) of the Act, in light of the fact that the hosiery goods and goods being sold at nominal price are sold under separate invoices with separate prices? Whether credit of the input tax paid on the items being sold at nominal prices would be available?

HELD
The supply shall not fall under the category of ‘composite supply’ since supply of hosiery goods and goods under promotional scheme cannot be considered as naturally bundled and supplied in conjunction with each other in the ordinary course of business. Supply shall be levied at the rate of each such item as notified by the Government. Provision of providing said goods under the retail scheme Circular would undoubtedly qualify as an activity undertaken in the course or furtherance of business. In the present case, a nominal value shall be assigned to the goods under the promotional scheme. Since the said goods are not supplied free of cost but at a nominal value, therefore, it cannot be termed as ‘gift’; however, the value of the said goods shall be required to be determined as per the provisions of section 15 read with Rule 27 of the Rules, as price is not the sole consideration for the supply. The Authority accordingly held that supply of goods at nominal price to retailers against purchase of specified units of hosiery goods pursuant to a promotional scheme would qualify as individual supplies taxable at the rates applicable to each supply as per section 9 of the GST Act. ITC of tax paid on the items being sold at nominal prices would be available to the applicant.

BCAJ Admin

RECENT DEVELOPMENTS IN GST

I. NOTIFICATIONS

Changes in Rate of Tax

*Sr. No.*	*Notification No.*	*Indicative changes*
1.	13/2021-Central Tax (Rate) dated 27^th October, 2021 and 13/2021-Integrated Tax (Rate) dated 27^th October, 2021. Changes in rate of goods	Sr. No. 243 under Schedule II (12%) is removed. So there is no entry levying 12% tax on software. From entry 452P under Schedule III (18%) the words ‘in respect of Information Technology Software’ are deleted. Therefore, sale of all software becomes taxable at 18% from 27^th October, 2021
2. Notification Nos. 14 to 17 of 2021-Central Tax (Rate) have been issued on 18^th November, 2021, effecting change in rate of tax of certain items of goods as well as services. All such changes shall be effective from 1^stJanuary, 2022

Sr. No.

Notification No.

Indicative changes

13/2021-Central Tax (Rate) dated 27^th October, 2021
and 13/2021-Integrated Tax (Rate) dated

27^th October, 2021. Changes in rate of goods

Sr. No. 243 under Schedule II (12%) is removed. So there is no
entry levying 12% tax on software. From entry 452P under Schedule III (18%)
the words ‘in respect of Information Technology Software’ are deleted.
Therefore, sale of all software becomes taxable at 18% from 27^th
October, 2021

2. Notification Nos. 14 to 17 of 2021-Central Tax (Rate) have
been issued on 18^th November, 2021, effecting change in rate of
tax of certain items of goods as well as services. All such changes shall be
effective from 1^stJanuary, 2022

II. CIRCULARS

Clarification in respect of applicability of Dynamic Quick Response (QR) Code on B2C invoices and compliances of Notification 14/2020-Central Tax dated 21st March, 2020-Circular No. 165/21/2021-GST dated 17th November, 2021
The CBEC has issued Circular No. 156/20/2021 dated 21st June, 2021 clarifying various aspects relating to QR Code requirements. One of the issues clarified was about QR code on the invoices by supplier who receives payments from the recipient located outside India through RBI-approved modes of payment, but not in foreign exchange (para 4). There were further queries, too. Therefore, with the present Circular it is clarified that no Dynamic QR code is required on such invoices as such dynamic QR code cannot be used by the recipient located outside India for making payment to the supplier.

Clarification in respect of refund related issues – Circular No. 166/22/2021-GST dated 17th November, 2021
By the above Circular, clarifications regarding difficulties faced by the taxpayers in relation to getting refunds on excess balance in electronic cash ledger are given. The main issues clarified are:

(i)

Time limit for refund of excess balance in electronic cash
ledger

No time limit

(ii)

Whether certification for declaration under Rule 89(2)(l) or
89(2)(m) of CSTG Rules is required to be furnished?

(iii)

Whether refund for TDS / TCS deposited can be refunded as excess
balance in electronic cash ledger?

Excess balance on account of TDS / TCS can be refunded to
registered person as excess balance in electronic cash ledger in accordance
with proviso to section 54(1) read with section 49(6) of CGST Act

(iv)

In case of deemed export, whether date of return filed by the
supplier or date of return filed by the recipient will be relevant for the
purpose of determining the relevant date for such refund

Date of return filed by supplier

III. ADVANCE RULINGS

(A) Place of Supply – Immovable Property
M/s Sri Avantika Contracts (I) Ltd. (Order No. A.R. Com/18/2018 dated 5th August, 2021 and TSAAR Order No. 05 /2021)(Telangana)
In this application, an issue about place of supply in relation to construction of immovable property was involved.

The applicant secured a contract from the National Buildings Construction Corporation Limited (NBCCL), Delhi for constructing a building at Addu City, Maldives. It is the understanding of the applicant that the recipient of construction service is the Government of Maldives, as the institute building is being constructed as part of assistance from the Government of India to the Government of Maldives. It was submitted by the applicant that the supply of services is taxable only within the territory of India and since the supply of his services will be outside India, it will not constitute taxable supply.

Given the above facts, the following questions were raised before the AAR:
‘1. Whether the construction of the Institute of Security and Law Enforcement Studies at Addu City in Maldives, constructed for the Government of Maldives under a Memorandum of Understanding between India and Maldives falls within the GST net?
2. Who is the recipient of service in the instant case?
3. What is the place of supply in respect of the works contract for setting up of the Institute of Security and Law Enforcement Studies at Addu City in Maldives?’

In the personal hearing, the position was reiterated that the activity of the applicant is works contract and hence service. It was further argued that though the contract has been awarded by NBCCL, as per the MOU the Institute is being constructed on behalf of the Government of India as part of assistance to the Government of Maldives towards the social and economic development of Maldives. Therefore, it was canvassed that the recipient of service in this case is the Government of Maldives and NBCCL is the executing body which has sub-contracted the subject work to the applicant.

Therefore, the contention was that the supply is rendered by the applicant in respect of immovable property located in Maldives to the Maldives Government and not liable to tax under GST in India.

The learned AAR considered the submissions and observed that the Government of the Republic of India and the Government of Maldives entered into an MOU for construction of a Police Academy. As per this MOU, the Government of India awarded the work relating to planning, designing and execution of the project to NBCCL, New Delhi. The applicant was in turn awarded the sub-contract to construct the said building by NBCCL.

Therefore, the AAR observed that the applicant has not entered into any contract with the Government of Maldives for carrying out the said construction, nor do they have any privity with respect to the MOU between the Governments of India and of Maldives. Accordingly, it held that the applicant does not have any mutual or successive relationship with the Government of Maldives and therefore the Government of Maldives is not the recipient of any service from the applicant.

In simple terms, the applicant is a provider of services to NBCCL which is the recipient of the service.

The AAR held that since both the applicant, who is the supplier of service, and NBCCL, which is the recipient of service, are located in India, the place of supply is to be determined u/s 12 of the IGST Act. The proviso to sub-section (3) of section 12 of the IGST Act clearly mentions that if the location of immovable property is intended to be outside India, the place of supply shall be the location of the recipient.

In view of above, the issues raised are answered as under:

*Question Raised*	*Advance Ruling Issued*
1. Whether the construction of Institute of Security and Law Enforcement studies at Addu City in Maldives, constructed for the Government of Maldives under an MOU between India and Maldives falls within the GST net?	The place of supply shall be the location of the recipient, i.e., within India and therefore the supply by the applicant to the NBCCL is within the ambit of GST
2. Who is the recipient of service in the instant case?	National Buildings Construction Corporation Limited is the recipient of service from the applicant
3. What is the place of supply in respect of the works contract for setting up of the Institute of Security and Law Enforcement Studies at Addu City in Maldives?	As per the proviso to sub-section (3) of section 12 of the IGST Act, the place of supply shall be the location of the recipient, i.e., NBCCL

Question Raised

Advance Ruling Issued

1. Whether the construction of Institute of Security and Law
Enforcement studies at Addu City in Maldives, constructed for the Government
of Maldives under an MOU between India and Maldives falls within the GST net?

The place of supply shall be the location of the recipient,
i.e., within India and therefore the supply by the applicant to the NBCCL is
within the ambit of GST

2. Who is the recipient of service in the instant case?

National Buildings Construction Corporation Limited is the
recipient of service from the applicant

3. What is the place of supply in respect of the works contract
for setting up of the Institute of Security and Law Enforcement Studies at
Addu City in Maldives?

As per the proviso to sub-section (3) of section 12 of
the IGST Act, the place of supply shall be the location of the recipient,
i.e., NBCCL

(B) Scope of Advance Ruling, Government Entity
M/s National Institute of Technology, Tiruchirappalli (Order No. 22/AAR/2021 dated 18th June, 2021)(Tamil Nadu)
The applicant was started as a joint co-operative venture of the Government of India and the Government of Tamil Nadu in 1964. Subsequently, it came to be covered by the National Institution of Technology Act, 2017.

The applicant procured services like pure labour and composite services and it framed the following questions before the AAR:

‘1. Whether National Institute of Technology, Tiruchirappalli (NITT) is a Government Entity under GST Law?
2.   If the answer to the question is in the affirmative, whether
   a. The applicant is liable to deduct tax at source (TDS) u/s 51 of the CGST Act, 2017?
   b. Whether the applicant is required to discharge liability on reverse charge basis on supply of services as per section 9(3) and 9(4) of the CGST Act, 2017?
3.    Whether the entry provided under
   A. Sl. No. 3, 3A of Notification 12/2017 is applicable to them,
   B. Composite supply of works contract provided to the applicant is covered by Sl. No. 3(vi) of Notification 11/2017 dated 28th June, 2017’

The AAR referred to the scope of the Advance Ruling provisions and observed that the recipient cannot seek ruling about exemption available to the supplier. However, to the extent whether the recipient is liable to RCM, the ruling can be sought.

The AAR justified above maintaining of AR in relation to RCM on the premises that the recipient liable to RCM is deemed to be in the capacity of supplier and hence the ruling can be sought as supplier. Further, the scope will be whether RCM liability falls on applicant as per section 9(3). Therefore, questions at 3 (A&B) held non-maintainable.

Regarding the other questions, the AAR considered the position on merits. In respect of the question as to whether the applicant is a Government Entity, the AAR referred to the background of the existence of the applicant. He also referred to the AR of Uttarakhand in the case of IT Development Agency (2018-VIL-79-AAR) in which a similar issue is considered.

The AAR noted that the applicant has sought a ruling whether NITT is a Government Entity under the GST law. It had submitted that they are a Government Entity inasmuch as the NITT was started as a joint and co-operative venture of the Government of India and the Government of Tamil Nadu in 1964 with a view to cater to the needs of manpower in technology for the country; they were subsequently covered under the Schedule of the National Institute of Technology Act, 2007 and it was declared as an Institution of National Importance; that NITT is under the direct supervision and control of the Ministry of Human Resources Development of India and the Board of Governors is constituted by the HRD Ministry; that the corpus fund of the Institute (akin to share capital in case of a body corporate) was initially provided by the Government of India by way of grants and it is stipulated in the Act that every institute shall maintain a fund to which shall be credited all moneys provided by the Central Government; that their accounts be audited by the Comptroller & Auditor-General of India. The applicant also submitted a copy of Gazette No. 34 dated 6th June, 2007 publishing the National Institute of Technology Act, 2007. It was also noted that the term Government Entity has been defined in Notification No. 32/2017-Central Tax (Rate) dated 13th October, 2017 as follows:

‘[(zfa) “Government Entity” means an authority or a board or any other body including a society, trust, corporation, (i) set up by an Act of Parliament or State Legislature; or (ii) established by any Government, with 90 per cent or more participation by way of equity or control, to carry out a function entrusted by the Central Government, State Government, Union Territory or a local authority.’

From the submissions of the applicant, it noted that the applicant institute was originally established in 1964 as a society registered with the Registrar of Societies, Tamil Nadu. Subsequently, it was covered under the NIT Act, 2007. It was also found that various authorities in NITT are from the Government, including Ministers.

It is also found that it fulfils the requirement of more than 90% financial participation from the Central or State Government. Accordingly, the applicant is held as a Government Entity by the AAR.

Regarding liability of RCM, the AAR referred to section 9(3) which reads as under:

‘9(3) The Government may, on the recommendations of the Council, by notification, specify categories of supply of goods or services or both, the tax on which shall be paid on reverse charge basis by the recipient of such goods or services or both and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both?

Since the applicant is a registered person, the AAR held that the provision of section 9(3) applies to it. He also referred to Notification No. 13/2017 dated 28th June, 2017 by which the class of persons liable to RCM is notified.

Serial No. 14 is particularly reproduced in the AR which is as under:

*Sr. No.*	*Category of Supply of Services*	*Supplier of Service*	*Recipient of Service*
14.	Security services (services provided by way of supply of security personnel) provided to a registered person: Provided that nothing contained in this entry shall apply to, (i)(a) a Department or Establishment of the Central Government or State Government or Union Territory: or (b) local authority; or (c) Governmental agencies which have taken registration under the Central Goods and Services Tax Act, 2017 (12 of 2017) only for the purpose of deducting tax u/s 51 of the said Act and not for making a taxable supply of goods or services; or (ii) a registered person paying tax u/s 10 of the said Act	Any person other than a body corporate	A registered person, located in the taxable territory

Sr. No.

Category of Supply of Services

Supplier of Service

Recipient of Service

14.

Security services (services provided by way of supply of
security personnel) provided to a registered person: Provided that nothing
contained in this entry shall apply to,

(i)(a) a Department or Establishment of the Central Government
or State Government or Union Territory: or

(b) local authority; or

which have taken registration under the Central Goods and
Services Tax Act, 2017 (12 of 2017) only for the purpose of deducting tax u/s
51 of the said Act and not for making a taxable supply of goods or services;
or

(ii) a registered person paying tax u/s 10 of the said Act

Any person other than a body corporate

A registered person, located in the taxable territory

On the facts, the AAR found that the security service is obtained from a body corporate, hence it held that the applicant is not liable to RCM in respect of such receipt of services.

In respect of legal services, by referring to Sl. No. 2 in the above Notification 13/2017, the AAR held that on the fees paid to the Advocate, the RCM liability accrues.

There is also online import of educational journals. Regarding RCM on such imports, the AAR held that if such import is of educational nature, no RCM would apply in view of Notification No. 2/2018-Integrated Tax (Rate) dated 25th January, 2018. However, if the nature of import is non-educational, then RCM will apply, the AAR held.

(C) Classification – Electronically-Operated Vehicles
M/s Anjali Enterprises (Order No. 01/Odisha-AAR/2021-2022 dated 15th April, 2021)
The applicant is a dealer in battery-powered electric two-wheelers. It purchases vehicles from M/s Omjay Eeve Ltd., Badchana under the brand name ‘EEVE’. During transportation, the batteries are not fitted with the vehicle though they are transported together.

It also manufactures a similar battery-powered electric vehicle. When the vehicles are sold to dealers, batteries are not fitted in the vehicles but given separately. Only when the dealer sells to the ultimate customer is the battery fitted and delivered to the customer. The applicant wants to know whether its sale without the battery fitted in vehicles will still be considered as sale of electrically-operated vehicle to get the benefit of the lower rate.

Electrically-operated vehicles, including two- and three-wheeled electric vehicles falling under Chapter 87, are taxable @ 5% as per Sl. No. 242A of Notification No. 1/2017-Central Tax (Rate) dated 30th June, 2017 as amended from time to time. The entry defines electrically-operated vehicles as ‘vehicles which are run solely on electrical energy derived from an external source or from one or more electrical batteries fitted to such road vehicles and shall include E-bicycles’.

It was strongly submitted that the vehicles were fulfilling all criteria and hence were duly covered by the above entry.

It was explained that though a sale of a vehicle running on fuel is done with an empty tank, it does not change the nature of the goods supplied and it remains a vehicle. If the vehicle in the case of the applicant is supplied without battery (i.e., without fuel), the nature of the goods is still ‘vehicle’. It was added that for vehicles to be classified as electrically-operated vehicles these must be such that they run solely on electrical energy derived from one or more electrical batteries, as and when put to use. The applicant argued that fitting of battery in the vehicle, at or before the time of supply, is not a precondition for the same to be classified as an electrically-operated vehicle.

The applicant relied upon the judgment of Reva Electric Car Company Pvt. Ltd. [2012 (275) ELT 488 (G.O.I.)]. The Revenue relied upon the AR in the case of Hooghly Motors (P) Ltd. (2020-VIL-235-AAR)(WB).

The AAR referred to the question posed, i.e., ‘Whether fitting of battery is mandatory in two- and three-wheeled battery-powered electric vehicles while selling the same to the dealers for getting the benefit of 5% GST rate applicable for electrically-operated vehicles?’

Though contrary judgments were cited, the AAR observed as under:

‘Before taking a final opinion, we need to go through the definition of “electrically-operated vehicle”. The Explanation to Entry No. 242A of Schedule 1 to Notification No. 01/2017-Central Tax (Rate), dated 28th June, 2017 as amended from time to time defines the term “electrically-operated vehicle” to mean “vehicles which run solely on electrical energy derived from an external source or from one or more electrical batteries fitted to such road vehicles and shall include e-bicycles’. This means it is a type of electric vehicle (EV) that exclusively uses chemical energy stored in rechargeable battery packs, with no secondary source of propulsion (e.g., hydrogen fuel cell, internal combustion engine, etc.). An electric vehicle with battery pack uses electric motors and motor controllers instead of internal combustion engines (ICEs) for propulsion. It derives all power from battery packs and thus has no internal combustion engine, etc. Electrically-operated vehicles are designed to run only on electrical energy. As such, they will run on battery as and when put to use. Hence, for vehicles to be classified as electrically-operated vehicles they must be such that they would run solely on electrical energy derived from one or more electrical batteries, as and when put to use.’

Further, relying on Reva Electric Car Company Pvt. Ltd. reported in [2012 (275) ELT 488 (GOI)] 2011-VIL-01-Misc, which holds that if electrical-battery operated cars are exported, though not fitted with batteries at the time of export, the same are still classifiable as ‘battery-powered road vehicles’ and would run on battery when put to use. Accordingly, the AAR held that fitting of battery in the vehicle, at or before the time of supply, is not a precondition for the same to be classified as electrically-operated vehicle. Accordingly, the AAR decided the AR in favour of the applicant.

(D) Works Contract – ‘Original work’
M/s Bindu Projects & Co. (AR Order No. KAR ADRG 40/2021 dated 30th July, 2021)
The applicant is a registered person and engaged in executing works contract services to South Western Railways. It has sought advance ruling in respect of the following question:

‘i. Applicability of GST rates for works contract services doing original works with South Western Railways.’

The applicant is a contractor with the South Western Railway, Bangalore and has been awarded the contract of ‘KSR Bengaluru City Railway Station and Service Buildings at Bengaluru such as C&W Office, Loco Trip Shed, DRM Office, Supervisory Training Centre, ORHCM SRH, Railway Hospital, RPF Barricade, GRP Barricade, etc.’ as per Zone-S vide LOA No. Bangalore Division ENGG/12SBC190F11-4-19 ITEM 12/00841250002528 dated 25th June, 2019. The said work is a Zonal Agreement, plus…
(a) It is a lump sum contract based on Unified Schedule of Rates, 2011 of South Western Railways.
(b) It includes New Works, Repair Works, additions and alterations to existing structures.
(c) The work is carried out through Work Orders each restricted to a maximum of Rs. 5 lakhs, where each work order is an individual tax invoice.
(d) The work is executed in service buildings like stations, PWI offices, RPF Barricades, etc., and in welfare buildings like Railway Hospitals, Colonies, etc.

The applicant has submitted that as per the Notification No. 11/2017-Central Tax (Rate) – Serial No. 3(v), the GST rate applicable is 12% if ‘composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017 is supplied by way of construction, erection, commissioning of original works pertaining to Railways (including monorail and metro).’

The applicant also brought to the notice of the AAR, Rule 2A of the Service Tax Rules 2006 wherein ‘Original Works’ has been defined as
(a) all new constructions,
(b) all types of additions and alterations to abandoned or damaged structures on land that are required to make them workable, and
(c) Erection, commissioning or installation of plant, machinery or equipment or structures whether prefabricated or otherwise.

In the light of the above, the applicant claimed that it is executing original works of Works Contract Services and hence eligible to 12% tax.

The AAR analysed the transactions and found that the applicant is executing two types of works wherein in one set the applicant is executing works contract for construction of new buildings and in the second it is executing works contracts not involving new construction. It was noticed that a majority of the works were like provision of compound wall to Railway properties, laying of tiles for buildings, plumbing with new pipelines, provision of new GLR and OHT, staff recreation like parks, new rainwater-harvesting structures, painting, renovation of old structures, etc.

The AAR reproduced Entry 3(v) of Notification No. 11/2017 dated 28th June, 2017 and the definition of ‘Original Works’ as given in clause (zs) of para 2 of Notification No. 20/2017-Central Tax Rate dated 22nd August, 2017 as under:

‘Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017, supplied by way of construction, erection, Commissioning, or installation of original works pertaining to, –
(a) Railways, ….
(b)….’

‘Original Works’ in clause (zs) of para 2 of Notification No. 12/2017-Central Tax (Rate) dated 28th June, 2017 is described as under:

‘(zs) “original works” means – all new constructions;
(i) All types of additions and alterations to abandoned or damaged structures on land that are required to make them workable;
(ii) Erection, commissioning or installation of plant, machinery or equipment or structures, whether prefabricated or otherwise;’

Although the definition is given in relation to Notification No. 12/2017, it can be adopted for the present entry also. Only ‘additions or alterations made to abandoned or damaged structures on land that are made to make them workable’ are treated as original works and not all repairs and maintenance services.

In view of the above, the AAR observed that so far as construction of new structure is concerned, it is covered by the above entry attracting tax @ 12%.

However, in the case of constructions which are made where the structures already exist, the same can be classified as under:
(a) where the additions and alterations are made to the abandoned structures on land or damaged structures on land to make them workable,
(b) repairs of already existing structures which are in working condition, and
(c) construction services on structures not on land.

It was further observed that only those works contract services covered under (a) above are to be treated as ‘original works’ and not those covered under (b) and (c). The AAR also considered the meaning of the words ‘structures on land’ by reference to the dictionary meaning.

According to the Cambridge Dictionary, ‘structure’ means ‘something that has been made or built from parts, especially a large building’ or ‘something built, such as a building or a bridge’. Considering all this, the AAR observed that the scope of the above entry will cover the structures which are directly on land. If these structures are damaged to the extent that the same cannot be used and by the activity of works contract services these unusable structures are made reusable, then such services would be covered under the above entry for reduced rate of tax.

The repair works are held to be not ‘Original Works’.

For services provided in relation to the residential accommodation of staff, the AAR examined the position separately. He referred to Entry 3(vi) which reads as under:

‘(vi) Services provided to the Central Government, State Government, Union Territory, a local authority, a Governmental Authority or a Government Entity by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of,
(a) a civil structure or any other original works meant predominantly for use other than for commerce, industry, or any other business or profession;
(b) a structure meant predominantly for use as (i) an educational, (ii) a clinical, or (iii) an art or cultural establishment; or
(c) a residential complex predominantly meant for self-use or the use of their employees or other persons specified in paragraph 3 of the Schedule III of the Central Goods and Services Tax Act, 2017, provided that where the services are supplied to a Government Entity, they should have been procured by the said Entity in relation to a work entrusted to it by the Central Government, State Government, Union Territory or local authority, as the case may be.’

The AAR observed that the Railway Department is a Central Government Department and therefore for services provided to it for a purpose other than for business, the same would be covered by above Entry 3(vi). The services of repairs, maintenance, renovation and alterations of residential complex meant for use of the Railway employees are therefore held as covered under Entry 3(vi) of the Notification and accordingly eligible for tax at 12% CGST.

The AAR also made observations about the application of the rate of tax. In a single contract given by the Railways, multiple works are mentioned. The issue examined is whether such multiple events are one composite supply transaction or mixed supply transaction or each one is separate. The AAR held that since there is no principal supply, it is not composite supply. Also, considering that each work is valued separately, it was held that it is also not a mixed supply. Therefore, each work in the contract is held as a separate transaction and accordingly the AAR ruled to apply the rates as discussed above.

(E) Co-operative Housing Society – Chargeability to GST
M/s Forest County Co-operative Housing Society Ltd. (Order No. GST-ARA-65/2019-20/B-42 dated 4th August, 2021)
The applicant society has a billing as under:

‘Total bill raised by a housing co-operative society if, for example, Rs. 6,500 per month per member, the break-up of Rs. 6,500 is as below:
1) Repair and maintenance fund: – Rs. 1,500
2) Sinking Fund: – Rs. 1,500
3) Other Maintenance charges: – Rs. 3,500
Total Maintenance Bill (1+2+3) – Rs. 6,500
Is the society liable to collect any GST in the above scenario? Or since the total maintenance bill is less than Rs. 7,500, no GST is required to be charged and collected by the housing co-operative society?’

The legality about the levy was not challenged. However, the society’s total receipts were more than Rs. 20 lakhs in a year and it has obtained registration under GST. The argument of the applicant was that though it has obtained registration, since the charges do not exceed Rs. 7,500 per member per month, it is actually not liable to pay any tax.

The applicant wanted a ruling on the above view. It cited Circular No. 109/28/2019-GST dated 22nd July, 2019.

The AAR noted that as per the provisions of the GST laws, ‘Repair and maintenance fund and sinking fund’ are covered under ‘services’ as per the provisions of the GST Act. Hence, it is observed that such services provided by the applicant to its members are liable to tax subject to crossing the threshold turnover limit and as per the provisions of Notification No. 12/2017-Central Tax (Rate) dated 28th June, 2017. As per Sl. No. 77(c) of Notification No. 12/2017-Central Tax (Rate) dated 28th June, 2017, charges up to Rs. 7,500 are not taxable. The AAR held that since in this case the charges are not exceeding Rs. 7,500 per member, per month, no tax is actually payable. He ruled accordingly.

(F) Valuation – DG Set and reimbursement of diesel cost
M/s Goodwill Autos (AR Order No. KAR-ADRG-44/2021 dated 30th July, 2021)
The applicant is a partnership firm registered under the Goods and Services Tax Act, 2017 and engaged in the business of leasing of DG Sets to customers like LIC of India, Syndicate Bank and SBI in various districts of Karnataka.

It has entered into an agreement with the Life Insurance Corporation of India (LIC), Branch Office at Koppa, Udupi to install a DG on hire basis for a rent of Rs. 10,520 per month along with reimbursement of diesel cost at Rs. 305 per hour on usage of the DG Set.

The applicant is discharging tax @ 18% (CGST @ 9% and KGST @ 9%) on DG Set hiring charges and also discharging tax @ 18% (CGST @ 9% and KGST @ 9%) on reimbursement of diesel cost incurred for running the DG Set.

However, LIC was of the opinion that the taxes collected by the applicant pertaining to the reimbursement of diesel charges for running the DG Set was erroneous because diesel did not come under the purview of GST. As diesel is non-GST goods as per section 9 of the CGST / KGST Act, 2017, LIC has requested the applicant to reimburse the wrongly-collected taxes.

Given the above facts, the applicant has filed the AR to know the correct position of law. It was contended that since there is no specific provision for inclusion of diesel cost in DG Set service charges, the same should be held as not liable to GST.

The judgment under Service Tax in the case of Intercontinental Consultants and Technocrats Private Limited vs. Union of India, 2012-VIL-106-Del-ST, was cited where the Court has taken a view that the reimbursement will not be liable to service tax in the absence of specific provision for valuation u/s 67 of the Service Tax Act. It was urged to apply the same position here.

The AAR considered the legal position by reference to section 15(1) which is reproduced as under:

‘the value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.’

The AAR also considered the definition of ‘consideration’ in section 2(31) which reads as under:

‘(a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;
(b) the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government:
Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply;’

After considering the above definitions, the AAR observed as under:

‘The contract entered into between the applicant and the recipient is for the hiring of DG Set and is a comprehensive contract with the consideration having a fixed component and a variable component. The fixed component is the monthly fixed rent charged in the invoice for the DG Set and the variable charge is the charge for the diesel used. Both are part of the same consideration and for the contract of supplying the DG Set on hire. Though it appears that the applicant is receiving the reimbursement of diesel cost, the recipient is not paying for the diesel but for the services of DG Set, which is an integral part of the supply of DG Set rental service. There is no separate contract for supply of diesel and the invoice issued for the reimbursement of diesel cost is nothing but a supplementary invoice issued for the supply of rental service of DG Set. Hence, consideration for reimbursement of expenses as cost of the diesel for running of the DG Set is nothing but the additional consideration for the renting of the DG Set and attracts CGST @ 9% and KGST @ 9%.’

Accordingly, the AAR upheld the levy of tax on receipts towards reimbursement of diesel cost.

BCAJ Admin

Service Tax

I. TRIBUNAL

4 Convance Clinical Development Ltd. vs. Commissioner of Central Excise, Bengaluru East [2021 (50) GSTL 433 (Tri-Bang)] Date of order: 2nd July, 2021

Rule 5 of the CENVAT Credit Rules, 2004 read with Notification No. 27/2012-CE dated 18th June, 2012 – Refund cannot be rejected on the ground that the reversal of credit was not made through service tax return

FACTS
The appellant is a 100% export company and it had filed a refund application under Rule 5 of the CENVAT Credit Rules, 2004 read with Notification No. 27/2012-CE dated 18th June, 2012 for claiming the refund of unutilised CENVAT credit. But it inadvertently transferred the CENVAT credit to the GST regime through Form GST TRAN-1. On realising the mistake, the appellant voluntarily reversed the said credit in the GSTR3B return filed for the month of May, 2018. However, the refund claim was rejected because the appellant had failed to debit the refund amount in the CENVAT credit account, the ST-3 return and Form A at the time of filing the refund claim, and in terms of the conditions specified under Notification No. 27/2012-CE dated 18th June, 2012.

HELD
The Tribunal observed that as per Notification No. 27/2012-CE dated 18th June, 2012, there was no requirement to debit the amount of refund claimed in the service tax return. The only condition under condition 2(h) of the said Notification No. 27/2012-CE is that the amount that is claimed as refund shall be debited by the claimant from his CENVAT credit account, maintained in the books of accounts at the time of making the claim. This condition was followed before filing the refund claim. The Tribunal also found that transition of credit to the GST regime is merely a procedural lapse which was rectified by the appellant by way of reversal in GSTR3B. Therefore, the Learned Commissioner (Appeals) should have taken a liberal view of a bona fide mistake without any intention to claim unjustified refund. Hence, the order was set aside, allowing the appeal.

5 M/s International Travel House Ltd. vs. Commissioner of Service Tax, Delhi [2021-TIOL-620-CESTAT-Del] Date of order: 17th September, 2021

Incentive received from airlines by air travel agents is not liable for service tax

FACTS
The appellant, an air travel agent, purchased tickets from various IATA Agents / Airlines which pay commission to them. A show cause notice was issued demanding service tax on the commission received. The appellant’s case was that the air travel agent is neither promoting its own business nor of the CRS Companies. Therefore, the receipt of incentive / commission from the airline cannot be liable for service tax.

HELD
The Tribunal, relying on the decision in the case of Kafila Hospitality and Travel Private Limited vs. Commissioner of Service Tax, Delhi [2018-TIOL-3504-CESTAT-Del] held that the incentives received by a service recipient from a service provider cannot be subjected to levy of service tax and a passenger cannot be deemed to be an audience for promotion of the business of CRS Companies.

6 Jay Jee Enterprises vs. CCE&ST, Daman [2021-TIOL-643-CESTAT-Ahm] Date of order: 20th September, 2021

Service recipient discharged 100% service tax instead of 75% on supply of manpower service and security service. Since tax is paid in full, the service recipient is allowed full input tax credit

FACTS
The issue involved is whether the appellant is entitled to CENVAT credit in respect of service tax paid on Manpower Supply and Recruitment Agency Service and Security Service under Reverse Charge Mechanism when the service tax was 100% paid by the appellant as a service recipient. However, Notification No. 30/2012-ST dated 20th June, 2012 provides that the service provider is supposed to pay the service tax on 25% of the value of the service and the service recipient is required to pay the service tax on 75% of the value of the service. The contention of the Revenue is that in the present case even the portion of the service tax which is liable to be paid by the service provider was paid by the service recipient; therefore, the appellant is not eligible for CENVAT credit. Being aggrieved by the impugned order, the present appeal has been filed.

HELD
The Tribunal primarily noted that whether it is the service recipient or the service provider who is liable to pay the service tax, so long as the service tax was admittedly paid even by the recipient of the service, the CENVAT credit cannot be denied. The credit was accordingly allowed.

BCAJ Admin

GOODS AND SERVICES TAX (GST)

I. HIGH COURT

11 TVL Mehar Tex vs. Commissioner of CGST&E, Madurai [2021 (50) GSTL 357 (Mad)] Date of order: 18th March, 2021

Assessee cannot be denied refund on account of technical glitches and errors of the GSTN portal

FACTS
The petitioner made zero-rated supply in the months of October, 2017; November, 2017; and February, 2018. A refund application was then filed for unutilised input tax credit. When the application was uploaded, due to technical glitches and errors in the new system of the GSTN portal the entire claim got consolidated under the head SGST alone. While considering the refund applications, the Department restricted the refund claim to the extent of credit balance remaining under the head of SGST and rejected the refund claims made under the other heads. The writ petition was filed to question this.

HELD
It was held that the petitioner cannot be denied refund to which he is otherwise eligible merely on the grounds of technical glitches and an error of the GSTN portal. Hence, the petition was allowed and the refund rejection order set aside to the extent that it rejected the refund claimed under CGST and IGST.

12 Dharmesh Gandhi vs. Asstt. Commr. (Anti-Evasion), CGST&CE, Belapur [2021 (50) GSTL 350 (Bom)] Date of order: 10th March, 2021

Section 83 of CGST Act – There cannot be provisional attachment of bank accounts of the family members of a taxpayer

FACTS
The Assistant Commissioner (Anti-Evasion), CGST and Central Excise, Belapur Commissionerate, issued a communication dated 9th November, 2020 to provisionally attach the bank accounts u/s 83 of the CGST Act, 2017. Out of the nine accounts that were so attached, only three accounts belonged to the petitioner and the rest belonged to his family. Even after several prayers made by them, the bank accounts were not released. Thus, by filing the writ petition under Article 226 of the Constitution of India, the petitioner sought to quash the communication dated 9th November, 2020.

HELD
The Bombay High Court referred to the case of Siddhart Mandavia vs. Union of India 2021 (44) GSTL 347 dated 3rd November, 2020 wherein a similar issue was examined and it was held that the bank account of only a taxable person can be provisionally attached. Thus, the Court ordered the release of the bank accounts of the petitioner’s family. Further, in respect of the bank accounts of the petitioner, the court allowed him to file an objection against such provisional attachment within a period of seven days if such objections were not filed previously and simultaneously instructed the Commissioner to afford an opportunity of being heard to the petitioner and pass an appropriate order in accordance with the law within three weeks from the date of filing of the objection.

13 Union of India vs. Aditya Auto Engineering Pvt. Ltd. [2021 (51) GSTL 31 (Kar)] Date of order: 22nd April, 2021

No interim order should be granted for carrying out business operations as registered dealer to a person who has failed to file returns for a continuous period of more than two years and his GSTN had been deregistered

FACTS
The respondent, a company, admittedly failed to file returns prescribed under the CGST law in Form GSTR3B and discharge its liability for the period October, 2018 to October, 2020. Even though the respondent had failed to file GSTR3B, he was regularly filing GSTR1 and passing on the credit to the customers. The authorities issued various notices and orders on several occasions under sections 46 and 62 of the CGST Act and in response to these the respondent had filed two writ petitions. An interim order was passed by a single judge to stay the operation of cancellation of GST registration, to allow the respondent to carry out his business as a registered dealer and to file the returns manually.

HELD
The Court observed that the GST law does not permit for filing of manual returns and allowing such manual filing would certainly unsettle the entire scheme of the law. Further, the law states that in case of failure to file returns for a continuous period of six months, a person is liable to be deregistered. Hence, it was held that the interim order passed by the single judge was liable to be set aside; the single judge was requested to decide the matter on merit.

14 Ramakrishnan Mahalingam vs. State Tax Officer (Circle), Kotagiri [2021 (50) GSTL 369 (Mad)] Date of order: 30th April, 2021

At the time of processing the application for revocation of cancellation of GST registration, the authorities cannot embark upon the process of assessment of tax dues and eligibility of refund claim

FACTS
The GST registration of the petitioner was cancelled as it had failed to file the GST returns for a continuous period of six months. The petitioner had filed two applications for revocation of cancellation of GST registration. The first one was rejected by an order dated 24th July, 2020 citing non-compliance with a notice issued by the A.O. and the second one was rejected while referring to outstanding interest on belated payment of tax dues and for alleged wrongful claim of input tax credit. Hence, the writ petition was filed.

HELD
The High Court held that the petitioner had only sought for revival of registration and under the guise of considering the application for revocation, the authorities cannot embark upon the process of assessment. An authority can question the levying of tax and claim of input tax credit only when an assessment is made u/s 73 or other applicable provisions after following the procedures set out therein. Thus, to state that registration will not be revived since the petitioner had incorrectly availed input tax credit would be putting the cart before the horse. Hence, the respondent was directed to pass an order reviving the registration.

II. AUTHORITY FOR ADVANCE RULING

15 M/s B.G. Shirke Construction Technology Pvt. Ltd. [2021-TIOL-234-AAR-GST] Date of order: 9th September, 2021 [AAR-Maharashtra]

In terms of second proviso to Rule 28 of CGST Rules, 2017, as most of the recipients of such services are eligible for full credit, whatever is charged in the invoice is deemed to be the open market value

FACTS
The applicant has construction sites in different States and for which it holds separate GST registrations. The site offices are independent offices and are also separately registered. The Registered / Corporate Office supplies managerial and leadership services to the aforesaid distinct and related persons in the areas of finance, operations, etc., for which it levies fixed monthly charges on lump sum basis. The charges are at the discretion of the Registered / Corporate Office and not supported by any specific valuation method u/s 15 of the GST law. The question before the Authority is whether the service is to be considered as a supply u/s 7 of the GST law.

HELD
The Authority primarily holds that the supply of managerial and leadership service is a supply under the GST law. Since the supply of service is between distinct and related persons, ‘transaction value’ u/s 15(1) of the GST law is not available. Therefore, one has to resort to Valuation Rules in terms of section 15(4) of the CGST Act, 2017. There is no ‘open market value’ of such services and / or comparable services and also such services are not further supplied by the recipient; hence the instant case is not covered under the first proviso to Rule 28 and also Clauses (a) or (b) of Rule 28. Since full input tax credit is admissible to the recipient, the value declared in the invoice would be deemed to be the open market value of the services. Hence, the existing practice of debiting of value of services through invoices is covered by the second proviso to Rule 28 of the CGST Rules, 2017 and is the correct position in law.

16 M/s Adama India Pvt. Ltd. [2021-TIOL-228-AAR-GST] Date of order: 11th August, 2021 [AAR-Gujarat]

Inputs and input services used for provision of CSR activities are not allowable as input tax credit

FACTS
The applicant has sought to know whether the inputs and input services in order to undertake the mandatory CSR activities as required under the Companies Act, 2013 qualify as being in the course and furtherance of business and, therefore, will be counted as eligible input tax credit in terms of section 16 of the CGST Act, 2017.

HELD
The Authority noted that CSR activity does not include activities undertaken in pursuance of the normal course of business of the company. As per the Companies (CSR Policy) Rules, 2014 made by the Central Government in exercise of its powers u/s 469 of the Companies Act, the CSR activities undertaken by the company shall exclude activities undertaken in pursuance of its normal course of business. Section 16(1) of the CGST Act stipulates that a registered person is entitled to take credit of input tax charged on any supply of goods or services, or both, which are used or intended to be used in the course or furtherance of his business. CSR activity is not included within the ambit of the said eligibility. The decisions cited pertain to the pre-GST era and hence cannot apply to the present case. Therefore, the credit is not admissible.

17 M/s. Gensol Ventures Pvt. Ltd. [2021-TIOL-227-AAR-GST] Date of order: 27th August, 2021 [AAR-Gujarat]

Applicant intending to develop, own an electronic platform for booking of cabs is an E-Commerce Operator and is engaged in provision of passenger transportation service

FACTS
The applicant intends to develop, own an electronic / digital platform for booking of cabs. The drivers will list their electric motor vehicles on the proposed electronic platform / application for booking by the customers for the passenger transportation services. Further, as a business measure, it offers discounts to the customers for the passenger transportation service provided by the drivers, and the consideration charged and collected from the customer is after deducting such discount amount and this discount is recorded as a ‘marketing expenditure’ in the books of accounts. The question before the Authority is whether the applicant is an E-Commerce Operator and is liable for paying service tax u/s 9(5) of the CGST Act, 2017? If yes, what is the value of service and rate of tax?

HELD
The Authority noted that E-Commerce Operator means any person who owns, operates or manages a digital or electronic facility or platform for electronic commerce; considering this, the applicant can be termed as an E-Commerce Operator. The value of supply for passenger transportation service shall be the net amount arrived at after the deduction of discount (to be provided by the applicant to the customer) from the gross value. The SAC for subject supply is 996412, i.e., passenger transportation service, and GST shall be leviable @ 5% subject to the fulfilment of the condition at Entry No. 8 (ii) of Notification 11/2017-Central Tax (Rate) of restriction in availment of credit.

BCAJ Admin

RECENT DEVELOPMENTS IN GST

I. NOTIFICATIONS
Changes in Rules – Notification No. 35/2021-Central Tax dated 24th September, 2021:
Certain changes made in the CGST Rules through the above Notification may be noted as follows:

i) Rule 10A: Rule 10A is about furnishing of bank account details. In addition to details already prescribed, the following further requirements are now prescribed:
• The bank account should be in the name of the registered person and should be based on the PAN of such person.
• In case of a proprietary concern, the PAN of the proprietor should be linked with the Aadhaar number of the proprietor.

ii) Rule 10B: Rule 10B is newly inserted. Authentication of Aadhaar is now necessary for registered persons in order to be eligible for the following functions:
• For filing application for revocation of cancellation of registration in Form GST-REG-21 under Rule 23;
• For filing refund application in Form RFD-01 under Rule 89;
• For refund under Rule 96 of the IGST paid on goods exported out of India; further, in the Rule it is mentioned that if an Aadhaar number has not been assigned to the registered person, then such person may furnish the following identification documents:
• Aadhaar Enrolment ID slip; and
• Bank passbook with photograph, or
• Voter identity card issued by the Election Commission of India; or
• Passport; or
• Driving License issued by the Licensing Authority under the Motor Vehicles Act, 1988 (59 of 1988).

In the above cases, such person must authenticate the number within 30 days of allotment of the Aadhaar number. The above changes in Rule 10A and 10B will come in force from a notified date.

iii) Rule 23(1): This Rule is regarding revocation application. In pursuance of the insertion of Rule 10B, this Rule is amended for giving reference to Rule 10B. The effect is that the application can be filed only by the authenticated person.

iv) Rule 45(3): Rule 45 is regarding conditions about ITC in relation to goods sent to a job worker. There is also a requirement of filing GST-ITC-04 giving details about goods dispatched to the job worker or received from the job worker. Before amendment such details were to be given on quarterly basis. Now, by the amendment, the quarter is replaced by specified period which is defined as below:

‘Explanation. – For the purposes of this sub-rule, the expression “specified period” shall mean – (a) the period of six consecutive months commencing on the 1st day of April and the 1st day of October in respect of a principal whose aggregate turnover during the immediately preceding financial year exceeds five crore rupees; and (b) a financial year in any other case’;

Thus, periodicity of filing Form GST-ITC-04 will now be half-yearly or yearly, based on aggregate turnover.

The above change is effective from 1st October, 2021.

v) Rule 59(6): Rule 59 is regarding filing of GSTR1. As per Rule 59(6)(b), if return in Form GSTR3B for two consecutive months were not filed, then filing of GSTR1 is prohibited. Now, by the present amendment, the period of two months is replaced by preceding month. In other words, unless return in Form GSTR3B for the preceding month is filed, GSTR1 will not be allowed to be filed for the next month. Similarly, such amendment is made in relation to quarterly return in Form GSTR3B. This amendment is applicable from 1st January, 2022.

In Rule 59(6) clause (c) is deleted since the position sought to be covered by the said clause is covered by the above amendment in Rule 59(6)(b).

vi) Rule 89: a) Rule 89(1) is regarding filing of refund application. In pursuance of newly-added Rule 10B, it is now provided that the application is to be signed by an Aadhaar authenticated person.
b) Rule 89(1A) is newly added. This Rule provides the procedure regarding filing of refund application where the tax on interstate supply is paid and refund of tax paid earlier as intra-state supply is to be claimed as refund. This Rule provides that the application for such refund should be filed in Form GST-RFD-01 before the expiry of two years from the date of payment of the tax on the interstate supply.

vii) Rule 96: a) Rule 96(1) is about filing refund application of IGST in relation to export. In pursuance of newly-added Rule 10B, by amendment in this rule it is provided that the application is to be signed by the Aadhaar authenticated person.

viii) Rule 96C is newly inserted. It is regarding credit of refund in bank account. In pursuance of the amendment in Rule 10A, by amendment in this rule it is provided that the bank account should be one which fulfils the conditions mentioned in Rule 10A.

II. EXCLUSION FROM AUTHENTICATION PROCEDURE – NOTIFICATION NO. 36/2021-CENTRAL TAX DATED 24TH SEPTEMBER, 2021

Under section 25(6D), the list of persons to whom authentication will not apply is notified vide Notification 3/2021 dated 23rd February, 2021. The said Notification is amended to bring reference of section 25(6A) in the said Notification. The effect is that the requirement of Aadhaar authentication will not apply to the persons covered by the
Notification.

III. CHANGES IN RATE OF TAX

Sl. No.	*Notification No.*	*Reference of Entry in which change is made*	Indicative changes (changes are made effective from 1^st October, 2021)
1.	06/2021-Central Tax (Rate) dated 30^th September, 2021 and 06/2021-Integrated Tax (Rate) dated 30^th September, 2021. By this Notification changes are made in the rate relating to services	Changes in Notification No. 11/2017-Central Tax (Rate) and 08/2017-Integrated Tax (Rate) both dated 28^thJune, 2017 a) Entry 3(iv)(g)	In addition to benefit of this Entry available to an entity registered u/s 12AA of Income-tax Act, by amendment the benefit is also extended to an entity registered u/s 12AB of the Act.
b) Entry 3(iv)(g)	This Entry was relating to rate of tax on Intellectual Property other than Information Technology software. This Entry is omitted and Entry 17(ii) is amended to consolidate the items.
c) Entry 17(ii)	Now, the Entry is replaced to incorporate temporary or permanent transfer or permitting the use or enjoyment of Intellectual Property (IP) right. The intention is to consolidate the Entry. Rate of tax is 18%.
d) Item (ica) is added in Entry 26	Category of ‘services by way of job work in relation to manufacture of alcoholic liquor for human consumption’, having rate of tax 18% is added. In item (id), amendment is made to add (ica). Similarly, addition of (ica) is made in item (iv).
e) Item (i) and (ii) in Entry 27	The Entry relating to services by way of printing is omitted and included in item (ii) which reads as under: ‘Other manufacturing services; publishing, printing and reproduction services; materials recovery services.’ Rate of tax is 18%.
1. (continued)		f) Items (iii) and (iiia) in Entry 34 are substituted	By substitution, the service by way of admission to casino or race clubs or any place having casino or race club or sporting events like IPL is separated and made taxable at 28% and other services like admission to theme parks etc. are retained at 18%.
g) Entry 38 is amended	By change in Explanation given in the said Entry, the reference to Entry 234 of Schedule I is substituted to Entry 201A of Schedule II.
h) In Annexures: scheme of classification of service, Entries 118a and 118b are added.	By addition of Entry 118a, multi-modal transport of goods is classified in group 99654. By insertion of Entry 118b, further classification is made under 996541.
2.	07/2021-Central Tax (Rate) dated 30^th September, 2021 and 07/2021-Integrated Tax (Rate) dated 30^th September, 2021. Changes in exemption Entries	Changes in Notification No. 12/2017-Central Tax (Rate) and 09/2017-Integrated Tax (Rate) both dated 28^th June, 2017 a) Entry 1 is amended	The exemption applicable to entity registered u/s 12AA of Income-tax Act is extended to entity registered u/s 12AB of the Act.
b) Entry 9AA is amended	The application of Entry to FIFA is kept open and it will apply whenever the given event is rescheduled.
c) Entry 9AB is inserted	Nil rate provided to services provided by and to Asian Football Confederation (AFC).
d) Entry 9D and 13 are amended	The benefit of Entry is extended to entity registered u/s 12AB of the Act.
e) Entries 19A and 19B are amended	Benefit is extended till 30^th September, 2022.
f) Entry 43 is omitted	The Entry was relating to leasing of assets by IRFC to Indian Railways.
g) Entry 61A is inserted	By this Entry, Nil rate is provided for services by way of granting National Permit to a goods carriage to operate throughout India / contiguous stages.
h) Entry 72 is amended	This Entry gives exemption for given services sponsored by the Government. Previously, it was required to be 100% sponsored. Now sponsorship of 75% or more is also allowable.
i) Entry 74A and 80 are amended	The benefit of Entry is extended to entity registered u/s 12AB of the Act.
j) Entry 82B is inserted	Exemption is provided to services by way of right to admission to the events organised under AFC Women’s Asia Cup, 2022.
3.	08/2021-Central Tax (Rate) dated 30^th September, 2021 and 08/2021-Integrated Tax (Rate) dated 30^th September, 2021. Changes in rate of goods	a) Entries 138 to 148, 187A, 234, under Schedule I and Entries 122,127 to 132, 205A to 205H and 232 under Schedule II are omitted. The said Entries are not given here for sake of brevity
3. (continued)		Changes in Schedule-I (2.5%)
b) Entry 71A is inserted	Separate Entry is provided for tamarind seeds meant for any use other than sowing.
c) Entry 186A is inserted	Entry provided for biodiesel supply to specified company.
d) Entry 232 is inserted	New entry for Pembrolizumab (Keytruda) is provided.
e) In List 3, Entry B(3) is inserted	Entry provided for retro fitment kits for vehicles used by disabled.
Schedule-II (6%)
f) Entry 80A is substituted	Biodiesel (other than biodiesel supplied to specified company) is brought under this new Entry.
g) Entry 201A is inserted	Specified renewable energy devices and parts for the manufacture of such devices are brought in this Entry.
Schedule-III (9%)
h) Entries 26C to 26L inserted	These new Entries cover ores of various metals like iron, manganese, copper, cobalt, nickel, aluminium, lead, zinc, tin and chromium and their concentrates.
i) Entry 101A is inserted	Separate Entry for waste, parings and scrap of plastic is provided.
j) Entry 153A is inserted	Various packing items like cartons, etc., covered by Customs heading 4819 are included in this Entry.
k) Entry 157A is inserted	Various items of plans and drawings for architectural work, etc., covered by heading 4906, are included in this Entry.
l) Entry 157B is inserted	Unused postage, revenue or similar stamps covered by heading 4907 specified in this Entry.
m) Entry 157C is inserted	Transfers covered by heading 4908 are included in this Entry.
n) Entry 157D is inserted	Printed or illustrated postcards, etc., covered by heading 4909 are included.
o) Entry 157E is inserted	Calendars of any kind covered by heading 4910 are included.
p) Entry 157F is inserted	Other printed matters covered by heading 4911 are included in this Entry.
q) Entries 398 A to 398H are inserted	Various items related to rail locomotives, railways or tramways covered by heading 8601 to 8608 are included in the above Entries.
3. (continued)		r) Entry 447 is substituted	The scope of the Entry is widened to include various other related items like stylograph and other pens, etc.
Schedule- IV (14%)
s) In Notification No. 01/2017-Central Tax (Rate) and 01/2017-Integrated Tax (Rate) both dated 28^th June, 2017, Entry 12B is inserted	New Entry covering carbonated beverages of fruit drinks or carbonated beverages with fruit juices is provided.
4.	09/2021-Central Tax (Rate) dated 30^th September, 2021 and 09/2021-Integrated Tax (Rate) dated 30^th September, 2021	a) In Notification No. 02/2017-Central Tax (Rate) and 02/2017-Integrated Tax (Rate) both dated 28^th June, 2017, Entry 86 is amended	The Explanation is added to restrict the scope of Entry and to provide that this Entry will not cover seeds meant for any use other than sowing.
5.	10/2021-Central Tax (Rate) dated 30^th September, 2021 and 10/2021-Integrated Tax (Rate) dated 30^th September, 2021	a) In Notification No. 04/2017-Central Tax (Rate) and 04/2017-Integrated Tax (Rate) both dated 28^th June, 2017, Entry 3A is inserted	This Notification is related to RCM. Entry 3A is inserted to include further items of essential oils when the supplier is an unregistered person.
6.	11/2021-Central Tax (Rate) dated 30^th September, 2021 and 11/2021-Integrated Tax (Rate) dated 30^th September, 2021	a) In Notification No. 39/2017-Central Tax (Rate) and 40/2017-Integrated Tax (Rate) both dated 18^th October, 2017, Entry 1 is substituted	This Notification is related to rate of 2.5% for intra-state supplies of specified goods. By substitution, the scope is mentioned precisely and mainly food preparations intended for free distribution to economically weaker sections under a programme approved by Central Government and/or State Government are covered.
7.	12/2021-Central Tax (Rate) dated 30^th September, 2021 and 12/2021-Integrated Tax (Rate) dated 30^th September, 2021	a) Newly inserted	This Notification is to provide exemption or concessional rate of 5% to specified medicines used in Covid-19 up to 31^st December, 2021. The items covered include Tocilizumab.
8.	01/2021-Compensation Cess (Rate) dated 30^th September, 2021	a) Entry 4B newly inserted	Rate of 12% provided on the item carbonated beverages of food drinks or carbonated beverages of fruit juices.

Sl.
No.

Notification No.

Reference of Entry in which change is made

Indicative changes (changes are
made effective from
1^st October, 2021)

06/2021-Central Tax (Rate) dated 30^th September, 2021
and 06/2021-Integrated Tax (Rate) dated 30^th September, 2021. By
this Notification changes are made in the rate relating to services

Changes in Notification No.
11/2017-Central Tax (Rate) and 08/2017-Integrated Tax (Rate) both dated 28^thJune, 2017

a) Entry 3(iv)(g)

In addition to benefit of this Entry available to an entity
registered u/s 12AA of Income-tax Act, by amendment the benefit is also
extended to an entity registered u/s 12AB of the Act.

b) Entry 3(iv)(g)

This Entry was relating to rate of tax on Intellectual Property
other than Information Technology software. This Entry is omitted and Entry
17(ii) is amended to consolidate the items.

c) Entry 17(ii)

Now, the Entry is replaced to incorporate
temporary or permanent transfer or permitting the use or enjoyment of
Intellectual Property (IP) right. The intention is to consolidate the Entry.
Rate of tax is 18%.

d) Item (ica) is added in Entry 26

Category of ‘services by way of job
work in relation to manufacture of alcoholic liquor for human consumption’,
having rate of tax 18% is added.

In item (id), amendment is made to add (ica). Similarly,
addition of (ica) is made in item (iv).

e) Item (i) and (ii) in Entry 27

The Entry relating to services by way of printing is omitted and
included in item (ii) which reads as under:
‘Other manufacturing services; publishing, printing and reproduction
services; materials recovery services.’
Rate of tax is 18%.

1.
(continued)

f) Items (iii) and (iiia) in Entry 34 are substituted

By substitution, the service by way of
admission to casino or race clubs or any place having casino or race club or
sporting events like IPL is separated and made taxable at 28% and other
services like admission to theme parks etc. are retained at 18%.

g) Entry 38 is amended

By change in Explanation given in the
said Entry, the reference to Entry 234 of Schedule I is substituted to Entry
201A of Schedule II.

h) In Annexures: scheme of classification of service, Entries
118a and 118b are added.

By addition of Entry 118a, multi-modal transport of goods is
classified in group 99654.

By insertion of Entry 118b, further classification is made under
996541.

07/2021-Central Tax (Rate) dated 30^th September, 2021
and 07/2021-Integrated Tax (Rate) dated 30^th September, 2021.

Changes in exemption Entries

Changes
in Notification No. 12/2017-Central Tax (Rate) and 09/2017-Integrated Tax
(Rate) both dated 28^th June, 2017

a)
Entry 1 is amended

The exemption applicable to entity registered u/s 12AA of
Income-tax Act is extended to entity registered u/s 12AB of the Act.

b) Entry 9AA is amended

The application of Entry to FIFA is kept open and it will apply
whenever the given event is rescheduled.

c) Entry 9AB is inserted

Nil rate provided to services provided by and to Asian Football
Confederation (AFC).

d) Entry 9D and 13 are amended

The benefit of Entry is extended to entity registered u/s 12AB
of the Act.

e) Entries 19A and 19B are amended

Benefit is extended till 30^th September, 2022.

f) Entry 43 is omitted

The Entry was relating to leasing of assets by IRFC to Indian
Railways.

g) Entry 61A is inserted

By this Entry, Nil rate is provided for services by way of granting
National Permit to a goods carriage to operate throughout India / contiguous
stages.

h) Entry 72 is amended

This Entry gives exemption for given
services sponsored by the Government. Previously, it was required to be 100%
sponsored. Now sponsorship of 75% or more is also allowable.

i) Entry 74A and 80 are amended

The benefit of Entry is extended to entity registered u/s 12AB
of the Act.

j) Entry 82B is inserted

Exemption is provided to services by way of right to admission
to the events organised under AFC Women’s Asia Cup, 2022.

08/2021-Central Tax (Rate) dated 30^th September, 2021
and 08/2021-Integrated Tax (Rate) dated 30^th September, 2021.
Changes in rate of goods

a) Entries 138 to 148, 187A, 234, under Schedule I and Entries
122,127 to 132, 205A to 205H and 232 under Schedule II are omitted. The said
Entries are not given here for sake of brevity

3.
(continued)

Changes in Schedule-I (2.5%)

b) Entry 71A is inserted

Separate Entry is provided for tamarind seeds meant for any use
other than
sowing.

c) Entry 186A is inserted

Entry provided for biodiesel supply to specified company.

d) Entry 232 is inserted

New entry for Pembrolizumab (Keytruda) is provided.

e) In List 3, Entry B(3) is inserted

Entry provided for retro fitment kits for vehicles used by
disabled.

Schedule-II (6%)

f) Entry 80A is substituted

Biodiesel (other than biodiesel supplied to specified company)
is brought under this new Entry.

g) Entry 201A is inserted

Specified renewable energy devices and parts for the manufacture
of such devices are brought in this Entry.

Schedule-III (9%)

h) Entries 26C to 26L inserted

These new Entries cover ores of various metals like iron,
manganese, copper, cobalt, nickel, aluminium, lead, zinc, tin and chromium
and their concentrates.

i) Entry 101A is inserted

Separate Entry for waste, parings and scrap of plastic is
provided.

j) Entry 153A is inserted

Various packing items like cartons, etc., covered by Customs heading
4819 are included in this Entry.

k) Entry 157A is inserted

Various items of plans and drawings for architectural work,
etc., covered by heading 4906, are included in this Entry.

l) Entry 157B is inserted

Unused postage, revenue or similar stamps covered by heading
4907 specified in this Entry.

m) Entry 157C is inserted

Transfers covered by heading 4908 are included in this Entry.

n) Entry 157D is inserted

Printed or illustrated postcards, etc., covered by heading 4909
are included.

o) Entry 157E is inserted

Calendars of any kind covered by heading 4910 are included.

p) Entry 157F is inserted

Other printed matters covered by heading 4911 are included in
this Entry.

q) Entries 398 A to 398H are inserted

Various items related to rail locomotives, railways or tramways
covered by heading 8601 to 8608 are included in the above Entries.

3.
(continued)

r) Entry 447 is substituted

The scope of the Entry is widened to include various other
related items like stylograph and other pens, etc.

Schedule- IV (14%)

s)
In Notification No. 01/2017-Central Tax (Rate) and 01/2017-Integrated Tax
(Rate) both dated 28^th June, 2017, Entry 12B is inserted

New Entry covering carbonated beverages of fruit drinks or
carbonated beverages with fruit juices is provided.

09/2021-Central Tax (Rate) dated 30^th September, 2021
and 09/2021-Integrated Tax (Rate) dated 30^th September, 2021

a)
In Notification No. 02/2017-Central Tax (Rate) and 02/2017-Integrated Tax
(Rate) both dated 28^th June, 2017, Entry 86 is amended

The Explanation is added to restrict the scope of Entry and to
provide that this Entry will not cover seeds meant for any use other than
sowing.

10/2021-Central Tax (Rate) dated 30^th September, 2021
and 10/2021-Integrated Tax (Rate) dated 30^th September, 2021

a)
In Notification No. 04/2017-Central Tax (Rate) and 04/2017-Integrated Tax
(Rate) both dated 28^th June, 2017, Entry 3A is inserted

This Notification is related to RCM. Entry 3A is inserted to
include further items of essential oils when the supplier is an unregistered
person.

11/2021-Central Tax (Rate) dated 30^th September, 2021
and 11/2021-Integrated Tax (Rate) dated 30^th September, 2021

a)
In Notification No. 39/2017-Central Tax (Rate) and 40/2017-Integrated Tax
(Rate) both dated 18^th October, 2017, Entry 1 is substituted

This Notification is related to rate of
2.5% for intra-state supplies of specified goods. By substitution, the scope
is mentioned precisely and mainly food preparations intended for free
distribution to economically weaker sections under a programme approved by
Central Government and/or State Government are covered.

12/2021-Central Tax (Rate) dated 30^th September, 2021
and 12/2021-Integrated Tax (Rate) dated 30^th September, 2021

a) Newly inserted

This Notification is to provide exemption or concessional rate
of 5% to specified medicines used in Covid-19 up to 31^st December,
2021. The items covered include Tocilizumab.

01/2021-Compensation
Cess (Rate) dated 30^th September, 2021

a) Entry 4B newly inserted

Rate of 12% provided on the item carbonated beverages of food
drinks or carbonated beverages of fruit juices.

CIRCULARS
1. Clarification on doubts related to scope of ‘Intermediary’; Circular No. 159/15/2021-GST dated 20th September, 2021:
The CBIC has issued the above Circular to clarify certain doubts related to the scope of ‘Intermediary’ services.

The CBIC has clarified the scope of intermediary services and primary requirements for intermediary services. It is clarified that for intermediary service to take place there should be three parties, two principals and the third who can be the intermediary. Within two parties no intermediary service can take place.

Further, if the supplies are on one’s own account, intermediary service cannot take place. Sub-contractor service, as principal to principal, also cannot be intermediary.

The CBIC has given illustrations as to how and when intermediary service takes place in different situations.

The Circular will be useful for guidance.

2. Clarification in respect of certain GST-related issues; Circular No. 160/16/2021-GST dated 20th September, 2021 r.w. Corrigendum No. 20001/8/2021-GST dated 24th September, 2021:
The CBIC has issued the above Circular to clarify certain GST-related issues. The clarifications given are as under:

* For the purpose of section 16(4), the year related to ITC in respect of debit note is delinked from the year of invoice. In other words, it is clarified that invoice and debit notes will be considered separately and the ITC claim can be taken as per the date of the respective documents. This is a beneficial clarification.
* Carrying copy of invoice during movement of goods: It is clarified that in case of E-invoice there is no need of carrying physical copy and invoice in electronic form will be sufficient compliance.
* Export of goods having Nil rate of export duty – In relation to prohibition of refund u/s 54(3), it is clarified that if there is actual levy of export duty then prohibition will apply. If there is no levy of export duty, being Nil or exempt from duty, the prohibition will not apply.

3. Clarification relating to export of services condition (v) of section 2(6) of the IGST Act, 2017; Circular No. 161/17/2021-GST dated 20th September, 2021:
By this Circular the CBIC has clarified certain issues relating to condition (v) of section 2(6) of the IGST Act which is relating to export of services.

The condition (v) in section 2(6) provides as under:
‘(6) “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; 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;’

It is clarified that if the two offices involved in the transaction belong to same entity then the above condition (v) will be applicable. However, if the entities are separate, such as one company registered outside India and one registered in India, although in the same group, they will be separate entities and not hit by the above clause (v).

4. Clarification in relation to refund of tax specified in section 77(1) of the CGST Act and section 19(1) of the IGST Act; Circular No. 162/18/2021-GST dated 25th September, 2021:
The CBIC has issued the above Circular in which the newly-inserted Rule 89(1A) and claiming of refund is explained with examples;
This Circular will be useful in a given situation where intra-state tax was already paid and subsequently interstate tax is actually paid, or vice versa.

5. Clarification in relation to GST rates and Classification; Circular No. 163/19/2021-GST dated 6th October, 2021:
The CBIC has issued the above Circular to explain the changes made in Entries in light of decisions taken in the 45th Council Meeting. The changes are effected by the Notifications referred above and explained in this Circular along with the background for changes.

6. Clarification in relation to applicable GST rates and exemption on certain Services; Circular No. 164/20/2021-GST dated 6th October, 2021:
Similar to the above Circular 163/19/2021, this Circular is issued to clarify the amendment made to entries
relating to services in light of decisions taken in the 45th Council Meeting. The changes are explained with the background.

INSTRUCTIONS
Instruction No. 2 – 2020-2021 dated 22nd September, 2021 has been issued. By this Instruction, the Department is reminded of time limits for initiating action under sections 73 and 74 of the CGST Act and further instruction to tax and to take timely action.

ADVANCE RULING
Composite Supply
M/s SHV Energy Pvt. Ltd. [Order No. A.R. Com/27/2018; dated 6th August, 2021 and TSAAR Order No. 06/2021] (Telangana)
The applicant applied for determination of the nature of his transaction. The facts are that the applicant is a supplier of LPG to domestic and industrial users. In the application it is submitted that it enters into an LPG supply agreement with industrial users for longer periods ranging from five to ten years. They have to set up a structure called manifold at the premises of the recipient for supply of LPG. This manifold consists of LPG cylinders, regulators, primary piping, pressure regulator systems, etc. The ownership of the structure lies with the applicant. The purchaser pays rental charges at the rate of Rs. 5,000 per month for this structure.

Further, since setting up of this system involves substantial investment, the customer is obliged to purchase LPG exclusively from the applicant and the conditions of the agreement specify the minimum quantity to be lifted from SHV. In the event of the purchaser not lifting the minimum quantity, such purchaser has to pay commitment charges at the rate of Rs. 2,900 per metric ton of such shortfall in quantity, called as ‘take or pay’ charges.

Based on the facts mentioned above, the applicant sought Advance Ruling on the following issues:
a. Whether the impugned supply can be regarded as ‘composite supply’ and whether the rate of tax of the principal supply could be adopted for the whole of the supplies?
b. The applicant sought determination in respect of the following specific questions:

i. Whether sale of LPG, collection of ‘take or pay’ charges for not lifting minimum assured quantity and rental charges for supplier gas system installed at the customer premises to store the LPG, which is a condition precedent for supply of LPG, be treated as composite supply u/s 2(30) of the GST Act, 2017?
ii. Whether supply / sale of LPG be treated as principal supply for the above-mentioned transaction?

In the course of the hearing, the above issues were reiterated. Judgments / orders were relied upon to support the issue that it is composite supply.

The AAR referred to the definition of ‘composite supply’ in section 2(30) which is reproduced as under:

‘“Composite supply” means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply.

Illustration: Where goods are packed and transported with insurance, the supply of goods, packing materials, transport and insurance is a composite supply and supply of goods is a principal supply.

The AAR also referred to the judgment of the Supreme Court in the case of Abbott Health Care Pvt. Ltd. (2020) 74 GSTR 37 (Kerala) – 2020-VIL-08-Ker, in which it is held that a composite supply must take into account supplies as effected at a given point in time on ‘as is where is’ basis.

He also referred to the guidelines about naturally bundled supply (as in Education Guide on Taxation of Services published by CBE & Con 20th June, 2012 at para 9.2.4) mentioned as under:
a. There is a single price or the customer pays the same amount, no matter how much of the package they actually receive or use.
b. The elements are normally advertised as a package.
c. The different elements are not available separately.
d. The different elements are integral to one overall supply – if one or more is removed, the nature of supply would be affected.

The AAR observed that as per the illustration given in the definitions, the supply of service, i.e., insurance and goods, go alongside each other. Therefore, a composite supply should be similar to a supply mentioned in the illustration to the definition in section 2(30), where two or more taxable goods or services are supplied along with each other to constitute a composite supply.

Based on the above background, the AAR observed that ‘take or pay’ charges are evidently compensation for breach of contract and a penalty stipulated to be paid to the applicant by his buyer for not purchasing the minimum quantity specified in the agreement. He therefore held that these charges come into existence only when there is no supply of LPG, meaning thereby that the supply of LPG and ‘take or pay’ charges are mutually exclusive and can never exist together. It observed that forbearance comes into existence only upon breach and hence the requirements of a composite contract as mentioned above are not fulfilled.

Accordingly, rejecting the contention of the applicant, the Learned AAR passed the following order:

*Question raised*	*Advance ruling issued*
1. Whether sale of LPG, collection of ‘take or pay’ charges for not lifting minimum assured quantity, and rental charges for Supplier Gas System installed at the customer’s premises to store the LPG which is a condition precedent for supply of LPG, be treated as composite supply u/s 2(30) of the GST Act, 2017?	1. Sale of LPG, collection of ‘take or pay’ charges for not lifting minimum assured quantity and rental charges for Supplier Gas System installed at the customer’s premises do not form a composite supply
2. Whether supply / sale of LPG be treated as principal supply for the above-mentioned transaction?	Does not arise in view of the above

Question raised

Advance ruling issued

1. Whether sale of LPG, collection of ‘take or pay’ charges for
not lifting minimum assured quantity, and rental charges for Supplier Gas
System installed at the customer’s premises to store the LPG which is a
condition precedent for supply of LPG, be treated as composite supply u/s
2(30) of the GST Act, 2017?

1. Sale of LPG, collection of ‘take or pay’ charges for not
lifting minimum assured quantity and rental charges for Supplier Gas System
installed at the customer’s premises do not form a composite supply

2. Whether supply / sale of LPG be treated as principal supply
for the above-mentioned transaction?

Does not arise in view of the above

BCAJ Admin

GOODS AND SERVICES TAX (GST)

I. SUPREME COURT

1 Union of India vs. Vishnu Aroma Pouching (P) Ltd. [2021 (129) taxmann.com 17 (SC)] Date of order: 29th June, 2021

The Supreme Court dismissed the SLP as barred by limitation and passed strictures on the Department regarding its lethargy and delay in filing the SLP without any cogent or plausible ground for condonation of delay, calling it a ‘certificate case’ and also imposed a cost of Rs. 25,000 for wastage of judicial time

FACTS

The Supreme Court dismissed the SLP belatedly filed by the Revenue against the order of the Gujarat High Court in the case of Vishnu Aroma Pouching (P) Ltd. vs. Union of India [2021] 129 taxmann.com 16 (Guj). In the said case, the petitioner paid GST liability for August, 2017 on 19th September, 2017 (i.e., before the due date). However, due to portal limitations, it could not file the return for August, 2017 before the due date. Further, when the return was filed on 21st September, 2017, due to technical glitches all the amounts appeared as ‘Nil’ in the said return. After a long-drawn follow-up with the Department, the petitioner was permitted to file Form GSTR3B for September, 2019 with taxes payable for August, 2017 and the same was accepted by the system. The Gujarat High Court had held that the petitioner had duly discharged the tax liability of August, 2017 within the period prescribed; however, it was only on account of technical glitches in the system that the tax amount had not been credited to the Government account, hence the petitioner would not be liable to pay any interest on the tax amount for the period from 21st September, 2017 to October, 2019.

HELD

While dismissing the SLP as barred by limitation, the Court passed strictures regarding the lethargy on the part of the Revenue Department for the delay in filing the SLP and called this case as a ‘certificate case’ filed only with the object to obtain a quietus from the Supreme Court, to complete a mere formality and to save the skin of the officers who may be at default in following the due process, or may have done it deliberately, noting that the petitioner has approached this Court without any cogent or plausible ground for condonation of delay. Referring to the decisions in the cases of State of Madhya Pradesh vs. Bheru Lal [SLP (c) Diary No. 9217 of 2020, dated 15th October, 2020]; and State of Odisha vs. Sunanda Mahakuda [SLP (c) Diary No. 22605 of 2020, dated 11th January, 2021], the Court stated that the leeway that was given to Government / public authorities on account of innate inefficiencies was the result of certain orders of this Court which came at a time when technology had not advanced and thus, greater indulgence was shown. This position is no more prevalent and the current legal position has been elucidated by the judgment of this Court in Office of Chief Post Master-General vs. Living Media India Ltd. [2012] 20 taxmann.com 347. The Supreme Court thus imposed costs on the petitioner(s) of Rs. 25,000 for wastage of judicial time.

2 Union of India & others vs. VKC Footsteps India Pvt. Ltd. [2021-TIOL-237-SC-GST] Date of order: 13th September, 2021

In case of Inverted Duty Structure, refund is allowed only of inputs and not with respect to input services

FACTS
Section 54(3) of the CGST Act, 2017 allows refund of unutilised input tax credit involving zero-rated supplies made without payment of tax and credit accumulated on account of the rate of tax on inputs being higher than the rate of tax on output supplies. Writ petitions under Article 226 of the Constitution were instituted before the High Courts of Gujarat and Madras. It was submitted that refund on account of inverted duty structure should be allowed on both input as well as input services. Restricting the credit only to inputs would be unconstitutional as it would lead to discrimination between input and input services. The Division Bench of the Gujarat High Court held that ‘Explanation (a) to Rule 89(5) which denies the refund of “unutilised input tax” paid on “input services” as part of “input tax credit” accumulated on account of inverted duty structure is ultra vires the provision of Section 54(3) of the CGST Act, 2017’. The High Court therefore allowed the refund. However, the Madras High Court gave a contrary decision in the matter. The Union of India has filed the present appeal against the decision of the Gujarat High Court.

HELD
The Court noted that section 54(3) allows refund of inputs, which by no parameters can also include input services. The Court noted that with the clear language which has been adopted by the Parliament while enacting the provisions of section 54(3), the acceptance of the submission will involve a judicial re-writing of the provision which is impermissible in law. Reading the expression ‘input’ to cover input goods and input services would lead to recognising an entitlement to refund, beyond what was contemplated by Parliament. The Court stated that proviso to section 54(3) is not a condition of eligibility but a restriction provided in the law. It was also noted that a discriminatory provision under tax legislation is not invalid per se, input goods and input services are not treated as one and the same, and they are distinct species under the GST law. Therefore, the submission that goods and services must necessarily be treated at par cannot be accepted. Thus, refund is allowed only in case of inputs in case of inverted duty structure. Therefore, the Court affirmed the decision of the Madras High Court and allowed the appeal of the Revenue filed against the Gujarat High Court.

II. HIGH COURT

3 Deem Distributors (P) Ltd. vs. UOI [2021 (129) taxmann.com 134 (Tel)] Date of order: 3rd August, 2021

The provisions of the GST law do not confer any advisory jurisdiction on the respondents to issue any ‘advises’ to the taxpayers to pay tax before ascertainment of the liability as required by section 74(9) and no demands in the form of letters asking the taxpayer to pay GST along with interest and penalty can be issued or raised when the investigation is still in progress

FACTS
The petitioner is a partnership firm registered under the GST Act. They availed Input Tax Credit (ITC) based on invoices issued by certain suppliers / firms. The Department requested them to reverse the said credit on the ground that the said credit has been availed fraudulently without receiving any material as the suppliers / firms are fictitious and are issuing fake invoices with intent to pass on the ITC. Summonses were also issued in the name of the Directors of the petitioner firm; however, the investigation was not complete and the show cause notice u/s 74 was issued. The petitioner deposited certain amounts merely to avoid coercion and buy peace, but challenged the said letters before the Court on the ground that liability cannot be determined by the respondents before conducting inquiry when even the investigation is incomplete and that any advice or demand can at best be a provisional one; and the petitioner cannot be compelled coercively to pay the amounts.

HELD
Referring to the provisions of section 74 and the affidavit in reply filed by the Department, the Court held that a conclusion that the petitioner had availed ITC and raised invoices by certain fictitious suppliers without actual receipt of goods, appears to have been drawn based on an incomplete investigation. It further held that section 74(5) gives a choice to the assessee to make any payment if he so chooses, but it does not confer any power on the respondents to make a demand as if there has been a determination of the liability of the assessee and demand tax along with interest and penalty. Hence, before ascertainment of the liability, as required by section 74(9), the Department could not have issued the letters advising the petitioner to reverse the input tax allegedly availed. The Court accordingly held that no advisory jurisdiction is conferred on the respondents to issue any ‘advises’ of the nature issued to the petitioner and no demands can be issued or raised when the investigation is still in progress. The Department cannot be allowed to put the cart before the horse and collect any tax, interest or penalty before they determine it in an inquiry. Any such action is wholly arbitrary and without jurisdiction. The Court thus directed the Department to refund the amount already deposited along with interest and proceed with their inquiry strictly in accordance with the provisions of law.

4 R.M. Dairy Products LLP vs. State of UP [2021 (129) taxmann.com 37 (All)] Date of order: 15th July, 2021

Rule 86A is not a recovery provision but only a provision to secure the interest of Revenue. It only provides, in certain situations and upon certain conditions being fulfilled, the specified amount that may be held back and be not allowed to be utilised (i.e., debited to the electronic credit ledger) by the assessee towards discharge of its liabilities on the outward tax or towards refund. Hence, if as on the date of passing the order there is no balance in the electronic credit ledger, the order would be read to create a lien up to the monetary limit mentioned in the said order in respect of future credits availed and credited in the electronic credit ledger

FACTS
The petitioner filed a writ petition challenging the order passed by the Department under Rule 86A(1)(a)(i) [i.e., not allowing debit in the electronic credit ledger of the amount equivalent to the credit of input tax that has been allegedly availed on the strength of tax invoices or debit notes issued by the registered person who has been found to be non-existent or not to be conducting any business] of the State / Central Goods and Services Tax Rules, 2017 raising the objections that the Department has no jurisdiction or authority to block any ITC over and above any amount that may have been actually available on the date of the order. The Department has to record a positive ‘reason to believe’ that credit of input tax had been fraudulently availed or the petitioner was wholly ineligible to avail the same. The adjudication proceedings in respect of the very same matter are underway in accordance with section 74 and till those proceedings are concluded, no amount would become recoverable from the petitioner u/s 78.

HELD
Referring to various provisions of the Act, the Court noted that the recovery provisions are contained in section 79 and the enabling Rules fall under Chapter XVIII being Rules 142 to 161. On the other hand, Rule 86A falls under Chapter IX of the Rules regarding payment of tax. It further held that the ambit and purpose of Rule 86A are inherently different and independent of the recovery provisions. Referring to Rule 86A, the Court held that it does not contemplate any recovery of tax due from an assessee. It only provides, in certain situations and upon certain conditions being fulfilled, the specified amount that may be held back and be not allowed to be utilised by the assessee towards discharge of its liabilities on the outward tax or towards refund. It creates a lien without actual recovery being made or attempted. The Court further clarified that Rule 86A does not allow the Revenue to reverse or appropriate any part of the credit existing in the electronic credit ledger or to adjust that credit against any outstanding demand or likely demand. It is at most a provision to secure the interest of Revenue, to be exercised in the presence of the relevant ‘reasons to believe’, as recorded and in respect of the amount equivalent to credit fraudulently taken which has to be kept unutilised. To that effect, the Legislature has chosen the words ‘not allow debit’ which is different from the word ‘appropriate’. The adjustment or appropriation may arise only upon an adjudication order attaining finality or after the lapse of three months from the date of it being passed if there is no stay granted in appeal, etc., that, too, as a consequence of the recovery provisions but not under Rule 86A of the Rules.

The Court further held that the words ‘input tax available’ used in the first part of sub-rule (1) of Rule 86A cannot be read as actual input tax available on the date of the order passed under that Rule. It would always relate back in time when the assessee allegedly availed ITC either fraudulently or which he was not eligible to avail. It does not refer to and therefore does not relate to the ITC available on the date of Rule 86A being invoked. The word ‘has been’ used in Rule 86A (1) leaves no manner of doubt in that regard. The Court also explained that the ‘ineligibility’ of the credit as mentioned in the said Rule is only for the reasons mentioned in the said Rule. The Court noted that the correctness or otherwise or the sufficiency of the ‘reason to believe’ was not the subject matter of dispute before it and the ‘reason to believe’ is based on material with the competent authority indicating the non-existence of the selling dealer which is a valid reason to invoke the said Rule.

5 Satyam Shivam Papers Pvt. Ltd. vs. Assistant Commissioner of Service Tax, Hyderabad [2021 (50) GSTL 459] Date of order: 2nd June, 2021

Section 129 of the Central Goods and Services Tax Act, 2017 – Mere expiry of E-way bill cannot lead to a presumption of intention to evade tax and invoke penalty

FACTS
The petitioner had made an intra-state supply and generated an E-way bill on 4th January, 2020. The transporter started for the delivery by an auto-trolley at 4.33 pm on the same day. On the way, there was a traffic jam on account of a political rally due to which the auto trolley could not move. This continued till 8.30 p.m. by which time the shop of the buyer was closed. Therefore, the driver took the auto trolley to his residence and planned to complete the delivery on the next working day. The next day being a Sunday, the goods were intended to be delivered on 6th January, 2020. On the way to delivery, the Respondent No. 2 (i.e., Deputy State Tax Officer, Bowenpally-II, Circle, Begumpet Division) detained the goods and a Notice for Detention in Form GST MOV-07 was issued alleging that the validity of the E-way bill had expired and proposing to impose tax and penalty.

The detained goods were unloaded at the premise of a relative of Respondent No. 2 without tendering any acknowledgement receipt for the same. The petitioner made various representations against the action of Respondent No. 2; however, all of them were ignored, stating that it was a clear case of evasion of tax. Therefore, to get the goods released, the petitioner made a payment of Rs. 69,000 towards tax and penalty on 20th January, 2020. Further, the Respondent No. 2 passed an order dated 22nd January, 2020 in Form GST MOV-09, which was signed by the Respondent No. 1 (i.e., Assistant Commissioner [ST], Osmanganj, Circle, Charminar Division, Hyderabad). It was stated in the order that the petitioner admitted the liability and it had no objection to pay the proposed tax and penalty. Aggrieved by the said order of 22nd January, 2020, the petitioner preferred the present petition.

HELD
The High Court held that there had been a blatant abuse of power by unloading the goods at a relative’s premise and by issuing an order that was signed by the Respondent No. 1. Also, no material was placed on record by the Respondent No. 2 to conclude that there was evasion of tax by the petitioner. Mere expiry of time limit mentioned on the E-way bill cannot lead to a presumption of intention to evade tax. Therefore, the order dated 22nd January, 2020 was set aside and the Respondents were directed to refund the amount of Rs. 69,000 to the petitioner along with interest @ 6% p.a. from 20th January, 2020 till the date of repayment. The Respondent No. 2 was also directed to pay a cost of Rs. 10,000 to the petitioner.

6 Anuj Mahesh Gupta vs. Asstt. Commissioner of Sales Tax, Mumbai [2021 (50) GSTL 180 (Bom)] Date of order: 12th July, 2021

Section 167(2)(a)(ii) of Code of Criminal Procedure – Assessee can be granted bail on expiry of 60 days from detention even in case of cognisable and non-bailable offences

FACTS
The petitioner is sole proprietor of M/s Savvy Fabrics and partner in M/s Shubhmangal Textile Industries LLP. It was alleged that he was actively involved in receiving tax invoices or bills without any actual supplies of goods or services or both and claiming ineligible ITC on such invoices. Thus, he had committed cognisable and non-bailable offences u/s 132(1)(b)(c) of the MGST Act by receiving fake invoices of more than Rs. 277 crores and taking ITC of at least Rs. 31 crores. As per clause (i) of section 132 of the CGST Act, in cases where the amount of tax evaded or the amount of ITC wrongly availed of or utilised or the amount of refund wrongly taken exceeds Rs. 500 lakhs, then the punishment would be imprisonment for a term which may extend to five years and with fine. As per section 167 of the Code of Criminal Procedure, 1973 where investigation could not be completed within 24 hours, the accused can be detained up to a maximum period of 60 days where the investigation relates to an offence other than those which are punishable with death, imprisonment of life or imprisonment of at least ten years and on expiry of such 60 days, the accused shall be released on bail. The petitioner was arrested on 15th January, 2021 and had completed 54 days in custody; therefore, the present petition was filed to examine the prayer for bail made by the petitioner.

HELD
The High Court applied section 167(2)(a)(ii) of the Code of Criminal Procedure, 1973 and held that the petitioner should be released on bail subject to certain conditions, viz., he should furnish case surety of Rs. 5 lakhs and within two weeks of release he should furnish solvent surety of like amount, the petitioner should co-operate in the investigation, he shall not tamper with any evidence or try to intimidate any witness, and the petitioner shall deposit his passport with the authorities.

7 Kerala Communicators Cable Ltd. vs. Addl. Dir.-General DGGI, Kochi [2021 (50) GSTL 116 (Ker)] Date of order: 24th March, 2021

Section 83 of the CGST Act, 2017 – Stay was granted to furnish the bank guarantee during pendency of writ petition filed to challenge the validity of the provisional attachment of bank accounts

FACTS
A search and inspection u/s 67 of the CGST Act was conducted at the premises of the petitioner. Based on this and to protect the interest of Revenue, the respondent had passed orders to provisionally attach the bank accounts of the petitioner. The petitioner had objected to such provisional attachment of its bank accounts and preferred a writ petition. During the pendency of the said petition, the provisional attachment order was modified and the petitioner was directed to furnish a security in the form of bank guarantee equivalent to Rs. 30 crores along with a bond. Pursuant to this direction, the petitioner furnished the bank guarantee and bond under protest reserving the right to challenge the modified order. Thus, being aggrieved by the modified provisional attachment order imposing additional condition to furnish bank guarantee and bond, the present writ petition was filed.

HELD
The High Court observed that the respondent had not disclosed reasonable apprehension that necessitated the issuance of the provisional attachment order. Also, the bank guarantee of about Rs. 30 crores would certainly block a huge amount from the business of the petitioner. Therefore, the High Court granted a stay on the direction that required the petitioner to furnish the bank guarantee till the disposal of the writ petition and directed the petitioner to execute an undertaking that it shall not sell, alienate or deal with any of its fixed assets, plant, property and equipment shown in the balance sheet dated 31st March, 2020.

8 Dhirendra Singh vs. Commissioner of CGST, Commissionerate [2021 (50) GSTL 176 (Guj)] Date of order: 4th March, 2021

Input tax credit wrongly availed in respect of goods allegedly never received by assessee – Department directed to proceed further in accordance with law – Section 70 of CGST Act, 2017

FACTS
The petitioners are the Directors of M/s Manpasand Beverages Limited (‘MBL’). They were issued multiple summonses and instructed to produce all the documentary evidence essential to verify their GST liability. However, the Directors were unable to produce the requisite documents and the final GST liability could not be arrived at. Hence, the Department was of the view that MBL had contravened the provisions of section 16 of the CGST Act inasmuch as they knowingly availed ITC and used the same in payment of GST liability. This constitutes an offence under sections 132(1)(b), 132(1)(c) and 132(1)(l) of the CGST Act and they are liable for punishment of imprisonment up to five years in terms of section 132(5) of the CGST Act. Therefore, the present writ petition was filed to evade arrest by challenging the validity of the summonses issued u/s 70 of the CGST Act.

HELD
The High Court held that there was no good or legal ground to challenge the validity of the summonses issued u/s 70 of the CGST Act. As such, the writ application becomes infructuous and the Court was not inclined to extend any further protection to the petitioners. Further, if the petitioners apprehended that they would be arrested any time, it was open for them to take recourse to the steps available to them in accordance with the law to avoid arrest.

III. AUTHORITY OF ADVANCE RULING

9 Eastern Coalfields Ltd., Kolkata [2021-TIOL-221-AAR-GST] Date of order: 9th August, 2021

Since the supplier has paid tax belatedly, the assessee is denied input tax credit

FACTS
The question is whether the applicant is entitled for ITC already claimed by him on the invoices raised by one of the vendors pertaining to January, February and March, 2020 for which the supplier has actually paid the tax charged in respect of such supply to the Government in the month of November, 2020 while filing the GSTR3B in November, 2020. And whether the applicant has to reverse the said ITC already availed by him where the vendor has actually paid the tax, though belatedly.

HELD
The Authority noted that section 16 of the GST law prescribes conditions and restrictions towards entitlement of ITC. Sub-section (c) allows ITC provided the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of ITC admissible in respect of the said supply. However, it is evident that while the applicant has availed ITC in the months of January, February and March, 2020, respectively, the supplier has declared such outward supplies in his respective Form GSTR1 in the month of November, 2020 and has also paid the taxes on such supply upon furnishing of return in Form GSTR3B in the month of November, 2020. The Authority also noted that Form GSTR2B has been made effective from 1st January, 2021 but at the same time the applicant cannot deny that the provisions of sub-rule (4) of Rule 36 were already in force during the period when the applicant availed of the ITC. The applicant is therefore not entitled for ITC claimed by him pertaining to the months January, February and March, 2020 for which the supplier has furnished Form GSTR1 and Form GSTR3B in the month of November, 2020 and the applicant is, therefore, required to reverse the said ITC.

Note: The Authority in the present case has denied the entire credit even though the tax is paid by the supplier. Denial of entire credit does not appear to be justified; at the most, interest could be demanded for availment of credit prior to payment by the supplier.

IV. APPELLATE AUTHORITY FOR ADVANCE RULING

10 M/s Pioneer Bakers, Odisha [2021-TIOL-29-AAAR-GST] Date of order: 27th July, 2021

Restaurant is a place where food items are prepared and served to customers. A mere outlet where ready-to-eat items are sold across the counter cannot be considered as a restaurant

FACTS
The applicant is operating under the Brand name of ‘Go-Cool’ since the year 1997. They have established it as a brand in the field of bakery items, especially cakes. Their principal business is producing and selling of bakery products, viz., cakes, artisan cakes, pastries, pizza, patties, sandwiches, self-manufactured ice-creams, handmade chocolates, cookies, beverages, etc. They also offer a number of customisation options to customers with respect to the above products. The outlets are equipped with all the facilities to dine such as tables and chairs, air conditioner, drinking water, stylish lights for providing a nice ambience which provide an overall good experience to the customers.

The question before the Authority, whether supply of food items prepared at the premises of the applicant and supplied to the customers from the counter (with the facility to consume the same in the air-conditioned premises itself) is covered under restaurant services was answered in the affirmative. Aggrieved by the order, this appeal was filed.

HELD
The Authority noted that the meaning of restaurant is provided in the Cambridge Dictionary as a place where meals are prepared and served to the customer. The serving of the items to the customers for consuming the food in the premises is done for very few customers. Therefore, the establishment cannot be considered as a restaurant. It was stated that, in the instant case, it is a bakery outlet where ready-to-eat items are sold and a mere facility is provided to eat them in the shop itself. The applicant only prepares birthday cakes as per orders for take-out service and does not prepare birthday cakes immediately on the customer’s order. For those who want to consume it within the premises, they merely supply the readily available cakes. They do not serve food on the customer’s table and in most cases the items are sold only across the counter. Therefore, the applicant should not be considered as providing Restaurant Services.

BCAJ Admin

RECENT DEVELOPMENTS IN GST

NOTIFICATIONS
Changes in Rules: Notification No. 32/2021-Central Tax dated 29th August, 2021

By the above Notification, the following changes have been effected in the CGST Rules, 2017:

(i) In case of companies a facility to upload returns, etc., by EVC was valid up to 31st August, 2021. With this Notification, the said facility is extended till 31st October, 2021. The facility will not be available from 1st November, 2021.
(ii) As per rule 138E of the CGST Rules, 2017 there are restrictions on furnishing of information in Part A of Form GST-EWB-01, if there is failure to file returns for two consecutive tax periods. However, in view of the pandemic, the above restriction was made non-applicable if the failure to file return was for the period February, 2020 to August, 2020 and the relaxation was operative up to 15th October, 2020. Now, by inserting a 5th proviso in the above rule, the said restriction is relaxed for the period from 1st May, 2021 to 18th August, 2021 in case where the return in Form GSTR3B or Form GSTR1 or GST-CMP-08 has not been filed for the period March, 2021 to May, 2021.
(iii) Certain changes have been made in Form GST-ASMT-14 (i.e., notice for assessment u/s 63). The notice now provides a reference number of the order cancelling registration. This will be useful for ready reference. The second change in the above form is to remove duplication of contents. And the third change is to incorporate the address of the issuing authority. This is also a good change so that the noticee can easily locate the officer.

Extension of amnesty regarding late fees: Notification No. 33/2021-Central Tax dated 29th August, 2021
By the earlier Notification dated 1st June, 2021 (details of which are given in the BCAJ issue of July, 2021) the Government has given relaxation in late fees for delayed filing of returns. The time limit for availing the above relaxation was up to 31st August, 2021. By the above Notification, the said time limit is extended up to 30th November, 2021.

Extension for filing revocation application: Notification No. 34/2021-Central Tax dated 29th August, 2021
Upon cancellation of registration, the affected person is allowed to file revocation application whereby he can apply for revocation of cancellation of registration. Such application is required to be filed within 30 days of cancellation of the registration order. By the above Notification, relaxation is given that if such cancellation is under section 29(2)(b) or (c) and if the time limit for filing revocation application falls between 1st March, 2020 and 31st August, 2021 then, such person can file revocation application till 30th September, 2021.

Under section 29(2)(b) the registration can be cancelled if there is failure to file returns by the composition person for three consecutive tax periods.

Under section 29(2)(c) the registration can be cancelled if there is failure to file returns by any registered person for a continuous period of six months.

The benefit of relaxation is given in the above cases only.

CIRCULARS

Clarification regarding extension of limitation for filing revocation application: Circular No. 158/14/2021-GST dated 6th September, 2021

The Government has given relaxation in filing revocation application as per Notification No. 34/2021-Central Tax dated 29th August, 2021, mentioned above. In respect of the above relaxation, the CBIC has issued the above Circular in which various clarifications covering various situations are given. The intention is that the affected person should get an opportunity to get his grievance of cancellation redressed by way of a revocation application.

Clarification on doubts related to scope of ‘Intermediary’ services: Circular No. 159/15/2021-GST dated 20th September, 2021

The Government has clarified the scope of Intermediary Services through the above Circular, issued after the GST Council meeting held on 17th September, 2021.

Clarification on certain issues: Circular No. 160/16/2021-GST dated 20th September, 2021
The above Circular has been issued to clarify certain issues in respect of
1. Time limit for availment of ITC in respect of Debit Notes to be considered with reference to the date of issuance of Debit Note, w.e.f. 1st January, 2021 [section 16(4)].
2. No necessity of carrying physical copy of Tax Invoice during journey in case where invoice has been generated in prescribed mode of e-invoice. [Rule 48(4).] Production of QR code, with embedded IRN, would suffice.
3. Applicability of restrictions imposed u/s 54(3) of the CGST Act for availment of refund of accumulated ITC, in case of export of certain goods.

Clarification relating to Export of Services: Circular No. 161/17/2021-GST dated 20th September, 2021
An important aspect related to Export of Services has been clarified through the above Circular. After a detailed analysis of legal provisions, the Circular concludes that ‘a company incorporated in India and a body corporate incorporated by or under the laws of a country outside India, which is also referred to as foreign company under Companies Act, are separate persons under the CGST Act, and thus are separate legal entities. Accordingly, these two separate persons would not be considered as “merely establishments of a distinct person in accordance with Explanation 1 in section 8”.’

Therefore, supply of services by a subsidiary / sister concern / group concern, etc., of a foreign company, which is incorporated in India under the Companies Act, 2013, may qualify for being considered as export of services, as it would not be treated as supply between merely establishments of distinct persons under Explanation 1 of section 8 of the IGST Act, 2017. Similarly, the supply from a company incorporated in India to its related establishments outside India, which are incorporated under the laws outside India, would not be treated as supply to merely establishments of distinct person under Explanation 1 of section 8 of the IGST Act, 2017. Such supplies, therefore, would qualify as ‘export of services’, subject to fulfilment of other conditions as provided under sub-section (6) of section 2 of the IGST Act.

ADVANCE RULINGS
(1) ITC – Eligibility for Solar Plant
M/s KLF Nirmal Industries Pvt. Ltd. (Order No. 19/ARA/2021 dated 18th June, 2021) (Tamil Nadu)
The facts are that the applicant is in the business of edible oil and has an extracting plant in the State of Tamil Nadu. For operating the plant, the applicant has got a solar plant installed in its factory. The supplier has considered the supply / installation of the solar plant as works contract.

It is positively confirmed that the electricity generated is only used for its captive consumption in the plant and nothing is given to outside agencies. To substantiate this fact, they have produced the memo issued by the Tamil Nadu Generation and Distribution Corporation Ltd., wherein it is stated as under:

‘(13) At present, as per the Hon’ble TNERC’s Grid Connectivity and Intra-State Open Access Regulations, 2014, parallel operation charges (Rs. 15,000 per month per MW or part thereof as per TNERC Order No. 5 of 2019 dated 29th March, 2019) as fixed by the TNERC have to be paid by the generator. This charge is applicable as the generator is availing parallel operation with the grid for captive use of solar power without availing open access and it is subject to revision based on the TNERC order issued from time to time.’

The applicant also submitted that the solar plant is capitalised in their books in the category of ‘Plant and Machinery’ and also that no depreciation is claimed on the GST component.

Based on the above facts, the applicant has posed the following questions:

‘1. Whether the company is eligible to take input tax credit as inputs / capital goods or input services of the items listed in Appendix-A.
2. Whether the company is eligible to take input tax credit for inputs and services for running the solar plant.’

The AAR referred to the statutory provisions of sections 16 and 17 of the CGST Act and observed the requisites for getting ITC. He noted that the applicant fulfils the conditions of section 16 as it has tax invoice, it is for business, the goods are received, the tax charged is paid and the return is filed. There is no dispute about compliance of the above conditions.

Reference was also made to the provision of blocked credit in section 17(5)(c). The said section is also reproduced in the AR as under:

‘(5) Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18, input tax credit shall not be available in respect of the following, namely,
(c) works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service;
(d) goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.
Explanation – For the purposes of this Chapter and Chapter VI, the expression “plant and machinery” means apparatus, equipment and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes
(i) land, building or any other civil structures;
(ii) telecommunication towers; and
(iii) pipelines laid outside the factory premises.’

The AAR observed that the said section will not affect the case of the applicant because although the solar plant is a works contract and it is an immovable property, but still it is in the excluded category being ‘plant and machinery’.

There were other purchases in the block of plant and machinery. However, since it was not substantiated further, the AAR did not give any further ruling on the same.

Based on the above facts, the AAR held that the applicant is eligible to take ITC on the solar plant.

(2) Exemption – Registration
M/s Sachdeva College Ltd. (Advance Ruling No. HR/HAAR/2020-21/16 dated 23rd June, 2021) (Haryana AAR)
The applicant is a limited company incorporated under the Companies Act. It provides training to selected candidates sponsored by the Directorate of Welfare of Scheduled Caste and Backward Classes Department, Haryana (referred to as Directorate of Welfare).

There is an agreement with the Directorate of Welfare and the whole expenditure is borne by the Government.

Based on the above facts, the following questions were put before the AAR:

‘2. The questions framed in advance ruling application are:
2.1 To determine the liability to pay GST / IGST tax on training to students at the behest of the Directorate of Welfare of Scheduled Caste and Backward Classes Department, Haryana by the applicant under a training programme for which the total expenditure is borne by the State Government of Haryana which implements three types of schemes, i.e., State Scheme, Sharing basis, Centrally-sponsored Scheme, especially in view of Entry No. 72 of the Haryana Government Excise & Taxation Department Notification No. 47/ST-2 dated 30th June, 2017, and whether this Entry grants exemption of GST on the training of students by the petitioner?
2.2 Whether the applicant is liable to be registered under the State of Haryana under HGST / CGST in view of the facts and circumstances of the present case?’

The applicant is claiming exemption for fees received from the Directorate of Welfare. The Excise and Taxation Commissioner, Haryana has clarified that no GST is payable on schemes related to training as per Entry No. 72 of the Haryana Department vide Notification dated 30th June, 2017.

The AAR referred to the exemption entry in the Haryana SGST and CGST as under:

‘E. Following services have been exempted by Notification No. 47-ST-2 (HGST) Entry No. 72 of HGST; 09/2017 (IGST) Entry No. 75 of IGST; and 12/2017 (CGST) Entry No. 69 of CGST:

47-ST-2 (HGST) Entry No. 72 of HGST:
“Services provided to the Central Government, State Government, Union Territory Administration under any training programme for which total expenditure is borne by the Central Government, State Government, Union Territory Administration.”

09/2017 (IGST) Entry No. 75 of IGST:
“Services provided to the Central Government, State Government, Union Territory Administration under any training programme for which total expenditure is borne by the Central Government, State Government, Union Territory Administration.”

12/2017 (CGST) Entry No. 69 of CGST:
“Services provided to the Central Government, State Government, Union Territory Administration under any training programme for which total expenditure is borne by the Central Government, State Government, Union Territory Administration”.’

The meaning of ‘coaching’ as given in the Cambridge Dictionary was referred to, which defines coaching as under:
‘the job or activity of providing training for people or helping to prepare them for something.’

The AAR relied upon the clarification given by the Excise Commissioner to the Directorate of Welfare in which, with reference to the above Entry No. 72 in Notification No. 47/HGST dated 30th June, 2017, it is clarified that no tax is payable, the transaction being exempt under the above entry.

Accordingly, the AAR opined that no tax is payable on the above transactions.

Regarding the liability for registration, the AAR observed as under:

‘Further, section 23 of the Act provides that any person engaged exclusively in the business of supplying goods and services or both that are not liable to tax or fully exempt from tax under this Act or under the Integrated Goods and Service Tax Act… So the applicant is not liable for registration till he supplies goods and services or both that are not liable to tax or fully exempt from tax under the GST Acts.’

Thus, the AR decided in favour of the applicant.

(3) Exempt supply vis-à-vis local authorities
M/s CMS Engineering Concern (Advance Ruling No. 05/WBAAR/2021-22 dated 30th July, 2021) (WB AAR)
The applicant, M/s CMS Engineering Concern, is engaged in the operation of water pumps and safeguarding pumping machinery at various pump-houses in different districts of West Bengal for supply of drinking water to the public and hospitals upon receipt of a work order from the Directorate of Public Health Engineering, Government of West Bengal (hereinafter referred to as the PHE Directorate).

The applicant is of the opinion that he provides services to local authority, i.e., Panchayat and Municipality, whose powers and duties are described in Article 243G and Article 243W of the Constitution of India. The services are described in the Eleventh and Twelfth Schedule of the Constitution attached to Article 243G (Panchayat) and Article 243W (Municipality). Both of the said Schedules contain ‘Drinking water’ and ‘Water supply for domestic, industrial and commercial purposes’.

Therefore, according to the applicant, the services provided by him are pure services which do not involve any supply of goods. Further, such services are provided to a local authority by way of activity in relation to the function entrusted to the Panchayat under Article 243G or in relation to the function entrusted to the Municipality under Article 243W and therefore the services are exempt from taxation vide entry at serial number 3 of the Notification No. 1136 F.T. dated 28th June, 2017 of the WB SGST [corresponding Central Notification No. 12/2017-Central Tax (Rate) dated 28th June, 2017 under CGST], as amended from time to time.

Based on the aforesaid nature of supply, the applicant has sought advance ruling on the question as to whether or not the services provided by him are exempt from GST.

The applicant referred to the advance ruling pronounced by the West Bengal AAR in the matter of Mahendra Roy (Case No. 35 of 2019-2019-VIL-288-AAR) where the applicant is stated to be providing conservancy / solid waste management service to the Conservancy Department of the Howrah Municipal Corporation. In this case, the AAR has held that the supply is exempt from the payment of GST under Sl. No. 3 of Notification No. 12/2017-Central Tax (Rate) dated 28th June, 2017, as amended from time to time.

The Revenue objected that the services rendered by the applicant for supervision of electrical installation and operating and guarding of pumping machinery are supply of services in the form of works contract or job work. These supplies in no way are sovereign services of the Government. Therefore, it was submitted that the stated services could not be considered as services falling under the purview of Articles 243G and 243W of the Constitution.

The AAR referred to the Entry involved and reproduced the same as under:

Entry serial No. 3 of the Notification No. 1136 F.T. dated 28th June, 2017:

Sl. No.	Chapter, Section, Heading, Group or Service Code (Tariff)	Description of Services	Rate (per cent)	*Condition*
3	Chapter 99	Pure Services (excluding works	NIL	NIL
		(continued) contract service or other composite supplies involving supply of any goods) provided to the Central Government, State Government or Union Territory or Local Authority or a Governmental authority by way of any activity in relation to any function entrusted to a Panchayat under Article 243G of the Constitution or in relation to any function entrusted to a Municipality under article 243W of the Constitution

Sl.
No.

Chapter, Section, Heading, Group or Service Code
(Tariff)

Description
of Services

Rate
(per cent)

Condition

Chapter 99

Pure Services (excluding works

NIL

(continued)

contract service or other composite supplies involving supply of
any goods) provided to the Central Government, State Government or Union
Territory or Local Authority or a Governmental authority by way of any
activity in relation to any function entrusted to a Panchayat under Article
243G of the Constitution or in relation to any function entrusted to a
Municipality under article 243W of the Constitution

Based on the above entry, the issues to be decided were:
(i) whether the instant supply of services can be treated as pure services;
(ii) whether the applicant provides services to the Central Government, State Government or Union Territory or Local Authority or a Governmental authority; and
(iii) whether the said services are in relation to any function entrusted to a Panchayat under Article 243G or to a Municipality under Article 243W of the Constitution of India.

The AAR observed that pure services will mean supply of services which do not involve any supply of goods.

Although minute details of the work involved were not available, the AAR assumed that if it does not involve goods, it will not be works contract, as works contract takes place when goods are involved. Since there is no activity of treatment or process of goods, it cannot be job work also, observed the AAR.

The AAR also referred to the functions entrusted to the Panchayat and Municipality under Articles 243G / 243W by reproducing the Articles.

He found that the functions entrusted to a Panchayat or to a Municipality as listed in the Eleventh and / or Twelfth Schedule include the functions like drinking water or water supply for domestic, industrial and commercial purposes.

In view of the above, the AAR held that the services as provided by the applicant for operation of water-pump and safeguarding pumping machinery at various pump-houses in different districts for supply of drinking water is a matter listed in the Eleventh and / or Twelfth Schedule in relation to functions entrusted to a Panchayat under Article 243G and / or to a Municipality under Article 243W of the Constitution and accordingly held the supply as exempt.

(4) Maintainability of Advance Ruling application
M/s Sree Krishna Rice Mill (Advance Ruling No. 04/WBAAR/2021-22 dated 30th July, 2021) (WB AAR)
The applicant, Sree Krishna Rice Mill, has entered into agreements with State Government agencies for custom milling of paddy, i.e., production of rice on job work. In the execution of custom milling, the applicant has to collect / procure paddy from paddy storage centres (commonly known as Mandis) and thereafter transport it to its milling site. After milling of rice from the said procured paddy, the applicant delivers such milled rice from its milling site to the various delivery centres.

According to the applicant, milling charges and usage charges for packing of rice is a taxable supply on which tax is levied @ 5% (CGST @ 2.5% and SGST @ 2.5%). However, on the issue of the services of transportation of paddy / rice, the applicant is of the opinion that the transportation charges in relation to paddy / rice are exempt from payment of tax under Entry serial No. 21 of Notification No. 12/2017-Central Tax (Rate) dated 28th June, 2017, being services provided by a goods transport agency by way of transport in a goods carriage of agricultural produce. The applicant further expressed his view that labour charges on procurement of paddy are not liable to tax under the GST Act.

Based on the aforesaid nature of supply, the applicant raised the following issues before the AAR:
(i) Whether transportation of raw paddy from the point of purchase to the rice mill is taxable or not;
(ii) Whether the reimbursement of Mandi labour charges is taxable or not.

The AAR discussed details of the above issues at great length. However, he noted that at present investigation proceedings are pending related to custom milling of paddy. He referred to the 1st proviso to sub-section (2) of section 98 of the CGST Act which says that the AAR shall not admit an application where the question raised is already pending or decided in any proceedings in the case of an applicant under any of the provisions of this Act.

Although in the application uploaded on 31st March, 2021 a declaration is made that the questions raised in the application are not pending nor decided in any proceeding, the correct fact is that the applicant has been served with a notice dated 16th March, 2021 in connection with proceedings under the provisions of the GST Act and the questions raised in the instant application are related to the said proceedings.

Under the circumstances, the AAR denied any ruling on the application and disposed of it accordingly.

BCAJ Admin

Service Tax

I. TRIBUNAL

23 Commissioner of Service Tax vs. Intas Pharmaceuticals [2021-TIOL-367-CESTAT-Mum] Date of order: 25th June, 2021

Notice pay received from the employee being in the nature of compensation for premature termination of service not liable to service tax

FACTS

The contractual agreement between the company and its employees is that the employee should not leave the employment before the prescribed period. In case of breach of this condition, he would be required to pay one month’s salary which is penal in nature. A show cause notice is issued demanding service tax on the amounts received by the company from its employees alleging toleration of act of breach of contract taxable as a declared service u/s 66E(e) of the Finance Act, 1994.

HELD

The Tribunal relied on the decision of the Madras High Court in the case of GE T&D India Pvt. Ltd. [2020] (35) GSTL 89 (Mad) where the Court categorically holds that the definition in clause (e) of section 66E is not attracted as the employer has not ‘tolerated’ any act of the employee but has permitted a sudden exit upon being compensated by the employee in this regard. Notice pay, in lieu of sudden termination, does not give rise to the rendition of service either by the employer or the employee. Accordingly, the demand was set aside.

24 M/s PVR Ltd. vs. Commissioner of Service Tax [2021-TIOL-368-CESTAT-Del] Date of order: 5th July, 2021

Booking of online tickets and charge of convenience fees is in the nature of E-commerce transaction not taxable under OIDAR services

FACTS

The issue involved in these two appeals relates to taxability of ‘convenience fee’ charged by the appellant to its customers for online booking of movie tickets under the category of ‘online information and database access retrieval system (OIDAR)’ defined u/s 65(75) of the Finance Act and taxable u/s 65(105)(zh) of the Finance Act.

HELD

The Tribunal noted that any person who visits the website of the appellant to seek information about the show timings or other information does not have to make any payment and it is only when a ticket is booked online that convenience fee is required to be paid by the user. The substance of the transaction is, therefore, to book a ticket online and thereby engage in E-commerce. Therefore, it cannot be said that convenience fee is charged for any access / retrieval of information or database as contemplated under OIDAR service. It is also noted that the Board Circular dated 9th July, 2001 also clarifies that E-commerce transactions do not fall within the ambit of OIDAR service. Thus, service tax under the category of OIDAR cannot be levied upon a user merely because he receives a code for getting a printout of the ticket from the cinema hall.

BCAJ Admin

GOODS AND SERVICES TAX (GST)

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.

BCAJ Admin

RECENT DEVELOPMENTS IN GST

NOTIFICATIONS

Waiver of penalty – Notification No. 28/2021-Central Tax dated 30th June, 2021

The Government has introduced the system of QR code vide Notification No. 14/2020-Central Tax dated 21st March, 2020. For non-compliance, penalty u/s 125 can be attracted. Vide the above Notification, waiver of penalty is provided if such non-compliance is in the period from 1st December, 2020 to 30th September, 2021.

CIRCULARS
Clarification in respect of applicability of Dynamic Quick Response (QR) Code on B2C invoices and compliances of Notification No. 14/2020-Central Tax dated 21st March, 2020 – Circular No. 156/12/2021-GST dated 21st June, 2021

The CBIC has issued the above Circular clarifying various aspects relating to QR code requirements. The issues clarified are about the requirement of QR code on invoices issued to a UIN holder, inclusion of bank details in QR code, QR code in respect of services provided to parties located outside India but place of supply is considered in India, QR code for sales over the counter, QR code in respect of payments received by voucher, etc.

Clarification regarding extension of limitation under GST law in terms of Supreme Court’s order dated 27th April, 2021 – Circular No. 157/13/2021-GST dated 20th July, 2021

This Circular clarifies certain issues regarding cognizance for extension of limitation in terms of the Supreme Court order dated 27th April, 2021 in Miscellaneous Application No. 665/2021 in SMW(C) No. 3/2020 under the GST law. In its detailed Circular, the CBIC has divided various actions / compliances under GST into three broad categories and stated that the extension of timelines granted by the Supreme Court is applicable in respect of any appeal which is required to be filed before the Joint / Additional Commissioner (Appeals), Commissioner (Appeals), Appellate Authority for Advance Ruling, Tribunal and various courts against any quasi-judicial order or where proceedings for revision or rectification of any order are required to be undertaken, and is not applicable to any other proceedings under GST Laws.

ADVANCE RULINGS
1. Classification – ‘Track Assembly’ for ‘Automotive Seating System’
M/s Daebu Automotive Seat India Ltd. (GST ARA-01, Application No. 5/2021/ARA dated 1st March, 2021 (TN AAR)

The issue involved in this Advance Ruling application (AR) was about classification of Track Assembly. The applicant is engaged in the business of manufacture of seat components / accessories which are used in the manufacture of four-wheelers.

The applicant has given particulars of the product, i.e., track assembly, with their views regarding classification. The same are reproduced in the AR as under:

‘3.3 On the write-up of the functions of the product, they have stated that:
(i) This track assembly is fitted on to the floor of the car. Essentially, it enables the movement forward and backward of the seat. When seats are fixed on this track assembly, they can slide back and forth with the operation of a lever for varying the positions of the seats, which is basically intended to improve the comfort and efficiency of the persons sitting thereon. This mechanism enables the passengers and drivers of the automobile to adjust seat positions for their comfort and convenience. Thus, the track assembly manufactured and supplied by them is an adjunct to the car seat.
(ii) They do not qualify to become parts of the seats as enunciated in the decision cited, viz., AAR Ruling GUJ/GAARJR/42/2020 dated 30th July, 2020 – 2021-VIL-15-AAR and the decision of the Supreme Court in the case of Commissioner C. Ex., Delhi vs. Insulation Electrical (P) Ltd. reported in 2008 (224) ELT 0512 (SC).
(iii) Car seats would be complete themselves without these mechanisms. Hence, track assembly mechanisms independently could not be called as parts of seats falling under HSN 94019000, whereas, they could at best be identified as accessories to the seats and hence would appropriately be classifiable under the heading 87089900.’

In light of the above facts, the applicant placed the following two questions for determination by AAR:
(a) What is the correct classification of goods manufactured by the applicant, viz., ‘Automotive Seating System’?
(b) Will the goods manufactured fall under CH 87089900 attracting GST @ 28% or under CH 940199990 attracting GST @ 18%?

The CGST authority have contended that HSN 94019900 covers parts of seats, i.e., those constituting specified parts such as backs, bottoms, armrests, etc., and cannot cover items like that of the applicant which is basically tied under a seat on the floor of the vehicle.

Noting the function of the track assembly, the AAR noted that when the seat is fixed on the track assembly, it can slide back and forth with the operation of a lever for varying the position of the seats. This is basically intended to improve the comfort and efficiency of the person sitting thereon. It is convenient for drivers / passengers to adjust the seat for comfort and convenience. It is a product adjacent to the car seat. The seat can be complete without such assembly.

There were two competing headings to be seen in this case, viz., 9401 and 8708. The AAR also referred to the section notes under HSN 8708 and sub-classification under 8708. Similarly, detailed reference was made to HSN 9401. He then concluded that HSN 9401 covers parts of seats of motor vehicles, whereas HSN 8708 covers parts and accessories of motor vehicles.

The meanings of ‘parts’ and ‘accessories’ in the Oxford English Lexicon were also reproduced as under:
‘8.6 CTH 8708 covers “Parts and accessories of Motor Vehicles” and CTH 9401 covers “Parts of seats of Motor vehicles”. Now it is essential to find out the definitions of “parts” and “accessories”. As per the Oxford English Lexicon, parts and accessories would be defined as under:
Parts: An amount or section which, when combined with others, makes up the whole of something.
Accessories: A thing which can be added to something else in order to make it more useful, versatile or attractive.

From the above definitions, “parts” are an amount or section which when combined with others makes up the whole of something. Hence, part is an essential component of the whole without which the whole cannot be complete or cannot function. It is an integral component of the whole. As defined above, accessories are not an essential component without which the whole cannot be complete or function, but it is a component which when added improves the utility, efficiency or appearance of the whole thing.

Based on the above, the AAR held that ‘part’ is one which is an essential component of a whole, without which the whole cannot be complete or cannot function. In contrast, accessories are not an essential component to complete the whole or to make it function but something to improve the utility, efficiency or appearance of the whole thing.

The seat is complete before fitting it on the track assembly which is useful for forward / backward movement of the seat. Hence, seats and track assembly are two independent products fixed together for comfort.

Therefore, the Learned AAR held that the track assembly is an accessory to the motor vehicle covered by heading 8708 and cannot be covered by heading 9401.

Accordingly, he held that GST rate of 28% will apply and not the lower rate.

2. EPC Contract vis-à-vis sub-contractor and Government entity
M/s URC Construction Pvt. Ltd. (Order No. 07/Odisha-AAR/2020-21/dated 9th March, 2021)
The Steel Authority of India Ltd. (SAIL) intended to get Ispat Post-Graduate Medical Institute and Super Specialty Hospital (referred to as ‘Hospital’) constructed at Rourkela Steel Plant on design, Engineering, Procurement and Construction (EPC) basis. It appointed NBCC India Ltd. (‘NBCC’), an executive agency, for getting the above work done. An MOU was entered into between SAIL and NBCC. NBCC awarded a contract to the applicant, M/s URC Construction Pvt. Ltd. (‘URC’) who is a national-level contractor.

The basic question in the AR was whether the contract to be executed by URC will be covered by Notification No. 11/2017-Central Tax (Rate) dated 28th June, 2017 as amended by Notifications 24/2017, 31/2017 dated 13th October, 2017, 46/2017 dated 14th November, 2017 and 17/2018 dated 26th July. 2018. The relevant part of the Notification is reproduced in the AR as under:

*Services*	*CGST Rate*
‘(iv) Composition Supply of Works Contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017, provided to the Central Government, State Government, Union Territory, a Local authority, a Government Authority or a Government Entity by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of –
(a)	a civil structure or any other original works meant predominantly for use other than for commerce, industry, or any other business or profession;	6
(b)	a structure meant predominantly for use as (i) an educational, (ii) a clinical, or (iii) an art or cultural establishment; or
(viii) Construction Services other than (i), (ii), (iii), (iv), (v) and (vi) above	9
(x) “Government Entity” means an authority or a board or any other body including a society, trust, corporation, (i) Set up by an Act of Parliament or State Legislature; or (ii) Established by any Government, with 90% or more participation by way of equity or control, to carry out a function entrusted by the Central Government, State Government, Union Territory or a Local authority’

Services

CGST Rate

‘(iv) Composition Supply of Works Contract
as defined in clause (119) of section 2 of the Central Goods and Services Tax
Act, 2017, provided to the Central Government, State Government, Union
Territory, a Local authority, a Government Authority or a Government Entity
by way of construction, erection, commissioning, installation, completion,
fitting out, repair, maintenance, renovation, or alteration of –

(a)

a civil structure or any other original works meant
predominantly for use other than for commerce, industry, or any other
business or profession;

(b)

a structure meant predominantly for use as (i) an educational,
(ii) a clinical, or (iii) an art or cultural establishment; or

(viii) Construction Services other than (i), (ii), (iii), (iv), (v)
and (vi) above

(x) “Government Entity” means an authority or a board or any
other body including a society, trust, corporation,

(i) Set up by an Act of Parliament or State Legislature; or

(ii) Established by any Government, with 90% or more participation
by way of equity or control, to carry out a function entrusted by the Central
Government, State Government, Union Territory or a Local authority’

If it is so covered then the rate will be 12%, else there will be a higher rate. The submission was that the work is executed for SAIL, a Government entity, and that the work is predominantly for clinical establishment. It is also work covered within the definition of Works Contract as defined u/s 2(119) of the CGST Act.

It was further submitted that though services are provided to NBCC, for the purpose of exemption the constitution of the ultimate service recipient (SAIL) is required to be seen and not NBCC, which is merely an executive agency. For the above purpose, reliance was placed on Shapoorji Pallonji & Co. Pvt. Ltd. vs. C.C.C. Excise & S.T., Patna [2016 (42) STR 681 (Pat)].

It was stated that SAIL is a Government entity as defined in paragraph 4 of Notification No. 11/2017-Central Tax dated 28th June, 2017. The said definition of Government entity referred to in paragraph 3.8 is as under:

‘3.8 M/s SAIL would fall within the ambit of “Government Entity”. The term “Government Entity” is defined in Explanation (x) in paragraph 4 of the Notification No. 11/2017-Central Tax (Rate) dated 28th June, 2017 as “an authority or a board or any other body including a society, trust, corporation, (i) set up by an Act of Parliament or a State Legislature; or (ii) established by any Government with 90% or more participation by way of equity or control, to carry out a function entrusted by the Central Government, State Government, Union Territory or a Local authority.’

SAIL is established by way of an Act passed by Parliament, viz., Public Sector Iron and Steel Companies (Restructuring) and Miscellaneous Provision Act, 1978.

Reliance was also placed on the AAR, Uttarakhand in the case of NHPC Ltd. [(2018)(19) GSTR 34 (AAR-GST)] in which it observed that in a number of Government entities, though initially the holding by Government is 90% or more, after establishment it is diluted for various reasons whereby it may go below 90%.

Based on the above it was submitted that there is no requirement of continuous holding of 90% and once 90% was already held, it would continue to be a Government entity.

And based on this submission, the applicant, URC, canvassed to hold its contract as covered by the above Notification attracting tax @ 12%.

The AAR referred to the history of the establishment of SAIL and observed that it had been established with the approval of Parliament. Hence it was held as a Government entity. The contract awarded is a composite contract involving pre-engineered building structure and RCC frame structure for a specialty hospital. It is works contract as per section 2(119) of the CGST Act.

It was further observed that the EPC contract gets classified in sub-entry (b) as Construction of structure predominantly meant for use as a clinical establishment. For meaning of ‘Clinical establishment’ reference was made to the meaning of the said term under Service Tax and found that since the given work contract fulfils the meaning of clinical establishment, it duly qualifies under the above entry.

Regarding the status of NBCC, the AAR observed that it is a separate limited company and not a Government company. Therefore, the AAR did not agree with the applicant that the supply to NBCC amounts to supply to ultimate recipient SAIL, which is a Government entity. However, the AAR held that the applicant is a sub-contractor and the benefit of lower rate applicable as per entry at Sl. No. 3(ix) of Notification No. 11/2017 as amended by 1/2018 can apply to it.

The contract is given by SAIL which is a Government entity. Therefore, NBCC is the main contractor and as a sub-contractor, the applicant is entitled to a concessional rate.

It was also observed by the AAR that the construction is at the initiative of the Central Government as supported by budget proposal and other documents.

In view of the above, the Learned AAR held that the rate of tax on the above contract of the applicant will be 12%.

BCAJ Admin

RECENT DEVELOPMENTS IN GST

NOTIFICATIONS
1. Effective date of amendment to section 50 – Notification No. 16/2021-Central Tax dated 1st June, 2021

As reported in the March, 2021 issue of the BCAJ (paragraph 5 in the Budget Proposals), a proviso is added to make the amended position in section 50(1) effective from 1st July, 2017. Section 50(1) relates to the levy of interest and the amendment has been carried out to clarify that the interest will be applicable on the cash portion involved in the discharge of the liability as per the return. The proviso was added in Budget 2021 to make the amended position effective from 1st July, 2017. By the issue of the above Notification, the said proviso is made operational from 1st June, 2021. The effect is that after 1st June, 2021 the authorities can levy interest only on the cash portion involved in the discharge of the liability, as per the return, starting the period from 1st July, 2017.

2. Extension of due date for filing GSTR1 – Notification No. 17/2021-Central Tax dated 1st June, 2021
By the above Notification the Government has extended the date of furnishing details of outward supplies in form GSTR1 for the period May, 2021 till 26th June, 2021.

3. Relaxation in interest / late fees – Notification No. 18/2021-Central Tax dated 1st June, 2021 and No. 19/2021-Central Tax dated 1st June, 2021
The Government has issued these Notifications under the powers conferred upon it under sections 50(1) and 128 of the CGST Act, respectively. Earlier, the relaxation in interest and late fees was granted for the months of March and April, 2021 in view of the pandemic situation. The earlier Notifications are substituted and the relaxation is extended to the month of May, 2021; apart from this, some further relaxation in interest is also provided.

The effect of the above Notifications is summarised in the following table:

Sr. No.	Class of registered person	Returns for tax periods	Concession in rate of interest	Concession in late fees
1.	Regular taxpayers having an aggregate turnover of more than Rs. 5 crores in the preceding financial year	March, April and May, 2021	Delay of first 15 days from due date – 9%; after 15 days – 18%	No late fees for delay of 15 days from due date
2.	Regular taxpayers having an aggregate turnover up to Rs. 5 crores in the preceding financial year who are liable to furnish the return as specified u/s 39(1), i.e., taxpayers other than ISD / non-resident taxpayers / Composition taxpayers and taxpayers liable to TDS / TCS	March, 2021 April, 2021 May, 2021	Delay of first 15 days from due date – Nil; next 45 days – 9%; afterwards – 18% Delay of first 15 days from due date – Nil; next 30 days – 9%; afterwards – 18% Delay of first 15 days from due date – Nil; next 15 days – 9%; afterwards – 18%	No late fees for delay of 60 days from due date No late fees for delay of 45 days from due date No late fees for delay of 30 days from due date
3.	Taxpayers covered by proviso to section 39(1), i.e., covered by QRMP Scheme	March, 2021 April, 2021	Delay of first 15 days from due date – Nil; next 45 days – 9%; afterwards – 18% Delay of first 15 days from due date – Nil; next 30 days – 9%; afterwards – 18%	No late fees for delay of 60 days from due date of return for the quarter January-March, 2021
3.	(Continued)	May, 2021	Delay of first 15 days from due date – Nil; next 15 days – 9%; afterwards –18%
4.	Payment of tax by taxpayers under the Composition scheme	Quarter ending March, 2021	Delay of first 15 days from due date – Nil; next 45 days – 9%; afterwards –18%

Sr. No.

Class of registered person

Returns for tax periods

Concession in rate of interest

Concession in late fees

Regular taxpayers having an aggregate turnover of more than Rs.
5 crores in the preceding financial year

March, April and May, 2021

Delay of first 15 days from due date – 9%;

after 15 days – 18%

No late fees for delay of 15 days from due date

Regular taxpayers having an aggregate turnover up to Rs. 5
crores in the preceding financial year who are liable to furnish the return
as specified u/s 39(1), i.e., taxpayers other than ISD / non-resident
taxpayers / Composition taxpayers and taxpayers liable to TDS / TCS

March, 2021

April, 2021

May, 2021

Delay of first 15 days from due date – Nil;

next 45 days – 9%;

afterwards
– 18%

Delay of first 15 days from due date – Nil;

next 30 days – 9%;

afterwards
– 18%

Delay of first 15 days from due date – Nil;

next 15 days – 9%;

afterwards – 18%

No
late fees for delay of 60 days from due date

No late fees for delay of 45 days from due date

No late fees for delay of 30 days from due date

Taxpayers covered by proviso to section 39(1), i.e.,
covered by QRMP Scheme

March, 2021

April, 2021

Delay of first 15 days from due date – Nil;

next 45 days – 9%;

afterwards – 18%

Delay of first 15 days from due date – Nil;

next 30 days – 9%;

afterwards – 18%

No late fees for delay of 60 days from due date of return for
the quarter January-March, 2021

(Continued)

May, 2021

Delay of first 15 days from due date – Nil;

next 15 days – 9%;

afterwards –18%

Payment of tax by taxpayers under the Composition scheme

Quarter ending March, 2021

Delay of first 15 days from due date – Nil;

next 45 days – 9%;

afterwards –18%

Similar relief is extended on payment of IGST or UTGST by Notifications bearing Nos. 02/2021-Integrated Tax and 02/2021-Union Territory Tax, both dated 1st June, 2021.

Further waiver of late fees for past and subsequent periods by Notification No. 19/2021
By insertion of provisos in the above Notification, the following waiver scheme is provided in relation to late fees:

i. For returns in form GSTR3B for period up to April, 2021

For defaulting registered persons furnishing returns in form GSTR3B for the months / quarter of July, 2017 to April, 2021 and furnishing returns during the period 1st day of June, 2021 to the 31st day of August, 2021, the total late fees will be Rs. 500 and if the total Central Tax payable is Nil in the said returns, then the total late fees will be Rs. 250 instead of Rs. 500.
ii. For returns in form GSTR3B for period from June, 2021 onwards
For defaulting registered persons furnishing returns in form GSTR3B for tax period June, 2021 or quarter ending June, 2021 and onwards, the total late fees will be as under:

Sr. No.	Registered persons	Total amount of late fees
1.	Registered persons whose total amount of Central Tax payable in the said return is Nil	Rs. 250
2.	Registered persons having an aggregate turnover up to Rs. 1.5 crores in the preceding financial year, other than those covered under S. No. 1	Rs. 1,000
3.	Taxpayers having an aggregate turnover of more than Rs. 1.5 crores and up to Rs. 5 crores in the preceding financial year, other than those covered under S. No. 1	Rs. 2,500

Sr. No.

Registered persons

Total amount of late fees

Registered persons whose total amount of Central Tax payable in
the said return is Nil

Rs. 250

Registered persons having an aggregate turnover up to Rs. 1.5
crores in the preceding financial year, other than those covered under S. No.
1

Rs. 1,000

Taxpayers having an aggregate turnover of more than Rs. 1.5
crores and up to Rs. 5 crores in the preceding financial year, other than
those covered under S. No. 1

Rs. 2,500

4. Rationalisation of late fees for delay in filing GSTR1 – Notification No. 20/2021-Central Tax dated 1st June, 2021
Like the concession given in relation to GSTR3B, similar concession is also provided in relation to GSTR1. For defaulting registered persons furnishing returns in form GSTR1 for tax period/s June, 2021 or quarter ending June, 2021 and onwards, the total late fees will be as under:

Sr. No.	Registered persons	Total amount of late fees
1.	Registered persons who have nil outward supplies in the tax period	Rs. 250
2.	Registered persons having an aggregate turnover of up to Rs. 1.5 crores in the preceding financial year, other than those covered under S. No. 1	Rs. 1,000
3.	Registered persons having an aggregate turnover of more than Rs. 1.5 crores and up to Rs. 5 crores in the preceding financial year, other than those covered under S. No. 1	Rs. 2,500

Sr. No.

Registered persons

Total amount of late fees

Registered persons who have nil outward supplies in the tax
period

Rs. 250

Registered persons having an aggregate turnover of up to Rs. 1.5
crores in the preceding financial year, other than those covered under S. No.
1

Rs. 1,000

Registered persons having an aggregate turnover of more than
Rs. 1.5 crores and up to Rs. 5 crores in the preceding financial year, other
than those covered under S. No. 1

Rs. 2,500

5. Rationalisation of late fees for delay in filing GSTR4 – Notification No. 21/2021-Central Tax dated 1st June, 2021

The Government has also rationalised the late fees for delay in filing return in form GSTR4. From F.Y. 2021-22 and onwards, defaulting registered persons furnishing return in form GSTR4 will be liable for total late fees of Rs. 250 where the total Central Tax payable is Nil and Rs. 1,000 in other cases.

6. Rationalisation of late fees for delay in filing GSTR7 – Notification No. 22/2021-Central Tax dated 1st June, 2021

The Government has rationalised the late fees for delay in filing return in form GSTR7. From the tax period June, 2021 and onwards, the late fees will be Rs. 25 per day, subject to a maximum of Rs. 1,000.

7. Exclusion from E-invoicing – Notification No. 23/2021-Central Tax dated 1st June, 2021

The Government has issued the above Notification by which Government Departments and local authorities are excluded from the requirement of issuing E-invoice.

8. Extension of time for compliance – Notification No. 24/2021-Central Tax dated 1st June, 2021

The Government has power to issue instructions and directions u/s 168A of the CGST Act. Using such power, it has issued a Notification to extend the time limits for different compliances considering the present pandemic situation. The extension was already granted vide Notification No. 14/2021 dated 1st May, 2021, details of which have been given in the BCAJ issue of May, 2021. By the above Notification, in general, the dates are extended up to 30th June, 2021 where they were expiring on 31st May, 2021 as per the earlier Notification. Where they were expiring on 15th June, 2021 as per the earlier Notification, the date is extended up to 15th July, 2021.

9. Extension of due date for filing GSTR4 – Notification No. 25/2021-Central Tax dated 1st June, 2021

By the above Notification, the Government has extended the due date of filing returns for the year ended 31st March, 2021 in form GSTR4 from 31st May, 2021 to 31st July, 2021.

10. Extension of due date for filing ITC-04 – Notification No. 26/2021-Central Tax dated 1st June, 2021

By this Notification, the Government has extended the date of filing declaration in form GST ITC-04 for the period from 1st January, 2021 to 31st March, 2021 till 30th June, 2021, which was earlier 31st May, 2021.

11. Cumulative calculation under Rule 36(4) and other amendments in Rules – Notification No. 27/2021-Central Tax dated 1st June, 2021

(i) Filing of returns through EVC

This Notification has amended the fourth proviso in Rule 26(1) of the CGST Rules, 2017 whereby the companies registered under the Companies Act, 2013 are allowed to file return in form GSTR3B and details of outward supplies in form GSTR1 through electronic verification code (EVC) during the period from 27th April, 2021 to 31st August, 2021. This is an extension of the facility originally given up to May, 2021.

(ii) Cumulative calculation under Rule 36(4)
As per Rule 36(4), the taxpayer can take ITC for matched amount further enhanced by 5%. By the earlier Notification No. 13/2021 dated 1st May, 2021, the above adjustment under Rule 36(4) was allowed to be done cumulatively for April and May, 2021. But through this Notification, the said facility of cumulative adjustment is widened and along with the months of April and May, 2021, June, 2021 is also included for cumulative adjustment.

(iii) Extension for IFF
By the above Notification, Rule 59(2) is amended and the person furnishing details using IFF for the month of May, 2021 can furnish the same up to 28th June, 2021.

12. Changes in Rate of Tax

Sr. No.	Notification No.	Reference of entry in which change is made	Particulars of change in Rate or other changes
1.	01/2021-Central Tax (Rate) dated 2^nd June, 2021; and 01/2021 – Integrated Tax (Rate) dated 2^nd June, 2021	(a) In Entry 259A in Schedule-I (2.5%) under CGST Act and (5%) under IGST Act, the mention of two headings, namely, 4016 and 9503, is substituted by one heading, i.e., 9503, effective from 2^nd June, 2021. (b) In List 1 for drugs in Schedule 1 (2.5%) under CGST Act and (5%) under IGST Act, new item ‘Diethylcarbamazine’ is added at Serial No. 231 from 2^nd June, 2021	No change in rate. Rate becomes 2.5% for given item under CGST Act and 5% under IGST Act
2.	02/2021-Central Tax (Rate) dated 2^nd June, 2021; and 02/2021 – Integrated Tax (Rate) dated 2^nd June, 2021	(a) In Entry 3 in Notification No. 11/2017-Central Tax (Rate) and Notification No. 08/2017-Inegrated Tax (Rate) relating to developers, in Explanation under fourth proviso in conditions, clause (iii) is inserted, effective from 2^nd June, 2021 (b) Entry (ib) is inserted in Entry at Serial No. 25 in above Notification No. 11/2017-Central Tax (Rate) and Notification No. 08/2017- Integrated Tax (Rate), effective from 2^nd June, 2021	By the above clause, the landowner-promoter is made eligible to utilise the credit of tax charged by the developer-promoter, for payment of tax on apartments supplied by him in such project both under CGST and IGST Act By the above Entry the rate of 2.5% (CGST Act) and 5% (IGST Act) is provided for maintenance, repair or overhaul services in respect of ships and other vessels, their engines and other components or parts
3.	03/2021-Central Tax (Rate) dated 2^nd June, 2021; and 03/2021- Integrated Tax (Rate) dated 2^nd June, 2021	In Notification No. 06/2019-Central Tax (Rate) and 06/2019-Integrated Tax (Rate), both dated 29^th March, 2019, two changes are made, effective from 2^nd June, 2021	(a) The above Notification is about developers. The promoters are required to pay tax on FSI, etc. As per original Notification, such liability was to arise upon issuance of completion certificate or first occupation, whichever is earlier. Now, by the amendment, the provision is made that promoters shall pay tax on the occurrence of the above event of completion certification or first occupation, whichever is earlier. (b) Further, the timing of payment of tax on FSI, etc., is also modified. Originally, it was to be payable on the date of issuance of completion certificate or first occupation, whichever was earlier. Now, by the amendment, the tax on FSI, etc., can also be paid earlier – but latest by the tax period in which date of issuance of completion certificate or first occupation falls. By this change, the recipient can utilise his credit as and when tax is paid by the promoter. The promoter can pay tax earlier to completion certificate or first occupation and as per the tax paid by him, tax credit will be available to the recipient
4.	04/2021-Central Tax (Rate) dated 14^th June, 2021; and 04/2021- Integrated Tax	In Notification No. 11/2017 – Central Tax (Rate) and 08/2017-	The above Entry (f) is relating to tax on structure meant for funeral, burial or cremation of
4.	(Continued) (Rate) dated 14^th June, 2021	Integrated Tax (Rate), both dated 28^th June, 2017, changes are made in Entry 3(iv)(f)	deceased. The original rate is 6% CGST. By the above Notification, the rate is reduced to 2.5% CGST for the period from 14^th June, 2021 to 30^th September, 2021
5.	05/2021 Central Tax (Rate) dated 14^th June, 2021; and 05/2021- Integrated Tax (Rate) dated 14^th June, 2021 read with corrigenda dated 15^th June, 2021	A new Notification giving exemption of whole of tax or partial tax	By this Notification, concessional rate of CGST / IGST on Covid-19 relief supplies is provided. There are 18 items. The list is not reproduced here for sake of brevity

Sr. No.

Notification No.

Reference of entry in which change is made

Particulars of change in Rate or other changes

01/2021-Central Tax (Rate) dated 2^nd June, 2021; and
01/2021 – Integrated Tax (Rate) dated 2^nd June, 2021

(a)
In Entry 259A in Schedule-I (2.5%) under CGST Act and (5%) under IGST Act,
the mention of two headings, namely, 4016 and 9503, is substituted by one
heading, i.e., 9503, effective from 2^nd June, 2021.

(b)
In List 1 for drugs in Schedule 1 (2.5%) under CGST Act and (5%) under IGST
Act, new item ‘Diethylcarbamazine’ is added at Serial No. 231 from 2^nd
June, 2021

No change in rate.

Rate becomes 2.5% for given item under CGST Act and 5% under
IGST Act

02/2021-Central Tax (Rate) dated 2^nd June, 2021; and
02/2021 – Integrated Tax (Rate) dated 2^nd June, 2021

(a) In Entry 3 in
Notification No. 11/2017-Central Tax (Rate) and Notification No.
08/2017-Inegrated Tax (Rate) relating to developers, in Explanation under
fourth proviso in conditions, clause (iii) is inserted, effective from
2^nd June, 2021

(b)
Entry (ib) is inserted in Entry at Serial No. 25 in above Notification No.
11/2017-Central Tax (Rate) and Notification No. 08/2017- Integrated Tax
(Rate), effective from 2^nd June, 2021

By
the above clause, the landowner-promoter is made eligible to utilise the
credit of tax charged by the developer-promoter, for payment of tax on
apartments supplied by him in such project both under CGST and IGST Act

By the above Entry the rate of 2.5% (CGST Act)
and 5% (IGST Act) is provided for maintenance, repair or overhaul services in
respect of ships and other vessels, their engines and other components or
parts

03/2021-Central Tax (Rate) dated 2^nd June, 2021; and
03/2021- Integrated Tax (Rate) dated 2^nd June, 2021

In Notification No.
06/2019-Central Tax (Rate) and 06/2019-Integrated Tax (Rate), both dated 29^th
March, 2019, two changes are made, effective from 2^nd June, 2021

(a)
The above Notification is about developers. The promoters are required to pay
tax on FSI, etc. As per original Notification, such liability was to arise
upon issuance of completion certificate or first occupation, whichever is
earlier. Now, by the amendment, the provision is made that promoters shall
pay tax on the occurrence of the above event of completion certification or
first occupation, whichever is earlier.

(b)
Further, the timing of payment of tax on FSI, etc., is also modified.
Originally, it was to be payable on the date of issuance of completion
certificate or first occupation, whichever was earlier. Now, by the
amendment, the tax on FSI, etc., can also be paid earlier – but latest by the
tax period in which date of issuance of completion certificate or first occupation
falls. By this change, the recipient can utilise his credit as and when tax
is paid by the promoter. The promoter can pay tax earlier to completion certificate or first occupation
and as per the tax paid by him, tax credit will be available to the recipient

04/2021-Central Tax (Rate) dated 14^th June, 2021; and
04/2021- Integrated Tax

In Notification No. 11/2017 – Central Tax (Rate) and 08/2017-

The above Entry (f) is relating to tax on structure meant for
funeral, burial or cremation of

(Continued)

(Rate) dated
14^th June, 2021

Integrated Tax (Rate), both dated 28^th June, 2017,
changes are made in Entry 3(iv)(f)

deceased. The original
rate is 6% CGST. By the above Notification, the rate is reduced to 2.5% CGST
for the period from 14^th June, 2021 to 30^th September,
2021

05/2021 Central Tax (Rate) dated 14^th June, 2021; and
05/2021- Integrated Tax (Rate) dated 14^th June, 2021 read with
corrigenda dated 15^th June, 2021

A new Notification giving exemption of whole of tax or partial
tax

By this Notification, concessional rate of CGST / IGST on
Covid-19 relief supplies is provided. There are 18 items. The list is not
reproduced here for sake of brevity

Similar changes in Entries are also effected in the Union Territory Goods and Services Tax Act, 2017.

CIRCULARS AND PRESS RELEASES

1. Guidelines regarding cancellation of registration under rule 22(3) of the CGST Act – Instruction No. CBEC-20/16/34/2019-GST/802 dated 24th May, 2021

By the above guidelines the CBEC has reiterated to follow the guidelines given in Board Circular No. 69/43 2018 GST dated 26th October, 2018 about the time limit for cancellation of registration where an application for cancellation is filed by the registered person. In other words, the CBEC has instructed that the proper officer should act as per legal process and accordingly pass the cancellation order within 30 days from the date of application.

2. Press release dated 28th May, 2021

The GST department has issued the above press release whereby the modified scheme about mandatory mentioning of HSN code on invoices is explained.

3. Press release relating to 43rd GST Council meeting dated 28th May, 2021

By this press release, the GST department has given information about decisions taken at the 43rd GST Council meeting held on 28th May, 2021. The decisions are mainly relating to GST Rates on goods and services, and more particularly about Covid-19-related supplies.

4. Press note relating to relief in late fees dated 5th June, 2021

The GST department has, through the above press release, explained the effect of the recent Notifications on the relief in late fees.

5. GST on supply of food in Anganwadis and schools: Circular No. 149/05/2021-GST dated 17th June 2021

It is clarified that the supply of food in Anganwadis and schools is exempt vide clause (b)(ii) of Entry 66 Notification No. 12/2017-Central Tax (Rate) dated 28th June, 2017. It is also clarified that Anganwadis are educational institutions (pre-school).

6. GST on activity of construction of road (annuity): Circular No. 150/05/2021-GST dated 17th June, 2021

It is clarified by this Circular that the annuity received in respect of road construction is not exempt under Entry 23A of Notification No. 12/2017-CT(R).

7. GST on supply of services by Boards: Circular No. 151/05/2021-GST dated 17th June, 2021

This Circular has given Clarifications about exempt services by various Central and State Boards (such as National Board of Examination). Specific services are described which will be exempt.

8. GST on construction services provided to Government entity: Circular No. 152/05/2021-GST dated 17th June, 2021

By the above Circular, a clarification is given about GST liability on works contract service provided by way of construction, such as of ropeway, to a Government entity. It is clarified that the service will fall under Entry at Sl. No. 3(xii) of Notification No. 11/2017-(CTR) and attract GST at the rate of 18% and it will not fall under 12% category.

9. GST on supplies to Government under PDS: Circular No. 153/05/2021-GST dated 17th June, 2021
In this Circular, a clarification is given about the applicable rate of tax for various supplies to Government, such as milling of wheat into flour or paddy into rice for distribution under PDS. The clarification is given about different services involved in the above activity.

10. GST on supplies to PSUs by Government: Circular No. 154/05/2021-GST dated 17th June, 2021
By the above Circular, a clarification is given about GST on services supplied by State Governments to their undertakings or PSUs by way of guaranteeing loans taken by them. It is clarified that such services are exempt under specific Entry 34A of Notification No. 12/2017-Central Tax (Rate) dated 28th June, 2017.

11. GST on drip irrigation items: Circular No. 155/05/2021-GST dated 17th June, 2021
By this Circular, clarification is given about the Rate of Tax on laterals (pipes to be used solely with sprinklers / drip irrigation system) and parts. It is clarified that if such items are to be used solely or principally with sprinklers or a drip irrigation system, which are classifiable under heading 8424, they would attract GST @ 12%. But on all other items the applicable Rate for such items will apply.

BCAJ Admin

Service Tax

I. HIGH COURT

18 Anjappar Chettinad A/c Restaurant vs. Joint Commissioner [2021-TIOL-1270-HC-Mad-ST] Date of order: 20th May, 2021

Takeaway and food parcels by restaurants tantamount to sale of food and drinks and does not attract levy of service tax

FACTS
The petitioners provide restaurant services, outdoor catering services and mandap keeper services. An audit was undertaken and service tax was demanded on the takeaway / parcel services. Accordingly, a petition is filed regarding taxability of food taken away or collected from restaurants in parcels.

HELD
The Court noted that not all services rendered by restaurants are taxable and the tax gets attracted only in certain specified situations. Sale of food and drink simpliciter, services of selection and purchase of ingredients, preparation of ingredients for cooking and the actual preparation of the food and drink would not attract the levy of tax. Only those services commencing from the point where the food and drinks are collected for service at the table till the raising of the bill, are covered. This would include a gamut of services including arrangements for seating, decor, music and dance, the service of waiters, the use of fine crockery and cutlery, among others. In the case of takeaway or food parcels, the aforesaid attributes are conspicuous by their absence. In many cases, there is a separate counter for collection of the takeaway and is generally positioned away from the main dining area which may or may not be air-conditioned. In any event, since the consumption of the food and drink is not in the premises of the restaurant, the same does not attract service tax.

19 Qualcomm India Pvt. Ltd. vs. Union of India and Others [2021-TIOL-1170-HC-Mum-ST] Date of order: 21st May, 2021

Interest is payable on delay in processing the refund claim beyond a period of three months from the date of receipt of application u/s 11BB of the Central Excise Act, 1944

FACTS
The petitioner is engaged in the export of services and receives various input services and avails input tax credit (ITC) of service tax paid on various input services. It filed a refund claim for the accumulated ITC under Rule 5 of the CENVAT Credit Rules, 2004. The refund was sought to be rejected on the ground that the input services did not have any nexus with the output services and thus were not eligible for refund. A part of the refund amount was sanctioned and a part was rejected. On appeal, the appellate authority allowed the refund claim. However, since the refund amounts were sanctioned beyond three months from the date of filing of refund applications, the petitioner claimed that it was entitled to interest on delayed payment of refund u/s 11BB of the Central Excise Act, 1944 made applicable to service tax vide section 83 of the Finance Act, 1994. Accordingly, the present writ application is filed to claim the interest on the refund amount.

HELD
The Court primarily noted that the orders granting refund were issued after the expiry of three months from the date of receipt of the refund application which resulted in a delay in granting the refund. Section 11BB clearly provides that if any duty ordered to be refunded is not refunded within three months from the date of receipt of an application, there shall be paid to that applicant interest at such rate as may be prescribed. Thus, irrespective of the fact that the delay was intentional or unintentional, interest ought to be granted. Non-granting of interest in such a case would amount to failure to discharge statutory duty / obligation by the refund sanctioning authority for which the aggrieved claimant can seek a writ of mandamus from the Writ Court under Article 226 of the Constitution of India.

20 M/s TV Sundram Iyengar and Sons Pvt. Ltd. vs. Commissioner of CGST & CE[2021-TIOL-1025-HC-Mad-ST] Date of order: 30th March, 2021

Relationship between the buyer and seller being on a principal-to-principal basis, trade discount received by way of credit note is not liable to service tax

FACTS
The petitioner is a dealer in motor vehicle parts and motor vehicle chassis. It entered into dealership agreements with various manufacturing entities. The case of the petitioner is that the relationship between it and the manufacturer is on a principal-to-principal basis. It purchases chassis from the manufacturer and resells the same in its own name and on its own account. A show cause notice was issued proposing levy of service tax with interest and penalty on the trade discount received from the manufacturers by way of credit notes.

HELD
The Court states that a mere reading of the dealership agreement between the assessee and the manufacturers would clearly indicate that the petitioner purchases the goods from the manufacturers by way of sale. It is also pointed out that the adjudicating
authority has not read the document as a whole but instead given undue emphasis to certain individual clauses mentioned in the agreement, thereby misinterpreting the transaction and relationship between the parties. The Court accordingly allowed the writ.

21 Commissioner of GST & CE vs. Sutherland Global Services Pvt. Ltd. [2021 (47) GSTL 454 (Mad)] Date of order: 24th February, 2021

Refund under Rule 5 shall be granted in case of export of exempted services

FACTS
The respondent was a 100% export-oriented unit and Software Technology Park of India (STPI) registered for service tax under ‘Business Auxiliary Services’ providing call centre services and technical support service. The appeal was filed by the Revenue against the order passed by the Tribunal approving the refund of CENVAT credit on input services used for exporting services which are otherwise exempt under servicetax laws. The Department contended that CENVAT credit cannot be availed of inputs, input services or capital goods used for output services, whether provided domestically or exported, if the same are exempted unconditionally.

HELD
The Court referred to the decision of Repro India Limited [2009 (235) ELT 614 (Bom)] and various other rulings wherein the scheme of CENVAT Credit Rules was elaborately discussed and distinction was drawn between Rules 5 and 6 of the CENVAT Credit Rules, 2004. The Tribunal had rightly held that Rule 6 uses the words ‘exempted goods / services’ and Rule 5 uses the words ‘final product / output service’. Further, exemption is applicable within Indian territory and therefore, goods as well as services whether taxable or exempted can be exported. Besides, the intention of the Legislature was to avoid export of duties or taxes. Therefore, the case was decided in favour of the assessee.

II. TRIBUNAL

22 Schlumberger Asia Services Ltd. [2021-TIOL-313-CESTAT-Chd] Date of order: 24th May, 2021

Credit of Education Cess, Secondary and Higher Education Cess and Krishi Kalyan Cess was eligible to be carried forward to the GST regime as on 1st July, 2017 – The amendment of bar in transition was made in section 140 on 30th August, 2018 effective from 1st July, 2017 – The refund claim filed within one year from the amendment is not time-barred

FACTS
The CENVAT credit of Education Cess, Secondary and Higher Education Cess, Krishi Kalyan Cess was lying unutilised and the appellant could not utilise the same till 30th June, 2017. On 1st July, 2017, the GST regime came into force and the credit lying in the account was allowed to be transferred under the GST regime. The credit was accordingly transited. Later, section 140 of the GST law was amended on 30th August, 2018 retrospectively, stating that the credit of cess cannot be carried forward to the GST regime. The appellant accordingly reversed the credit and filed a refund claim. The refund was rejected on the ground of time bar. Accordingly, the present appeal is filed.

HELD
The Tribunal noted that on 1st July, 2017 there was no bar on carry forward of the CENVAT credit of Education Cess, Secondary and Higher Education Cess and Krishi Kalyan Cess to the GST regime. The amendment to section 140 came after one year of the switch to the GST regime on 30th August, 2018 which was applicable retrospectively. In these circumstances, how could the appellant have filed the refund claim within one year from 1st July, 2017 to 30th August, 2018? Therefore, the relevant date of filing the refund claim shall be 30th August, 2018 and within one year of the said date, the refund claim has been filed. Thus, the refund claim is not barred by limitation and should be allowed.

BCAJ Admin

Service Tax

I. TRIBUNAL

1 Neyveli Lignite Corporation Ltd. vs. CCE&ST [2021-128 taxmann.com-405-CESTAT-Chen] Date of order: 26th July, 2021

Liquidated damages recovered from the contractor cannot be said to be a consideration for agreeing to tolerate the act of the contractor of not completing the task within time schedule so as to attract the provisions of section 66E(e) of the Finance Act, 1994

FACTS
The issue before the Tribunal relates to the demand of service tax on liquidated damages recovered by the appellant for acts of default such as delayed or deficient supplies by various suppliers. The period involved in all the appeals is after 1st July, 2012 and the case set out by the Department is that the appellant had agreed to tolerate breach of timelines stipulated in the contract against the amount imposed as liquidated damages as consideration u/s 66E(e) of the Finance Act, 1994.

HELD
The Tribunal relied upon the decisions in the cases of South Eastern Coalfields Ltd. vs. CCE&ST [2021] 124 taxmann.com 174 (New Delhi-CESTAT) and M.P. Poorva Kshetra Vidyut Vitaran Co. Ltd. vs. Pr. Commissioner CGST & CE [2021] 126 taxmann.com 182 (New Delhi – CESTAT) and held that it is not possible to sustain the view taken by the Commissioner that since the contractor did not complete the task within the time schedule, the appellant agreed to tolerate the same for a consideration in the form of liquidated damages, which would be subjected to service tax u/s 66E(e) of the Finance Act. The appeal was accordingly allowed.

Note: A similar view is also taken by the Chennai Tribunal in the case of Steel Authority of India Ltd. vs. CCE [2021] 128 taxmann.com 400 (Chennai-CESTAT), order dated 26th July, 2021.

2 M/s Seaport Lines India Pvt. Ltd. vs. CGST&CE [2021-TIOL-574-CESTAT-Mad] Date of order: 7th September, 2021

A freight forwarder, when acting as a principal, will not be liable to pay service tax when the destination of the goods is from a place in India to a place outside India when there is a mark-up between the freight received and freight paid

FACTS
During verification of records of the assessee, it was noticed that they hire containers from different liners like Maersk and Hapag Lloyd and ‘sell’ these to their customers; that while arranging containers for shippers, the assessee collected ocean freight and local charges like terminal handling charges and documentation charges; and they also availed CENVAT credit on such charges and paid service tax on the invoice amount raised on customers. It was noticed that the assessee collected ocean freight charges higher than the actual amounts charged by shipping lines / steamer agents; however, they did not include the ocean freight charges collected in taxable value for the purpose of payment of Service Tax under business support services.

HELD
The Tribunal, relying on the decision in the case of M/s Marinetrans India Pvt. Ltd. [2020] (33) GSTL 241 (Tri-Hyd) held that buying and selling space on ships does not amount to rendering a service and any profit or income earned through such transactions is not liable to service tax. The demand was accordingly set aside.

3 M/s. Bharat Coking Coal Ltd vs. CCE&ST [2021-TIOL-551-CESTAT-Kol] Date of order: 25th August, 2021

A joint reading of section 67 of the Finance Act and Rule 3 of the Service Tax (Determination of Value) Rules, 2006 clarifies that service tax is chargeable on the value of the service provided. Any other expenses incurred and reimbursed is not includible in the value for charge of service tax

FACTS
The appellant is a PSU and a 100% subsidiary company of Coal India Limited engaged in the business of mining and selling of coal. They receive security services under a Memorandum of Understanding from the Central Industrial Security Force (CISF) and were discharging service tax under reverse charge. For the purpose of valuation, the amount paid to CISF towards cost of deployment, cost of arms and ammunition and cost of clothing items (uniforms), etc., was considered. In addition to the above, they were also providing facilities to CISF for free residential accommodation, free medical services to the CISF personnel at its premises, free vehicles / cabs to CISF personnel and reimbursement of expenditure on petty imprest expenses, medicines and telephones on actual submission of bills / invoices. The appellant has not included the value of the above facilities for payment of service tax on reverse charge basis.

HELD
The Tribunal, relying on the case of Central Industrial Security Force 2019-TIOL-3277-CESTAT-All where it has been held that expenses incurred towards medical services, vehicles, expenditure on dog squad, stationery expenses, telephone charges, expenditure incurred by service recipient for accommodation provided to CISF, are not includible as the same cannot be considered as consideration for providing security services.

BCAJ Admin

Service Tax

I. TRIBUNAL

25 Khushboo Beauty Care vs. CCE&ST, Daman [2021-TIOL-467-CESTAT-Mum] Date of order: 27th July, 2021

When it is established that the goods are received by the appellant job-worker, credit should be allowed even if the Bill of Entry is in the name of the principal supplier

FACTS
The issue involved in the present case is whether the appellant is entitled to CENVAT credit on the strength of the Bill of Entry which was in the name of the supplier of the raw material, whereas the goods were received by the appellant as a job-worker and used in the manufacture of goods on job-work basis.

HELD
The Tribunal noted that right from the show cause notice, the case of the Department is only whether the appellant is entitled for CENVAT credit on the strength of the Bill of Entry which is in the name of the principal supplier along with the declaration given by the supplier. The Tribunal finds that there is no dispute about the receipt and the use of the goods supplied under the cover of the Bill of Entry along with the declaration in favour of the appellant. Even though the Bill of Entry is in the name of the supplier, but on the basis of the declaration it is established that the material has been supplied to the appellant for job work, therefore, merely because the Bill of Entry bears the name of the supplier, CENVAT credit cannot be denied to the appellant.

26 M/s NSSL Pvt. Ltd. vs. Commissioner of Central Excise [2021-TIOL-469-CESTAT-Mum] Date of order: 3rd August, 2021

Refund of service tax paid under reverse charge after 1st July, 2017 is available in accordance with the provisions of the erstwhile statute by virtue of section 142(3) of the CGST Act

FACTS
The appellant filed a refund application claiming refund of service tax paid by it under the Reverse Charge Mechanism. The refund application was rejected on the ground that ITC can only be claimed under GST / CGST Act, 2017 and not otherwise. The Commissioner (Appeals) relied upon sub-section (8)(a) of section 142 of the CGST Act, 2017 to reject the refund application which deals with assessment and adjudication.

HELD
The Tribunal noted that the appellant is not falling within the scope and ambit of sub-section (8)(a) of section 142 inasmuch as no assessment / adjudication orders were passed by competent authorities in determining the tax liability, which the appellant was required to pay under the erstwhile statute. Actually, the case of the appellant is governed under provisions of sub-section (3) of section 142 which provides that every claim of refund filed after the appointed day shall be disposed of in accordance with the provisions of the erstwhile statute. The authorities below have not questioned the issue regarding the entitlement of the CENVAT credit under the erstwhile CENVAT statute. On careful examination of the statutory provisions, it is held that the refund claims should merit consideration under the provisions of sub-section (3) of section 142 and, as such, the appellant should be entitled to the benefit of refund of service tax paid by it.

BCAJ Admin

GOODS AND SERVICES TAX (GST)

I. HIGH COURT

23 Hindustan Unilever Ltd. vs. UOI [2021 (49) GSTL 292 (Mad)] Date of order: 12th July, 2021

Petitioner cannot be denied relief merely due to technological limitations of ICES system (Customs Portal)

FACTS

The petitioner had filed 87 bills of entry before the Chennai Customs Authority for import of raw materials required for the manufacture of various toiletries / fast-moving goods. With the advent of GST, in order to facilitate the seamless flow of input tax credit (ITC) of IGST, the GSTIN was required on the bill of entry. At the time of filing the bills of entry, instead of quoting the GSTIN of Tamil Nadu, the petitioner had inadvertently quoted the GSTIN of Maharashtra, Puducherry and Karnataka. Therefore, to avoid the challenge of ITC availment of IGST and to rectify the aforesaid inadvertent errors, the petitioner had filed an application for the amendment of bills of entry u/s 149 of the Customs Act, 1961. In reply to the application, an order was passed by the Customs Authority stating that the ICES system (Customs Portal) is designed in such a way that once the data is transmitted to the GSTN portal, the details of GSTIN cannot be amended. Being aggrieved by this order, the writ petition was filed.

HELD

It was held that the petitioner cannot be denied benefit merely because of the technological limitations of the ICES system. Proper measures must be taken to resolve such technological limitations and the amendments of documents must be considered manually till such technological limitations are resolved.

24 BA Continuum India Pvt. Ltd. vs. UOI [2021 (49) GSTL 370 (Bom)] Date of order: 8th March, 2021

The opportunity of being heard cannot be substituted by telephonic conversations or email exchanges

FACTS

The petitioner was engaged in the business of providing IT and IT-enabled services to various customers located outside India. It had filed five refund applications for claiming refund of the unutilised balance of ITC on account of export of services without payment of tax. As a sequel to the aforesaid refund applications, five identical show cause notices were issued, alleging that the petitioner was facilitating the supply of services between two persons and such services are classifiable as ‘intermediary services’ whose place of supply falls in India. Therefore, the services cannot be considered as export of services. Thus, the refund was liable to be rejected. Due to technical glitches on the GST portal, initially, they (the petitioners) were unable to reply to the notice. The replies were filed through various emails and subsequently uploaded over the GST portal as well.

In the meanwhile, the respondent had called for certain documents. However, due to the pandemic, it was not possible to submit such documents and the petitioner had sought additional time via email. Subsequently, through an email dated 21st April, 2020, the respondent instructed that if documents are not submitted within three days, the matter would be decided ex parte. It also referred to MVAT Circular 3T of 2020 dated 17th March, 2020 which stated that the email reply would be treated as personal hearing. The petitioner made a detailed submission via email and requested a personal hearing before the passing of any adverse order. However, without granting any personal hearing, five identical orders were passed rejecting the refund applications of the petitioner. The petitioner then filed the present writ petition.

HELD

The High Court held that Rule 92 of the CGST Rules, 2017 specifically mandate to grant an opportunity of being heard before rejecting a refund application. Such opportunity of being heard cannot be substituted with mere email exchanges and telephonic conversations. Further, Circular 3T of 2020 dated 17th March, 2020 was issued in the context of MVAT assessment and it cannot be relied upon to dispense with the hearing procedure while rejecting the refund application.

25 Vidyut Majdoor Kalyan vs. State of Uttar Pradesh [2021 (49) GSTL 230 (All)] Date of order: 18th January, 2021

Section 30 of CGST Act, 2017 and Rule 23 of CGST, Rules 2017 – Non-compliance of an order passed by a competent Appellate Authority is neither permitted nor accepted merely because there was no facility on GST portal to restore the GST registration

FACTS
The petitioner had failed to file the monthly returns (GSTR3B) from October, 2017 to June, 2018. Therefore, a show cause notice was uploaded on the GST portal seeking cancellation of its GST registration because of failure to file returns for more than six months. The petitioner was granted seven days’ time to reply to the show cause notice. However, it failed to reply to the same. As a consequence, an order for cancellation of GST registration was passed. Being aggrieved by this order, an appeal was preferred before the Appellate Authority and a favourable order was received directing the respondent to restore the GST registration.

Even after this order, the implementation of restoration of registration was not done on the GST portal. Nothing was brought on record to show that the order passed was illegal or without jurisdiction. The only contention of the respondent for non-compliance of the Appellate Authority’s order was that there was no facility to manually restore a GST registration that was already cancelled. Hence, the present writ petition was filed.

HELD
The High Court held that non-compliance of an order passed by the Appellate Authority cannot be accepted or permitted merely because there was no facility on the GST portal for restoration of a registration that was already cancelled. The Court allowed the writ petition and directed the respondent to restore the registration forthwith.

II. AUTHORITY FOR ADVANCE RULING

26 M/s EVM Motors and Vehicles India Pvt. Ltd. [2021-TIOL-163-AAR-GST] Date of order: 25th May, 2021 (AAR-Kerala)

The transportation of passengers in a house-boat with all the facilities of accommodation and meals is covered under Chapter Heading 996415 liable for GST at 18% – Input tax credit on expenses incurred on refurbishing, maintenance and food is fully allowable

FACTS
The applicant has started a new venture and has acquired house-boats. These are to be used for cruises, both overnight and for day trips. Meals are to be provided as part of the package along with alcohol. The boats are to be furnished with state-of-the-art bedrooms, dining rooms, halls and kitchens. The fare proposed to be charged is an all-inclusive rate for transportation, accommodation, food services and other incidental services. The applicant seeks a ruling on whether the service rendered is covered under Chapter 99, Heading 9964 and Service Code 996415 and whether it is entitled to claim ITC.

HELD
The Authority noted that Heading 9964 pertains to passenger transport services and 996415 pertains to local water transport services of passengers by ferries, cruises and the like. The Explanatory Notes to the Heading 996415 state that the service code includes inland water cruises that include transportation, accommodation, food and other incidental services in an all-inclusive fare. The services rendered squarely fall under the Heading 996415 in view of the Explanatory note, liable to GST at the rate of 18%. The applicant is eligible for ITC in respect of the expenses incurred by it on refurbishing, furnishing, maintaining and repairing the vessel as the supplies are used for providing the taxable outward supply of passenger transport services specified in the exclusion clause in section 17(5)(aa)(i)(B) of the CGST Act. It is also eligible for ITC on the supply of food during the cruise as the supply is an element of the outward taxable supply of passenger transport services and hence covered by the proviso to section 17(5)(b)(i) of the CGST Act.

27 M/s Bindu Projects and Company [2021-TIOL-190-AAR-GST] Date of order: 30th July, 2021 (AAR-Bangalore)

GST rate for repairs and maintenance of residential complex for railway employees is taxable at 12% – Other repair activity for railways will attract GST rate of 18%

FACTS
The applicant has sought a ruling on the applicability of GST rates for works contract services for doing original works with South Western Railways. It submitted that as per the Notification No. 11/2017-Central Tax (Rate) – Serial No. 3(v), the GST rate applicable is 12% if ‘composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017 is supplied by way of construction, erection, commissioning of original works pertaining to Railways (including monorail and metro)’. Also, as per the definition of original works provided in clause (zs) of para 2 of Notification No. 12/2017-Central Tax (Rate) dated 28th June, 2017, it is submitted that they are engaged in provision of original works contract services.

HELD
The Authority noted that original works means all new constructions and additions or alterations to abandoned or damaged structures. The Railways is a Central Government Department and hence it is clear that the service provided to them if it is for a purpose other than for business, then the same would be covered under Entry 3(vi) of Notification 11/2017-Central Tax (Rate). However, since the Railways is undertaking the transportation services of goods and passengers, the services provided cannot be considered as for purposes other than business and thus cannot be covered under Entry 3(vi)(a). However, the services of repairs, maintenance, renovation and alterations of residential complex meant for use of the Railway employees are covered under Entry 3(vi) of the Notification and hence eligible for tax of 12%. Thus, new constructions will be charged at a GST rate of 12%; similarly, repairs, maintenance, renovation and alteration of residential complex will attract a GST rate of 12%, and other repair works of old constructions will be taxable at the rate of 18%.

BCAJ Admin

RECENT DEVELOPMENTS IN GST

NOTIFICATIONS

Effective date for operation of sections 110 and 111 of Finance Act, 2021 – Notification No. 29/2021-Central Tax dated 30th July, 2021
The Government has issued the Notification as above whereby sections 110 and 111 of the Finance Act, 2021 (13 of 2021) have been made operative from 1st August, 2021.

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.

BCAJ Admin

GOODS AND SERVICES TAX (GST)

I. HIGH COURT

13 Dharmendra M. Jani vs. Union of India and Others [2021-TIOL-1297-HC-Mum-GST] Date of order: 9th June, 2021

Section 13(8)(b) of the Integrated Goods and Services Tax Act is held to be unconstitutional – However, there is a difference of opinion between the judges and the dissenting judge is yet to pronounce his judgment

FACTS

The petitioner is engaged in marketing and promotion services to customers located outside India. The Indian purchaser, i.e., the importer, directly places a purchase order on the overseas customer for supply of the goods which are then shipped by the overseas customer to the Indian purchaser. The overseas customer raises sales invoice in the name of the Indian purchaser. Upon receipt of payment, the overseas customer pays commission to the petitioner in convertible foreign exchange. Essentially, the transaction is one of export of service. Section 13(8)(b) of the Integrated Goods and Services Tax Act, 2017 provides that the place of supply in case of an intermediary is the location of the service provider. Sub-section (2) of section 8 of the said Act says that in case of supply of services where the location of the supplier and the place of supply are in the same state or union territory, it would be treated as an intra-state supply. Therefore, the export of service by the petitioner as intermediary would be treated as intra-state supply of services u/s 13(8)(b) read with section 8(2) liable to payment of CGST and SGST. The tax was paid under protest and the present writ is filed questioning the constitutional validity of section 13(8)(b).

HELD

The Court noted Articles 246A and 269A of the Constitution of India. While Article 246A deals with special provisions with respect to GST, Article 269A provides for levy and collection of GST in the course of inter-state trade or commerce. From a careful and conjoint reading of the two Articles, it is quite evident that the Constitution has only empowered Parliament to frame laws for the levy and collection of GST in the course of inter-state trade or commerce, besides laying down principles for determining place of supply and when such supply of goods or services, or both, takes place in the course of inter-state trade or commerce. Thus, the Constitution does not empower imposition of tax on export of services out of the territory of India by treating the same as a local supply. There is an express bar under clause (1) of Article 286 that no law of a state shall impose or authorise imposition of a tax on the supply of goods or services, or both, where such supply takes place in the course of import into or export out of the territory of India.

In the present case, the Court accepts the fact that the recipient of the service is the overseas customer and therefore it is an export of service as defined u/s 2(6) of the IGST Act read with section 13(2) thereof. However, section 13(8)(b) of the IGST Act read with section 8(2) has created a fiction deeming export of service by an intermediary to be a local supply, i.e., an inter-state supply. This is definitely an artificial device created to overcome a constitutional embargo. The Court categorically mentioned that it is unable to accept the view of the Gujarat High Court in the case of Material Recycling Association of India (2020-TIOL-1274-HC-Ahm-GST) where section 13(8)(b) of the IGST Act is held to be constitutional. Accordingly, it was held that section 13(8)(b) of the IGST Act, 2017 is ultra vires the said Act, besides being unconstitutional. However, there was a difference of opinion in the decision of the judges and the dissenting judge is yet to pronounce his judgment.

14 M/s Aryan Tradelink vs. Union of India [2021-TIOL-1283-HC-Kar-GST] Date of order: 21st April, 2021

The blockage of credit in the electronic credit ledger beyond a period of one year is impermissible in law

FACTS
The petitioner challenges the act of blocking of the credit ledger and its continuance beyond one year. It is submitted that in light of the mandate under Rule 86-A(3) of the CGST Rules, 2017, blocking of the electronic credit ledger shall cease to have effect after the expiry of a period of one year from the date of imposing such restriction.

HELD
Without entering into the merits of the order blocking the electronic credit ledger, in light of Rule 86-A(3), restriction in blocking of the electronic credit ledger cannot be extended beyond the period of one year from the date of imposing such restriction and, accordingly, in light of the blocking having been done on 21st January, 2020, its continuance in the present instance is impermissible in law. It is therefore declared that the action of the respondents in continuing the blocking of the electronic credit ledger is set aside.

15 Suman Kumar vs. The State of Bihar and Ors. [2021(47) GSTL 449 (Patna)] Date of order: 3rd March, 2021

Best judgement assessment order cannot be passed without granting an opportunity of being heard or without assigning any reason

FACTS
An ex parte order was issued on the basis of best judgement assessment in Form ASMT-13. The petition was filed praying to recall the best judgement assessment made u/s 62(1) of the CGST Act, 2017 and to consider GSTR3B filed by the petitioner for the assessment.

HELD
The order was passed in violation of the principles of natural justice since neither adequate opportunity of being heard was granted, nor any reason assigned for passing such order which would entail civil consequences seriously prejudicing the petitioner. Therefore, the order was quashed without expressing any opinion on the merits of the case with the direction that the proceedings may be conducted digitally considering the current pandemic if required, but the authority shall decide the case on merits preferably by 31st March, 2021, at least within two months from the date of this order.

II. ADVANCE RULING

16 Gujarat Narmada Valley Fertilizers & Chemicals Ltd. [2021 (48) GSTL 172 (AAR-Gujarat)] Date of order: 17th September, 2020

Section 15 of CGST Act and Rule 33 of CGST Rules – Electricity charges collected by landlord at actuals as per agreement would be a case of pure agent and would not form part of value of supply

FACTS
The applicant has entered into a lease agreement with the President of India on behalf of the Commissioner of Central Excise, Audit-I, Ahmedabad (the lessee) to provide a building on rent along with interior infrastructure on 1st December, 2015. The applicant charges rent along with electricity charges and in view of the terms of the agreement, the lessee was liable to pay all charges in respect of electric power, air-conditioning charges, light and water along with applicable taxes. The applicant receives the electricity bill in its name, charges proportionate electricity charges from different tenants and collects GST on such electricity charges from other tenants.

The applicant sought Advance Ruling on whether when the landlord charges electricity or incidental charges in addition to rent as per the lease agreement, was the landlord liable to pay and recover GST from the tenant on such electricity or incidental charges? Can electricity charges paid by the landlord to Torrent Power Ltd. (the supplier of electricity) for the electricity connection in the name of the landlord and recovered based on sub-meters from different tenants be considered as amount recovered as pure agent of the tenant when the legal liability to pay the electricity bill was that of the landlord?

HELD
The question relating to ‘recovery’ of GST from the tenant on electricity or incidental charges was outside the scheme of advance ruling. Such a question being a civil matter, shall be decided in terms of the agreement entered into between both the parties. In view of the terms of the agreement, it was inferred that the applicant was charging a fixed sum as rent and there were no other incidental expenses or charges. The charges in respect of electric power were to be paid on actual basis. One of the clauses of the agreement stipulated that the Government shall pay all charges in respect of electric power, light, etc., along with the applicable taxes thereon. However, the words ‘to whom’ the payment was to be made were missing in the agreement. By applying linguistic principles, it was observed that the lessee was required to pay the charges directly to the electricity company in respect of electric power used by it. The clauses relating to rent and charges for electric power were independent of each other. Thus, electricity charges would not form part of the value of supply.

In respect of the second question, the applicant had not obtained separate meters from the electricity company but had installed sub-meters. Therefore, although the lessee had to pay electricity charges directly to the company as per actual usage in terms of the agreement, in the absence of infrastructure, i.e., separate electric meter, there was a silent agreement that the applicant shall collect electricity charges on actual basis and pay the same to the company. Since this arrangement has been going on for a long time, there was a mutual understanding which can be called as an ‘agreement’ in view of the Indian Contract Act, 1982. Thus, it was held to be a case of pure agent.

17 Manoj Mittal [MANU/AR/0035/2021 (AAR-WB)] Date of order: 22nd March, 2021

If there are two separate sections, one for takeaways and another as restaurant, and if separate books of accounts, records, etc., are maintained, both such sections shall be treated as independent sections – Section for only takeaways can be considered as supply of goods

FACTS
The applicant has a place of business with two sections. One section has a sweets parlour to sell sweetmeats, namkeens and bakery items off the counter in the form of takeaways. In the other section, fast food snacks and beverage items were prepared and served which could either be consumed at the premises or allowed as takeaways. Catering services were also provided to an educational institution which provides education up to secondary level. The two sections were separated through separate billing counters, registers and books of accounts. Based on these facts, the applicant sought advance ruling in respect of classification of supply either as supply of service or of goods, the rate of tax to be applied, exemption to catering services provided to the educational institution, availment of ITC and reversal of common ITC.

HELD
Since there was no direct or indirect nexus between the sweetmeats parlour and the restaurant, it was held that goods supplied from the sweetmeats parlour as takeaways without any element of supply of services shall be treated as supply of goods. Input tax credit shall be available in respect of such supply of goods.

The supply of food and beverage items in the restaurant or as takeaway from the restaurant counter has an element of supply of service. This being composite supply and principal supply being restaurant services, GST shall be levied @ 5% subject to non-availment of input tax credit. Based on the agreement entered into for supply of catering services to the educational institution (i.e., its students and staff) and auditor, guests / parents on programme days, supply only to the extent of catering services provided to the educational institute would be exempt. The supply of food and beverages to the auditor, guests / parents on programme days shall be treated as ‘outdoor catering’ liable to GST @ 5% subject to non-availment of input tax credit. For common input tax credit, sections 17(1) and (2) of the CGST Act read with Rule 42 and 43 of the CGST / WBGST Rules, 2017 shall be followed.

BCAJ Admin

Service Tax

I. HIGH COURT

18. Commissioner of CGST Delhi East vs. Anand and Anand
2022 (65) GSTL 137 (Del.)
Date of order: 1st August, 2022

Refund of unutilized credit admissible to exported legal consultancy services.

FACTS

The respondent, a law firm of legal practitioner, provides legal services to clients in India as well as outside India and specializes in providing services in the field of intellectual property services and exports 70 to 80 percent of its services. The short issue in the Revenue’s appeal related to whether the assessee should be allowed refund of unutilized CENVAT credit for the period from July 2012 to March 2015. The Revenue’s contention based on the sole contention was that for the legal services, the tax burden is on the recipient of service and hence such service is clearly excluded from the definition of “output service” as defined in Rule 2(p) of CENVAT Credit Rules, 2004 (CCR). Therefore, even when the said services are exported, CENVAT credit is not available on such exported services also.

HELD

The Court examined section 68(2) of the Finance Act, 1994 along with the definition of “output service” in Rule 2(p) of CCR, the definition of “exempt service” as per Rule 2(e) of CCR as well as Rules 5 and 6(7) of Service Tax Rules, 2004 (“the Rules”). As per Rule 5 of the rules for all exported services, service providers are eligible for refund. Rule 6(7) keeps SEZ services out of the ambit while providing for the method and procedure for computing the value of exempted goods and/or exempted services used for providing taxable exempted services and/or manufacturing excisable and exempted goods. In addition to this, the Court also noted that commensurate with these observations, in Rule 2(e) of CCR also, the definition of exempted service excludes services exported in terms of Rule 6A of the Rules. Hence, the Court held that the analogy drawn by the Revenue with exempt service was flawed, or else, as per the assessee’s contention, Rule 5(1) of CCR would have been rendered redundant. Hence, agreeing with Tribunal’s conclusion, the Revenue’s appeal was dismissed.

II. TRIBUNAL

19 Karnataka Beverages Corporation Ltd. vs. CST Bangalore
2022 (64) GSTL 605 (Tri.-Bang.)
Date of order: 28th April, 2022

Demurrage charged on the Corporation from manufacturers of liquor not liable for service tax.

FACTS

The appellant–a corporation established for distribution of liquor, purchased it from distilleries and stored the same in hired godowns, and subsequently sold the same to licensed dealers. Where they did not sell within 90 days, the appellant was entitled to charge Rs. 2 per carton. According to the Revenue, the said amount collected was towards business auxiliary service (BAS) and storage and warehousing service. The appellant charged no storage charge till the period of 90 days.

HELD

Relying on several earlier decisions of various High Courts including Kerala State Beverages (M&M) Corporation vs. CCE 2014 (33) STR 484 (Kerala) and Karnataka State Beverages Corporation 2017 (8) STR 411 (Tri.-Bang) [Revenue’s Appeal dismissed by Hon’ble Karnataka High Court as reported at 2011 (24) STR 405 (Kar), which was affirmed by Supreme Court as reported at 2015 (40) STR 209 (SC)], the Tribunal found that appellants discharged their statutory function as no mandate was given by the Karnataka State Excise Act and the Rules framed thereunder and did not render any service as BAS and storage and warehousing service. Hence, the so named ‘commission’ or ‘warehousing charge’ are not exigible to service tax.

20. Flemingo Travel Retail Ltd. vs. CC & CE, Mumbai East
2022 (64) GSTL 564 (Tri.-Mum.)
Date of order : 10th February, 2022

Rent of duty-free shops at arrival/departure terminals of airport are beyond customs frontiers. Hence outside taxable territory of India. No service tax payable. Also, judicial discipline ought to be followed.

FACTS

The appellants challenged the rejection of refund in a bunch of claims of service tax borne by them for 7 years on rent paid to Mumbai Airport International Airport Ltd. for their duty-free shop. The issue relates to whether or not the rent charged for the immovable property is within the taxable territory when it is beyond the customs frontiers. Though there was a precedent available of the Mumbai Tribunal itself in the case of CST vs. Flemingo Duty Free Shop Pvt. Ltd. 2018 (8) GSTL 181 (Tri.-Mum), wherein the claim of refund was upheld, the refund was refused on the grounds such as unjust enrichment, and in some of the claims, the reason for rejection was that the precedent in the case of CST vs. DFS India P. Ltd. 2019 (365) (Tri.-Mum) pertained to only the departure terminal which is a “taxable territory”. However, in the decision of Flemingo Duty Free Shops Pvt. Ltd.’s case, the Tribunal had settled the issue as “there is no dispute that duty-free shops whether in arrival lounge or departure lounge of the International airports are beyond customs frontiers……. and that the rental space in arrival or departure lounge area in non-taxable territory and same therefore is not a taxable service”.

HELD

The Hon. Tribunal held that taxable territory is not necessarily the same as geographical reaches of India, nor can it be limited to the physical frontiers, it is what Finance Act, 1994 states it to be. Reiterating its reliance on the Supreme Court’s decision in the case of Hotel Ashoka vs. Assistant Commissioner of Commercial Taxes 2012 (270) ELT 433 (SC), which had laid the foundation for the ruling of Tribunal to follow inter alia in DFS India’s case (supra), the Tribunal observed that the lower authorities not only disregarded judicial discipline but also patently decided contrary to the said Supreme Court’s decision. Also, it was held that the provision relating to unjust enrichment was not available to the Revenue to deny refund of such tax collected without authority of law for non-taxable services.

21. PMI Organisation Centre Pvt. Ltd. vs. Commissioner of CGST, Mumbai East
G.S.T.L. 244 (Tri. – Mum.)
Date of order: 7th February, 2022

Refund of CENVAT credit cannot be denied merely on the ground of lack of nexus between input service and output service.

FACTS

The appellant was engaged in providing Business Auxiliary Service and exported output taxable services during the relevant period. As a result, the appellant filed a refund application as per Rule 5 of CENVAT Credit Rules, 2004 for the refund of CENVAT credit availed on input services used to provide output service. The Adjudicating Authority rejected the refund claim of certain input services stating that there was no nexus between input services and output services which were exported. The Commissioner (Appeals) upheld the stand taken by Adjudicating Authority denying refund. Being aggrieved by such an order, the appellant preferred an appeal before this Hon’ble Tribunal.

HELD

It was held that the department had only a limited angle to assess whether the refund application was filed as per prescribed formula under Rule 5 of CENVAT Credit Rules, 2004. Further, denial of CENVAT credit solely on the basis of lack of establishing nexus between input and output service without pointing any discrepancy was arbitrary and illegal. The appeal was thus allowed.

22. Bharti Realty Ltd. vs. Commissioner of Service Tax, Delhi-III
2022 (65) G.S.T.L. 234 (Tri. – Del.)
Date of order: 9th May, 2022

CENVAT credit on inputs used for construction of buildings which were subsequently rented out for commercial purpose was eligible.

FACTS

The appellant was engaged in construction of buildings and had rented the same for commercial purpose. It had paid service tax after utilizing the CENVAT credit on inputs used for construction. A show cause notice was issued to the appellant covering the period 1st April, 2008 to 31st March, 2011 for denial and recovery of CENVAT credit on grounds that the inputs, input services and capital goods used result into creation of immovable property which is neither good nor services as per the Circular No. 98/1/2008-S.T. dated 4th January, 2008 and CBE&C. Instruction No. 267/11/2010-CX, dated 8th July, 2010. The appellant stated that the definition of input services specifically used for construction of buildings have been excluded from the ambit of eligibility of CENVAT credit w.e.f. 1st April, 2011, prospectively. However, the respondent passed an order denying CENVAT credit on such inputs used for construction. Being aggrieved by such an order, the appellant preferred an appeal before this Hon’ble Tribunal.

HELD

It was held that the CENVAT credit of inputs used for construction of building which were then rented out, was eligible and the same cannot be denied by relying upon the decision of jurisdictional High Court in Vodafone Mobile Services Ltd 2019 (27) GSTL 481 (Del. HC). It was further held that CENVAT credit on such inputs cannot be denied merely because Revenue had gone in appeal against the above mentioned decision of the High Court before the Apex Court. Thus, the impugned order seeking to deny and recover CENVAT credit was set aside.

BCAJ Admin

Goods and Services Tax

I. HIGH COURT

56. RSB Transmissions (India) Ltd. vs. Union of India
[2022] 145 taxmann.com 1 (Jharkhand)
Date of order: 18th October, 2022

The
liability to pay interest arises on delayed filing of GSTR-3B return
and debit of tax due from the Electronic Cash Ledger. Any deposit in the
Electronic Cash Ledger prior to the due date of filing of GSTR-3B return does not amount to discharge of tax liability on the part of the registered person.

FACTS

The
issue before the Court was whether, under the provisions of the GST
Act, the amount deposited as tax through valid challans by a registered
person in the Government Exchequer prior to the filing of the GSTR-3B
returns could be treated as the discharge of the tax liability due
against such person for the period in question in respect of which the
GSTR-3B return is being filed later and whether interest could be levied
on delayed filing of GSTR-3B in such circumstances u/s 50 of the Act.
The petitioner contended that interest cannot be levied for the delay in
filing of the return, but only on delayed payment and that a late fee is already prescribed in terms of section 47 for the delay in filing of
the return. It was further contended that as per section 39(7), payment
of tax can be made before the due date of return and that when the
amount is credited to the electronic cash ledger (ECL) is subsequently
debited to the ECL at the time of filing of the return, there is no real
movement or transfer of money from the Petitioner to the Government as
the amount is already in the Government exchequer. It was further
contended that since in terms of recent amendments, ITC is deemed to be
as good as tax paid, there is no real distinction between the Electronic
Cash and Credit Ledgers as far as the amount of tax is in the hands of
the Government is concerned.

HELD

The Hon’ble Court, after
considering the relevant provisions of the CGST Act and rules
thereunder, held that any deposit made in the modes prescribed u/s 49(1)
are mere deposit towards tax, interest, penalty, fee or any other
amount by such person which can be credited to the ECL. The Court
further held that a combined reading of section 49(1) of the CGST Act,
2017 and Rule 87 (6) and (7) of CGST Rules, 2017, go to show that such a
deposit does not mean that the amount is appropriated towards the
Government exchequer. The explanation to section 49 also makes it clear
that the date of credit to the account of the Government in the
authorized Bank shall be deemed to be the date of deposit in the ECL and
hence, the deposit in the ECL does not amount to payment of the tax
liability. Accordingly, the Court held that under the scheme of the Act,
no person can make payment of tax prior to the filing of GSTR-3B
return, though such deposits may be made or are lying in his ECL and the
tax liability gets discharged only upon the filing of GSTR-3B return.
The Court also highlighted that cash is just in the nature of a deposit
in the ECL, whereas the ITC is available in favor of the assessee on
account of tax already paid and therefore certain distinction has been
made u/s 50 of CGST Act as regards the computation of interest only on
that portion of the tax paid after due date of filing of return u/s
39(7) of the Act by debiting the ECL.

[Note: A similar decision
has been also pronounced by the Hon. Madras High Cout in the case of
Yamaha Motors Pvt. Ltd. vs. Asst. Commr. 2022-TIOL-1186-HC-MAD-GST.]

57. Genpact India (Pvt.) Ltd. vs. UOI
[2022] 144 taxmann.com 201 (Punjab & Haryana)
Date of order: 11th November, 2022

Since
there is not much difference between the definition of ‘intermediary’
in the pre-GST and GST regime, and the agreement between the parties is
on principal-to-principal basis involving the provision of the main
service as a sub-contractor to third-party clients of the main supplier,
they are not “intermediary services”.

FACTS

Petitioner is a
Business Process Outsourcing (BPO) service provider located in India
providing services to customers located in India as well as outside
India. Services include, inter alia, (i) maintaining vendor/customer
master data, scanning and processing vendor invoices, book keeping,
preparing/finalizing books of account, generating ledger
reconciliations, managing customer receivables, etc., (ii) Developing,
licensing and maintaining software as per clients’ needs, (iii)
Technical IT support i.e. trouble-shooting services and (iv) Data
analysis and providing solutions to clients in respect of forecasting of
demand for their offerings and management of inventory, supporting
various business functions like sourcing and supply chain management,
etc. The petitioner is engaged by a foreign party for providing various
services on a principal-to-principal basis including for actual
performance of BPO services to the clients of the said party located
outside India in terms of the Master Service Agreement (MSA) entered
into between the parties.

In this writ, the order is challenged,
wherein it was held that the services provided by the petitioner are in
the nature of “Intermediary Services” and do not qualify as “export of
services” in terms of section 2(6) of the Act and hence the refund claim
of un-utilized ITC used in making zero-rated supplies of services
without payment of IGST is rejected.

HELD

The Court examined
the contents of the MSA entered into between the parties, and also the
law relating to “intermediaries services” prevailing in the pre-GST
regime as well as the GST regime. The Court held that for services to be
called as intermediary services three conditions are required to be met
namely, the relationship between the parties must be that of a
principal-agency relationship, the supplier is involved in the
arrangement or facilitation in the provision of the service provided by
the principal and plays no role in the actual performance of service
intended to be received by the receiver. Thus, the scope of the
intermediary is to mediate between the two parties i.e. the principal
service provider and the beneficiary who receives the main service and
expressly excludes any person who provides such main service on his own
account from its scope. The Court held that in the present case, since
the company provides BPO services on behalf of a foreign party, it
undoubtedly provides the main services on its own account. Further, the
agreement is on principal-to- principal basis. It also held that all
that is evident from the record is that the petitioner is providing the
services which is subcontracted to it by the foreign party. As a
sub-contractor, it is receiving fee/charges from the main contractor
i.e. foreign party for its services. The main contractor i.e. foreign
party, in turn, is receiving consideration from its clients for the main
services that are rendered by the petitioner pursuant to the
arrangement of sub-contracting. Even as per the circular dated 20th
September, 2021 issued by CBIC, at its para 3.5, it stands clarified
that sub-contracting for a service is not an ‘intermediary’ service.

The
Court held that a bare perusal of the recitals and relevant clauses of
the MSA do not in any manner indicate that the petitioner is acting as
an ‘intermediary’ and cannot also be interpreted to conclude that the
petitioner has facilitated the services. The said clauses are in
relation to the modalities of how the actual work would be carried out
and do not in any manner establish that the petitioner was required to
arrange/facilitate the third party to render the main service which has
actually been rendered by the petitioner.

The Court agreed in
principle that the definition of ‘intermediary’ in essence and there
does not seem difference in its meaning under the GST regime and the
pre-GST regime. The Court relied upon the decision of Bharat Sanchar
Nigam Ltd. v. Union of India [2006] 3 SCC 1, in which the Hon’ble
Supreme Court had reiterated that where facts and law in a subsequent
assessment year are the same, no authority whether quasi-judicial or
judicial can generally be permitted to take a different view.

58. CTC (India) (Pvt.) Ltd. vs. Commissioner (Appeals), CGST & Central Excise
[2022] 144 taxmann.com 10 (Jharkhand)
Date of order: 7th September, 2022

Where
the petitioner did not show zero-rated supplies in GSTR-3B and the
turnover shown in GSTR-1 was not supported by documentary evidence, even
after providing a sufficient opportunity of being heard, the officer
was right in rejecting the ITC refund claim.

FACTS

The
petitioner is a company and is a 100 per cent export-oriented unit. The
petitioner filed an application for refund of accumulated CGST, SGST and
IGST credit in the prescribed Form-GST-RFD-01A along with supporting
documents. The petitioner, while filing the GSTR-3B return of Input Tax
Credit for the relevant period, inadvertently, missed out to mention the
zero-rated supplies against the outward taxable supplies (zero-rated)
in the said return and instead mentioned the same to be ‘zero’. However,
the said amount of zero-rated supplies has been correctly shown in
GSTR-1 return of outward supplies against export invoices. The refund
was rejected, inter alia, on the grounds that the value of zero-rated
supply as per GSTR-3B appears to be zero.

HELD

The Court observed that the petitioner has not produced
any documentary evidence for his refund claim; either before the
adjudicating authority or before the appellate authority, though he was
afforded a personal hearing but he failed to prove that the declaration
(zero-rated value of GSTR-1) was legal and genuine. The Court held that
merely claiming any refund on the basis of averments would not suffice
unless and until the said claim of any assessee is corroborated by
documentary evidence.

59. Esveeaar Distilleries (Pvt.) Ltd vs. Assistant Commissioner (State Tax), Tirupati-II Circle
[2022] 144 taxmann.com 153 (Andhra Pradesh)
Date of order: 20th October, 2022

“Whether
alcoholic liquor for human consumption falls within the meaning of food
or food products” to determine the rate of GST for job-work purposes?
Held – No.

FACTS

The petitioner herein is a manufacturer of
Indian made foreign liquor for the manufacture of ‘McDowell’ brand
alcoholic beverages like rum, whisky and brandy. An assessment came to
be made by the GST authorities levying GST at 18 per cent. The same is
challenged on the grounds that the job work charges relatable to the
manufacture of alcoholic liquor is chargeable at 5 per cent since liquor
also falls within the category of “Food and food products” under
Chapter 22, as it was sought to be inserted at serial No.26 after clause
‘e’ by Notification issued on 13th October, 2017 and that the
subsequent notification issued on 30th September, 2021 levying tax on
services by way of job work in relation to manufacture of alcoholic
liquor for human consumption is only prospective in nature and
applicable from 1st October, 2021.

HELD

The Court noted that
based on recommendations of GST Council in its 45th meeting held on 17th
September, 2021, it has been clarified that food and food products in
the said entry exclude alcoholic beverages for human consumption.
However, assuming that the recommendations of the GST Council are not
binding and they are only directions, plain reading of the item, which
is in dispute, would clearly show that the same cannot be treated as an
article of food. The Court held that alcohol cannot be treated as an
item of food for many reasons, more particularly, for the advertisements
carried on the item that consumption of the same would be injurious to
health, etc. Hence, job work of alcohol manufacturing cannot attract 5
per cent GST rate. The Court further held that the notification issued
on 30th September, 2021 is clarificatory in nature and would be
retrospective in operation.

60. Kinaram Vintrade Pvt. Ltd. vs. State of West Bengal
2022 (65) GSTL 163 (Cal.)
Date of order: 30th June, 2022

Order passed for blocking of electronic credit ledger without intimating the reasons was not sustainable.

FACTS

The
respondent had blocked the petitioner’s ITC available in electronic
credit ledger. The petitioner was not informed about the reasons before
taking such an action by the respondent. Being aggrieved by such an
action, the petitioner preferred a writ petition before the Hon’ble High
Court.

HELD

It was held that the order blocking ITC without
intimating the reasons to the petitioner was arbitrary, illegal and
violative of the principle of natural justice. Accordingly, the Court
directed the respondent to provide a copy of reasons for blocking of ITC
to the petitioner and then pass a reasoned order after giving an
opportunity of being heard.

61. Hindustan Steel & Cement vs. Assistant State Tax Officer, Kozhikode
2022 (65) GSTL 133 (Ker.)
Date of order: 20th July, 2022

Right to file an appeal could not be deprived merely because no summary order in Form DRC-07 was generated.

FACTS

Goods
and conveyance of the petitioner were detained and seized u/s 129 of
the CGST/SGST Act. The petitioner paid the requisite amount for getting
its goods and conveyance released. Further, an order was issued in Form
MOV-09 but corresponding summary of order in Form DRC-07 was not issued.
As the summary order was not issued, the petitioner could not proceed
to file an appeal electronically. The respondent contested that once payment is done by the petitioner in Form DRC-03,
it demonstrates acceptance of facts by the petitioner and proceedings
are deemed to be concluded. Being aggrieved by such a stand, the
petitioner preferred this writ petition.

HELD

The Hon’ble
High Court referred to section 129(3) of CGST Act read with Rule 142 of
CGST Rules and Circular No. 41/15/2018-GST dated 13th April, 2018 and
held that irrespective of the fact whether or not a payment was made, or
security was provided as per section 129(1) of CGST Act, 2017, it was
the responsibility of respondent to pass an order and upload the summary
order in FORM DRC-07. Merely because the summary order was not
generated on culmination of proceedings, it cannot by any stretch of
imagination result into depriving of statutory right of the petitioner
to file an appeal u/s 107 of CGST Act.

The writ was thus allowed.

62. Ankush Auto Deals vs. Commissioner of DGST
2022 (65) GSTL 184 (Del.)
Date of order: 21st July, 2022

Supreme
Court order providing COVID-19 relaxation in time limit was not
applicable to interest payment on refund granted beyond 60 days.

FACTS

The
petitioner filed an application for refund on 20th July, 2021 amounting
to Rs. 25,29,944. The respondent remitted a refund to the extent of
Rs. 14,22,482 on 4th January, 2022 and the balance refund of Rs. 11,07,462 was
remitted on 22nd, March, 2022 without providing any interest. There was
no dispute with respect to the eligibility of refund. The petitioner
contended that the refund should be granted with interest since there
was a delay beyond 60 days. The Department stated that the time limit of
60 days was not applicable due to Supreme Court COVID-19 relaxation.
Being aggrieved by the same, the petitioner preferred a writ petition
before this Hon’ble High Court.

HELD

The Hon’ble Court, after
considering the submissions, stated that the statutory rate of interest
provided u/s 56 of the CGST Act was a compensation for use of money and
the respondent could not retain money beyond the stipulated period.
Accordingly, it was held that reliance placed on Supreme Court’s order
providing relaxation in time limit by the respondent denying interest
was misconceived. Consequently, the respondents were directed to pay
interest on the delayed payment of refund.

BCAJ Admin

Recent Developments in GST

I. NOTIFICATIONS

1. Notification No .21/2022-Central Tax dated 21st October, 2022

By above notification, the due date of filing monthly return of September, 2022 is extended by 1 day and the same is notified as 21st October, 2022.

II. OFFICE MEMORANDUM

1. The Central Government has issued an Office Memorandum dated 17th October, 2022 by which the modification is effected in membership of the Law Committee and the reconstituted committee is notified.

2. The Central Government has also issued one more Office Memorandum dated 19th October, 2022, in which clarification is provided about handling of investigation matters and issue of SCN where jurisdiction of the taxpayer is with the State authority and investigation is conducted by the Central Authority. It resolves the issue about consequential action, whether to be taken by State Authority or Central Authority, in case of investigation matters.

III. ADVISORY

1. On portal, the authorities have issued an Advisory dated 21st October, 2022 about sequential filing of GSTR-1.

2. There is also information dated 20th October, 2022 about the implementation of mandatory mentioning of HSN Codes in GSTR-1.

IV. CIRCULARS

1. Clarification on refund related issues-Circular No.181/13/2022-GST, dated 10th November, 2022

In the above circular the CBIC has clarified various issues relating to GST refund. Two issues are clarified – One, about the effective date for amendment made in formula prescribed under rule 89(5) of CGST Rules, and second pertains to the effective date for application of restrictions inserted by notification No.09/2022-Central Tax (Rate) dated 13th July, 2022.

2. Guidelines for verification of transitional credit- Circular No.182/14/2022- GST, dated 10th November, 2022

The CBIC has issued the above circular giving guidelines to field formation about verification of transitional credit in light of the orders of the Hon. Supreme Court in the case of Filco Trade Centre Pvt. Ltd., SLP (C) No.32709-32710/2018, orders dated 22nd July, 2022 and 2nd September, 2022.

V. ADVANCE RULINGS

30. Bhopal Smart City Development Corporation Ltd.
(AAR No.MP/AAAR/01/2022 dated13th April, 2022 (MP)

Developed Plot vis-à-vis Liability under GST

This appeal arose out of the AR No.16/2021 dated 22th November, 2021 passed by M.P. AAR in the case of Bhopal Smart City Development Corpn. Ltd.The issue was about liability in case of sale of developed land plots. The basic facts were that the applicant therein purchased a plot of land, developed it with various works like drainage line, water line, electricity line, land leveling and common facilities like road and street lights, etc.

The argument of the applicant therein was that, inspite of the above development, the land remains land and the applicant is not liable to GST as it will be sale of land, which is outside scope of GST (Schedule III). The ld. AAR concurred with applicant and ruled accordingly vide the above AR.

Against the above AR, the Respondents, i.e., Revenue Authority filed an appeal before the AAAR.

Before the AAAR, the contentions of revenue were reiterated including that there is difference between barren land and developed land. The usability also changes, argued the appellant.

The Judgment in the case of Narne Construction Pvt. Ltd. (2013 (29) STR 3 (SC)- 2012-VIL-19-SC-ST) was relied upon.

The Respondent (original applicant) reiterated its position.

The ld. AAAR examined the issue at its level and observed as under:

“The issues discussed above have been examined. In this case, the issue to be decided is whether GST is applicable on sale of developed plot of land and whether the activities undertaken for developing a barren land into a developed land with provision of amenities essential to make it inhabitable and fit for construction of a complex on the said land is a service and also whether it is a part of the service of construction of the complex and also whether this activity is covered under entry 5(b) of Schedule II of the CGST Act, 2017.”

The ld. AAAR thereafter analyzed the fact, that by development the use changes and involves substantial cost. The ld. AAR also referred to the Supreme Court judgment cited by the appellant and reproduced certain portion as under:

“The sale price was not for the virgin land but included the development of sites and provision of infrastructure. The opposite party has undertaken the obligations to develop the plots and obtain permissions/approvals of the lay outs. The opposite party itself pleaded in its counters that the plots were developed by spending huge amounts and subsequent to the amounts paid by the complainants also plots were developed. It pleaded that huge amounts were spent towards protection of the plots from the grabbers and developed roads, open drains, sewerage lines, streetlights etc. It is therefore, manifest that the transaction between the parties is not a sale simplicitor but coupled with obligations for development and provision of infrastructure. Inevitably, there is an element of service in the discharge of the said obligations.”

Based on above case and considering the scope of entry 5(b) in Schedule II, the ld. AAAR held that a developed plot has different identity and is liable to GST as per notification No.11/2017-Central Tax (Rate) dated 28th June, 2017 at 18per cent.

For valuation, the Ld. AAAR observed that the same can be arrived at as by taking 1/3rd deduction towards land.

Thus, the ld. AAAR reversed the AR.

[Note: By Circular 177/09/2022 dated 3rd August, 2022, the CBIC clarified that the sale of developed plot is also sale of land and hence not liable to GST as per entry 5 in Schedule III. The above order of AAAR is prior to the above circular.]

31. Karnataka Secondary Education Examination Board
(AAR No.KAR-ADRG/17/2022
dated 1st July, 2022) (KAR)

GST – Educational Institution

The applicant is established under the Karnataka Secondary Education Examination Board Act,1966 and holds GSTIN. It has raised the following questions:

“i. Whether the Applicant is an “educational institution” and ought to be treated as such for the purposes of applicability of GST?

ii. Whether the activity of printing of the following items of stationary on behalf of educational institutions constitutes a supply of service:

a. question papers,
b. admit cards,
c. answer booklets
d. SSLC Pass Certificate, the overprinting of variable data and lamination,
e. Fail Marks cards
f. Circulars, ID card and other formats used for and during examinations.
g. Envelopes for packing answer booklets

If yes, whether the service provided to educational institutions by way of printing of stationery and other services incidental to the conduct of examination by such institutions would be covered by Sr.No.66 (Heading 9992) of Notification No. 12/2017-Central Tax (Rate), as amended and subject to Nil rate of tax.

iii. Whether the following incidental services provided to or performed on behalf of educational institutions are also services that are covered by Sr. No.66 (Heading 9992) of Notification No. 12/2017-Central Tax (Rate), as amended and subject to Nil rate of tax:

a. scanning of answer booklets and converting the same into digital images;
b. hiring of light motor vehicles and heavy motor vehicles for transportation of examination materials;
c. annual maintenance of computers and equipment;
d. obtaining the services of programmers and technical staff for examination related work; and
e. Obtaining Group ‘D’ staff, Drivers, Data Entry Operators, Security Guards & House Keeping services related for SSLC Examination work.”

The applicant provided information about the administrative set up. It also informed that the functions of the Board involve the conduct of the SSLC Examination. The applicant performs all activities in relation to the conduct of examinations, declaration of results and so on, and for this purpose it engages in procurement activities for stationery and examination materials and outsources activities like maintenance of computer hardware and software.

The main activities of the applicant are printing of examination papers, answer booklets/answer scripts, marks cards, examination admit cards, circulars pertaining to the activities and functioning of the Board etc. in different formats, for which the Board maintains full ownership of all content to be printed, but the actual printing activity itself is done by third parties decided on a process of tender invitation and competitive bidding.

The applicant termed itself as an Educational Institution in view of the definition of ‘educational institution”, given in Karnataka Education Act,1983.

It further drew attention to the definition of ‘educational institution’ in clause 2(y) of the GST notification no.12/2017 Central Tax (Rate) and clause (iv) of Explanation of the said notification which are also reproduced in AAR as under:

“(y) “educational institution” means an institution providing services by way of-(i) pre-school education and education upto higher secondary school or equivalent; (ii) education as a part of a curriculum for obtaining a qualification recognized by any law for the time being in force; (iii) education as a part of an approved vocational education course;

Further, clause (iv) of Explanation of the said notification reads as below:

(iv) For removal of doubts, it is clarified that the Central and State Educational Boards shall be treated as Educational Institution for the limited purpose of providing services by way of conduct of examination to the students.”

It was stressed that, it being an examination Board, falls within the ambit of the term “educational institution” by virtue of judgments not only of different High Courts but also affirmed by the Supreme Court.

Referring to various other relevant materials, the applicant submitted that, they being an Examination Board established for the purposes of conducting certain examinations, it is an educational institution as held and affirmed by various case laws as well as by the legislative intent conveyed in the Karnataka Education Act and the Notifications issued under GST.

In respect of incidental services, like scanning of answer booklets and converting the same into digital images; hiring of light motor vehicles and heavy motor vehicles for transportation of examination materials; annual maintenance of computers and equipment; and obtaining the services of programmers and technical staff on outsourcing basis for examination related work, the applicant stated that they all are indisputably and unambiguously classified as services and not goods. It was further argued that such services are also exempt as they will fall under the ambit of the same Sl.No.66 (Heading 9992) of Notification 12/2017 Central Tax (Rate), which provides that services relating to admission to, or conduct of examination by, such educational institution are liable to be charged GST at Nil rate.

The ld. AAR observed that the Applicant is Karnataka Secondary Education Examination Board (KSEEB), which is established for the purpose of holding and conducting public examinations. The ld. AAR noted that the application is to know whether it is an “educational institution” as per GST Notification No. 14/2018-Central Tax (Rate) dated 26th July, 2018 clause (iv) and held that Karnataka Secondary Education Examination Board is an educational institution for the limited purpose of providing services by way of conduct of examination to the students.

In relation to various services like printing of papers and other incidents services, the ld. AAR found that the applicant is a recipient of services and not supplier.

The ld. AAR referred to section 95(a) of CGST Act which provides that AR application can be filed by supplier. In the present case, finding that the applicant is not supplier but recipient, the ld. AAR held that such questions are not maintainable. The ld. AAR passed ruling as under:

“i. The Applicant is an “Educational institution” for the limited purpose of providing services by way of conduct of examination to the students, as per clause (iv) of Notification No. 14/2018-Central Tax (Rate) dated: 26.07.2018.

ii. This question cannot be answered for the reasons mentioned supra.

iii. This question cannot be answered for the reasons mentioned supra.”

32. K. P. H. Dream Cricket P. Ltd.
(AAR No.01/AAAR/CGST/KPH/2022
dated 1st June, 2022 (Punjab)

Free Distribution of Ticket – No supply

The issue arose before the Punjab AAAR out of the AR passed by the ld. AAR in AAR/GST/PB/002/dated 20th August, 2018.

Before the ld. AAR, the applicant (present appellant) presented its facts that it has entered into a Franchise Agreement in the month of April, 2008 with the Board of Control for Cricket in India (‘BCCI’) for the purpose of establishing and operating a cricket team in the Indian Premier League (‘IPL’) under the title of ‘Punjab Kings’. The appellant has participated in the IPL with other franchisees where the matches are held at the home and away venues as designated by BCCI-IPL.

The appellant intended to distribute match tickets to local Governmental authorities/ officials, consultants, etc. free of cost as a goodwill gesture for promotion of business. These tickets are to be distributed without any consideration flowing from the receivers to the appellant.

Based on the above facts, the appellant sought the ruling of AAR whether there is any GST liability and whether it is entitled to ITC in respect of inward supply for above free tickets.

The ld. AAR held that providing free complimentary tickets will be a supply. The ld. AAR held that when appellant issues a complimentary ticket to any person, the appellant is displaying an act of forbearance by tolerating persons who are receiving the services provided by the appellant without paying any money, which other persons not receiving such complimentary tickets would have to pay for. Since free distribution of ticket is held as taxable supply, correspondingly it was also held that appellant will be eligible to ITC.

Aggrieved by the above AR, an appeal was filed before the AAAR. Before the ld. AAAR, the appellant reiterated its ground that there is no consideration and hence no supply. Section 7(1)(d) is deleted by Amendment Act,2018 and section 7(1A) is inserted, providing clarification in relation to entries in Schedule II of CGST Act. The submission was that without consideration in monetary terms or otherwise, there will not be supply and transaction will be out of scope of GST.

In respect of ITC, it was submitted that the ITC will be eligible as it is not falling in rules blocking ITC, including Rule 17(5)(h).

It was argued that, if there is supply, then the question of taxable/non-taxable supply will arise and ITC can be determined accordingly.

However, when the transaction is not supply at all, the concept of taxable/non-taxable will not apply and the Rule about blocked credit will also not apply.

The ld. AAR analyzed the arguments vis-à-vis the legal position. It referred to important relevant provisions like scope of ‘supply’ as per section 7 and definition of ‘consideration’ in section 2(31).

The ld. AAAR concurred with appellant that the entries in Schedule II are for classifying the supply transactions into supply of goods or supply of services and by itself it is not deciding ‘supply’.

In respect of ‘consideration’, the ld. AAAR reproduced the definition as under:

““Section 2 (31) consideration in relation to the supply of goods or services or both includes–

(a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;

(b) the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government:

Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply;”

It also analyzed the same as under:

“The key elements of “consideration” that emerge from the said definition are detailed hereunder:

a) Consideration includes both the payment made as well as payment to be made. This signifies that the consideration is not only limited to the payment received but shall also include the payment which has not been received;

b) Consideration can be in the form of money or otherwise. This implies that the consideration is not merely defined by the payment received in money but also includes the payment received in kind, which is other than money;

c) Consideration to flow from the supply of goods or services or both i.e. it can be in respect of, in response to, or for the inducement of, the supply of goods or services or both. The important aspect here is that the consideration has to be linked with the supply of goods or services or both and that linkage can be in varied forms. It can be in respect of the supply or in response to the supply or even be an inducement for the supply;

d) Consideration can flow from the recipient or any other person but shall not include any subsidy given by the Central Government or a State Government. The matrix of consideration has been widened by not limiting its flow merely from the recipient. Any consideration that is flowing from any other person but can be linked to the supply of goods or services in the manner defined in para (c) above shall bring it within the fold of consideration;

e) The ambit of consideration has been widened by including the monetary value of any act or forbearance provided the same has the linkage with the supply as detailed in in para (c) above. It needs to be understood that any act or forbearance which has a linkage with the supply in a certain manner which may be either in respect of or in response to or for the inducement of would fall within the fold of consideration;

f) Lastly, the element of deposit given in respect of the supply of goods or services or both has been taken out of the fold of consideration. However, the same may be included in consideration when such deposit is applied as consideration for the said supply by the supplier.”

The ld. AAAR also referred to the Finance Act,1994, the Indian Contract Act and certain international rulings. The ld. AAAR came to the conclusion that, for considering a transaction as a ‘supply’, there must be consideration flowing from recipients either in money terms or in kind. It cannot be illusionary.

The ld. AAR summarized its findings as under:

‘20. The inference drawn from the above delineations is that even for the consideration in the form of payment in kind, it should not be vague or illusory and there should be an element of reciprocity. If the argument by the Authority for Advance Ruling is agreed to and accepted that every kind of activity or transaction whether for gift or charity or for any other purpose shall fall within the domain of supply. The CBIC vide its Circular No. 92/11/2019-GST dated 7th March, 2019 has clarified that, “goods or services or both which are supplied free of cost (without any consideration) shall not be treated as supply under GST (except in case of activities mentioned in Schedule I of the said Act). Accordingly, it is clarified that samples which are supplied free of cost, without any consideration, do not qualify as supply under GST, except where the activity falls within the ambit of Schedule I of the said Act.”

21. Thus, the argument by the appellant that on account of absence of consideration in such activity or transaction, the same should not fall within the territory of supply is well taken and therefore the activity of providing such free or complimentary tickets is not a supply as per the GST Act. However, it is important to note here that as per section 7 of the Act read with Schedule I any activity or transaction between the related person including employee shall be treated as supply even if the aspect of consideration is not there. So, where such complimentary tickets are being provided by the appellant to related person as defined in section 15 of the Act or to distinct person as defined in section 25 of the Act the same would fall within the ambit of supply even if there is no consideration.”

Therefore, providing complementary tickets are held to be not a supply.

Regarding ITC, the ld. AAAR held that the basic theory under GST is to grant ITC, if there is outward tax burden. If there is no outward tax liability, then ITC is not eligible. Accordingly, in the present case, the ld. AAAR held that ITC is not eligible.

The ld. AAAR decided the questions of the appellant as under:

“a) Activity of providing free complimentary tickets does not fall within the domain of supply as it does not have the element of consideration. However, where such complimentary tickets are being provided by the appellant to a related person or a distinct person the same shall fall within the ambit of supply on account of Schedule I of the Act and the appellant would be liable to pay tax on the same;

b) The appellant would not be eligible to avail input tax credit in relation to such activity. But, where such activity or transaction is treated as supply on account of being provided by the appellant to a related person or a distinct person the appellant would be entitled to avail input tax credit for the same.”

BCAJ Admin

Goods and Services Tax

45. Apar Industries Ltd vs. UOI
[2022] 142 taxmann.com 289 (Bombay) Date of order: 23rd August, 2022
And
Colgate Palmolive (I.) Ltd. vs UOI [2022] 142 taxmann.com 18 (Bombay) Date of order: 29th August, 2022

Where the department alleged that ISD is not entitled to TRAN-1 credit, and hence the distribution of such credit to recipient units is invalid. The Hon’ble High Court directed petitioners to claim such credit in the revised TRAN-1 of recipient units and further held that it shall be regarded as regularisation of CENVAT credit from the date it was originally taken.

FACTS

The petitioner availed accumulated CENVAT credit balance in the ISD registration under the erstwhile service tax regime by filing a declaration in TRAN-1 of the ISD registration obtained in the GST Regime u/s 140 of the CGST Act within the prescribed time and manner. The transition of the aforesaid CENVAT credit was permitted and the said balance got credited to the Electronic Credit Ledger (ECL) of the ISD registration on the GST common portal. The petitioner issued the invoices to transfer the transitional credit from its ISD registration to its other units. Basis the said invoices, the respective units availed the input tax credit in its ECL by disclosing the said amounts transferred by the ISD registration in its return filed in Form GSTR–3B. The department objected to the same inter-alia alleging that (i) the ISD unit of petitioner has erroneously transitioned the credit from the erstwhile regime to the GST regime and (ii) the credit distributed by the ISD unit of petitioner has been wrongly availed and utilized by the recipient units for payment of output GST liability of the recipient unit. The main grounds were (i) ISD is not eligible to carry forward its balance credit to the ECL u/s 140(1) of the CGST; (ii) Migration of ISD registration from the existing law to the GST regime as an ISD is prohibited under GST; and (iii) the ISD has transitioned credit with respect to invoices which were not received by it prior to 30th June, 2017.

HELD

The Hon’ble Court observed that there is no dispute with regards to the eligibility of petitioner to claim and/ or transition the aforesaid credit. The entire dispute only pertains to the procedure for the transition of the said CENVAT credit being balance of the ISD credit and its distribution to the other units of the petitioner. Referring to the decision of the Hon’ble Apex Court in the case of Union of India & Another vs. Filco Trade Centre Pvt. Ltd. & Another 2022 (7) TMI 1232, the Hon’ble High Court permitted the petitioner’s recipient units to file a revised declaration in Form GST TRAN-1, either electronically or manually (where electronically is not possible), for taking the credit already distributed to them by the ISD registration of petitioner by issuing invoices. The Hon’ble Court directed to treat this as regularisation of credit from the date it was originally taken. It further held that once the credit taken by the respective units is regularized by filing a revised electronic or manual declaration (as the case may be) in Form GST TRAN-1, the credit balance shown in the ECL of the petitioner being the balance of ISD credit transitioned shall be deemed to have lapsed/ deleted.

46. Curil Tradex (P.) Ltd vs. Commissioner,
Delhi Goods & Service Tax [2022]143 taxmann.com 111 (Delhi)

Date of order: 26th August, 2022

The petitioner was directed to apply for the revocation of the GST registration cancellation order as the information based on which the show cause notice was issued was not provided to the assessee, and the registration was canceled based on an inspection report of physical verification of place of business of the petitioner that was carried out in the absence of petitioner’s authorised representative and without giving him any notice of such physical inspection.

FACTS

The petitioner’s registration was canceled based on the letter from DC, CGST-Delhi South Commissionerate that the firm is non-existent. The petitioner challenged the said order on the ground that the said letter from DC, CGST- Delhi which was the foundation of issuance of show cause notice, and the notice of inspection was not served upon him. He further stated that had the authorized representative of the petitioner been made to remain present at the business premises, the circumstances at the site could have been explained by the said representative.

HELD

Referring to Rule 25 of the CGST Rules, the Hon’ble Court observed that in the present case the physical verification of the premises was carried out in the absence of authorized representatives of the petitioner. It also observed that the verification report and uploading of the documents and photographs as required under Rule 25 was however carried out by the department. The Court also observed that as per the department, the worker of the petitioner was present at the premises at the time of verification. The photographs reveal that the business premises exist but were evidently empty. Having regard to the overall circumstances of the case, the Court expressed a view that had the respondents/ Revenue given notice/intimation of the inspection, it could have been carried out in the presence of the authorized representative of the petitioner and hence lent greater authenticity and credibility to the inspection report. In these facts of the case, the Court directed the petitioner to file the application for revocation of the said cancellation order and directed the department to adjudicate the same and pass a speaking order.

47. Dauji Ispat (P.) Ltd vs. State of UP [2022] 142 taxmann.com 470 (Allahabad) Date of order: 10th November, 2021

The High Court set aside the order when only the summary order in DRC-07 not containing any reasons was uploaded on the electronic portal and the reasoned order was not appearing on the portal. It also issued directions to enquire into reasons for the same and to take remedial action and necessary upgradation of the system.

FACTS

The assessee was served with the summary order DRC- 07 dated 20th July, 2021 through the electronic portal.

The said order did not mention/disclose the reasons. The order containing the reasons was not uploaded on the portal and hence was not served on the assessee.

HELD

The Hon’ble Court held that the summary order served on the petitioner is wholly defective and lacking vital aspects namely reasons for the conclusions drawn therein and set aside the said order. The conclusion was drawn on the ground that unless the complete copy of the order containing the reasons is served on the petitioner/assessee, he may never have any right to challenge the same before any forum including the appellate forum and that the fact that the AO may have available to it another copy of the same order which may contain reasons therefor, may be of no help as such copy of the order has not been served on the petitioner/ assessee.

The Court also directed to inquire the reasons as to why and how an incomplete copy of the order impugned came to be uploaded on the GSTN portal, and to take remedial action to ensure that complete copies of the orders are visible to the assessees and to attempt to provide a verifiable means/electronic trail/audit, etc. to ascertain (where required) how many pages of a document and how many characters were uploaded at any given point of time by any authority or the assessee on the GSTN portal. The High Court expressed a view that such improvement/ upgrade is necessary to be made since under the GST Act, service of notices and filing of replies is primarily to be done through the GSTN portal through electronic means.

48. Oasis Realty vs. UOI
[2022] 143 taxmann.com 5 (Bombay)

Date of order: 16th September, 2022

The ECL can be utilized for payment of 10 per cent of the tax in dispute in terms of section 107(6) (b) of the CGST Act in view of CBIC Circular F. No. CBIC- 20001/2/2022-GST dated 6th July, 2022 where the tax in dispute is not on account of reverse charge liability.

FACTS

In this case, the issue before the Hon’ble Court was whether an amount equal to 10 per cent of the amount of tax in dispute required to be paid in terms of section 107(6) of the MGST Act can be paid by using credit available in the electronic credit ledger (ECL).

HELD

The Hon’ble Court observed that the amount required to be deposited u/s 107(6) is only the amount of tax in dispute and does not include interest, fine, fee and penalties mentioned in the impugned order. The Hon’ble Court did not agree with the contention of the department that the amount available in the ECL can be used only for payment of output tax and not for payment of tax u/s 107(6)(b). The Court held that the said provision uses the expression “unless the appellant has paid” (and not ‘deposited’). As the amount in the ECL can be utilized for payment of tax, it can certainly be utilized to pay 10 per cent of the tax in dispute u/s 107(6)(b) of the MGST Act. It further held that any payment towards output tax, whether self-assessed in the return or payable as a consequence of any proceeding instituted under the MGST Act can be made by utilisation of the amount available in the ECL. The Hon’ble Court did not discuss the contrary decision rendered by the Orissa High Court in the case of M/s. Jyoti Construction vs. Deputy Commissioner of CT & GST noting that subsequent to the said decision, the CBIC has issued clarification vide Circular F. No.CBIC-20001/2/2022-GST dated 6th July, 2022 on the issue concerning utilization of balance in the ECL which is in line with the above conclusion.

Note: A similar decision is also rendered by the Hon’ble Allahabad High Court in the case of Tulsi Ram and Company vs. Commissioner [2022] 143 taxmann.com 6 (Allahabad) dated 23rd September, 2022.

49. Seema Gupta vs. UOI
[2022] 142 Taxmann.com 564 (Delhi)

Date of order: 27th September, 2022

Renting of a residential dwelling to a proprietor of a registered proprietorship firm who rents it in his personal capacity for use as his own residence and not for use in the course or furtherance of business of his proprietorship firm and where such renting service is received by him on his own account and for the proprietorship firm, shall be exempt from tax under Notification No.04/2022- Central Tax (Rate) dated 13th July, 2022.

FACTS

The petitioner challenged Clause (A)(b) of the Notification No.04/2022-Central Tax (Rate) dated 13th July, 2022, as unsustainable being ultra vires Article 14 of the Constitution of India, and also beyond the powers conferred under the Goods And Services Tax Act, 2017 (GST). The petitioner submitted that the exemption granted by a previous Notification dated 28th July, 2017 for renting of residential accommodation is no longer available to tenants who are registered under GST. It is further averred that this amendment is particularly affecting those who are doing their business as a proprietary concern, like the petitioner. It is also averred that denial of exemption solely on account of the fact that the tenant is registered under GST is not based upon any intelligible differentia and the said differentia has no rationale for the object sought to be achieved.

HELD

The Hon’ble Court observed that the respondents have filed an affidavit stating that renting of a residential dwelling to a proprietor of a registered proprietorship firm who rents it in his personal capacity for the use as his own residence and not for use in the course or furtherance of business of his proprietorship firm, and such renting is on his own account and not that of the proprietorship firm, shall be exempt from tax under Notification No.04/2022- Central Tax (Rate) dated 13th July, 2022. Having regards to the fact that respondents undertook to be bound by the said clarification, the Court held that a transaction of the nature mentioned above, would not attract GST and would continue to be exempt.

50. DBS Tradelink and Advisors Pvt. Ltd. vs. State of Maharashtra
2022 (64) GSTL 389 (Bom.)
Date of order: 20th July, 2022.

The system generated show cause notice issued and order cancelling registration passed without application of mind ought to be quashed.

FACTS

A show cause notice was issued on 21st April, 2022 to petitioner by merely stating that in case registration is liable to be cancelled on account of misstatement and suppression of facts. There was no allegation in the show cause notice as well as digital signature on the document was not verified. The order passed cancelling registration also lacked clarity and reasoning. Being aggrieved by such a show cause notice and consequent passing of the order, the petitioner preferred a writ petition before the Hon’ble High Court.

HELD

It was observed that both the show cause notice issued and the order of cancellation of registration were passed without application of mind and in breach of the principles of natural justice. Accordingly, the impugned order passed mechanically was quashed and petitioner’s registration was restored. Further, the respondent was given the liberty to initiate fresh proceedings by issuing a show cause notice and passing an order in physical form.

51. Imax Infrastructure Pvt. Ltd. vs. Union of India
2022 (64) GSTL 479 (Cal.)
Date of order: 10th June, 2022.

Writ Petition cannot be dismissed where jurisdiction of officer is challenged merely because an alternative remedy is available to the petitioner.

FACTS

The DRI Officer had passed an order u/s 74(9) of the SGST Act. The petitioner contended that initiation of proceedings and passing of an order is going beyond his jurisdiction. Being aggrieved by such an order, the petitioner filed a writ petition. The respondent contended that the writ petition was not maintainable as the petitioner had an alternative remedy of appeal.

HELD

The Hon. High Court held that the writ petition was admissible in cases where challenge is pertaining to the jurisdiction of an officer, violation of principles of natural justice or constitutional validity of provisions of law. Accordingly, it passed an interim order holding that the writ petition was admissible even where alternative remedy was available since the question of jurisdiction was involved.

52. Globus Petroadditions Pvt. Ltd. vs. Union of India
2022 (64) GSTL 54 (Bom.)
Date of order: 1st February, 2022

Adjudicating Authority cannot refuse to follow the order of Appellate Authority merely because the department has decided to go for Appeal before the Tribunal.

FACTS

The petitioner had filed two refund applications under Inverted Rated Structure for second and third quarter in 2018. However, the respondent rejected both the refund applications. Being aggrieved by such rejection, the petitioner filed an appeal before the Additional Commissioner, who set aside both the orders of respondent. The petitioner filed a fresh refund application which was once again rejected by the respondent on the ground that it would be going for appeal against such order before the Hon’ble Tribunal. Being aggrieved by the stand taken by the respondent, the petitioner preferred a writ before the Hon’ble High Court.

HELD

The Hon’ble Court prima facie held that the respondent had not acted in accordance with law by rejecting the refund claim. The respondent had no discretion by refusing to comply with the order of the Additional Commissioner merely because in its view, the order passed was erroneous or it had decided to file an appeal against the said order before the Hon’ble Tribunal. Accordingly, the impugned order was set aside, and the respondent was directed to comply with the order of the Additional Commissioner within four weeks from the date of communication of this order.

53. Manish Scrap Traders vs. Principal
Commissioner
2022 (64) GSTL 482 (Guj.)
Date of order: 12th January, 2022

Cash credit account cannot be provisionally attached u/s 83 of CGST Act, 2017.

FACTS

The petitioner was a scrap trader. His cash credit account was provisionally attached by the respondent by passing an order in Form GST DRC-22. Being aggrieved by such an order of provisional attachment, he preferred a writ before the Hon’ble Court.

HELD

It was held that the cash credit account cannot be provisionally attached as per section 83 of CGST Act, 2017 by squarely relying on the decisions of this Court in the matter of Formative Tex Fab vs. State of Gujarat and M/s. Vinodkumar Chechani vs. State of Gujarat. It was further held that the respondent Principal Commissioner, by ignoring and superficially distinguishing the settled law, was in contempt of the Court. Consequently, the order of provisional attachment was set aside.

54. Adi Enterprises vs. Union of India
2022 (64) GSTL 392 (Guj.)
Date of order: 8th June, 2022

Refund of IGST paid on ocean freight was required to be granted with interest.

FACTS

The petitioner had discharged IGST on entire CIF value of goods as well as on ocean freight under reverse charge mechanism. The petitioner had challenged the validity of Notification No. 10/2017 IGST (Rate), dated 28th June, 2017 as ultra vires of the Act. The Division Bench of this Court in Mohit Minerals Pvt. Ltd. vs. Union of India [2020 (33) G.S.T.L 321 (Guj.) in order dated 23rd January, 2022 allowed the writ petitions and declared Entry No.10 of Notification No.10/2017 IGST (Rate), dated 28th June, 2017 as ultra vires the Act. Further, the appeal against the said order before the Apex Court was dismissed. Owing to that, the petitioner filed a writ petition for refund of tax paid along with interest.

HELD

It was held that based on the decision of Apex Court in Union of India vs. Mohit Minerals Pvt. Ltd. [2022 (61) G.S.T.L 257 (S.C.)], the petition was allowed. Accordingly, the Court directed the respondents to grant refund of the amount of IGST already paid by the petitioner along with statutory rate of interest.

55. Amutha Metal Industries vs. Deputy State Tax Officer, Chennai
2022 (64) GSTL 308 (Mad.)
Date of order: 4th April, 2022

Order passed without strictly following the procedure prescribed u/s 74 of CGST Act, 2017 is invalid.

FACTS

The petitioner was a registered dealer under the TNGST Act, 2017. A notice was issued in Form GST ASMT-10 dated 1st November, 2021 to which the petitioner submitted a response on 24th November, 2021. Thereafter, straight away an order was passed on 9th December, 2021 u/s 74 of the CGST Act, 2017 without issuing any notice u/s 74(1) or pending hearing in the matter. Being aggrieved by such an order, the petitioner preferred a writ petition before this Hon’ble High Court.

HELD

It was held that the notice was issued and order was passed without strictly following the procedure laid down in section 74 of CGST Act and suffered from infirmities. Accordingly, the impugned order was set aside and the matter was remanded back to the respondent to pass an order after strictly following the prescribed procedure including providing a personal hearing to the petitioner.

BCAJ Admin

Recent Developments in GST

I. NOTIFICATIONS

1. Notification No.18/2022-Central Tax dated 28th September, 2022

By above notification, provisions of section 100 to 114, except clause(c) of section 110 and section 111 of the Finance Act, 2022 are brought in operation from 1st October, 2022.

2. Notification No.19/2022-Central Tax dated 28th September, 2022

By above notification, the CGST Rules are amended. More particularly, amendments are made in the following rules:

Rule 21 – New Clauses (h) and (i) are inserted to enable cancellation of registration when there is a failure to furnish six monthly returns required u/s 39(1) or two quarterly returns.

Rule 36 – Rule is regarding documentary requirements and conditions for claiming ITC. It is now required that invoices and debit notes relating to ITC are communicated in Form GSTR-2B.

Rule 37- Regarding reversal of ITC for non-payment to supplier within 180 days is substituted. Now it is provided that the reversible ITC should be paid with interest in the tax period immediately following the period of 180 days and it is also provided that the taxpayer can re-avail the said ITC when the payment is made. Specifically, the proportionate disallowance method is done away with.

Rule 38- There are changes in Rule 38 relating to the claim of credit by banking companies or financial institutions which are technical.

In Rules 42, 43 and 60, there are technical changes.

There is also an omission of certain rules like Rules 69 to 77 and 79. These rules mainly dealt with matching for ITC. However, due to shift in methodology of matching of ITC, the above rules are omitted.

There are technical changes in Rules 83 and 85.

In Rule 89, changes are made in respect of application for refund of tax. The category of claiming refund in the electronic cash ledger as per section 49(6) is included in main Rule 89(1).

There are further technical changes relating to Form Number etc. in Rule 96.

The Form GSTR-1A, GSTR-2 and GSTR-3 are omitted.

3. Notification No.20/2022-Central Tax with corrigendum dated 28th September, 2022

By above notification, the notification No.20/2018 –CT dated 28th March, 2018 which was regarding United Nations (Privileges and Immunities) Act, 1947 (46 of 1947), Consulate or Embassy etc. has been rescinded from 1st October, 2022.

II. PRESS RELEASE

1. Press release dated 4th October, 2022 – clarifications are given about changes of time limits for certain compliances pursuant to issuance of Notification No.18/2022-Central Tax dated 28th September, 2022.

III. ADVANCE RULINGS

26. Andhra Pradesh Industrial Infrastructure Corporation Ltd.
(AAR No.09/AP/GST/2022 dated 30th May, 2022) (AP)

Taxable Supply and Valuation

The brief facts are that APIIC Ltd was incorporated under the Companies Act, 1956 on 26th September, 1973. It is a wholly-owned undertaking of the Government of Andhra Pradesh. APIIC Ltd allots land to the SC/ST/BC entrepreneurs collecting certain percentage of the land cost from the entrepreneurs at the time of allotment of land. The sale agreement for the same is executed on the satisfaction of certain allotment conditions by the entrepreneur. With regards to the balance amount of the land cost, the same is collected from the entrepreneur in annual installments, along with interest, in the moratorium period.

The facts and questions raised before the authority were as under:

“APIIC allots the land to the SC/ST/BC entrepreneurs by collecting 25% of the land cost from the entrepreneurs at the time of allotment of land and the sale agreement for the same is executed on satisfaction of certain allotment conditions by the entrepreneur. With regard to the balance 75% of the land cost, the same will be collected from the entrepreneur in 8 equal annual installments (at 16% p.a. rate of interest duly providing 2 years moratorium period). The entire interest income on the balance land cost is being recognized in the financial year in which the sale agreement is executed.

The applicant approached this authority seeking a clarification, whether the interest amount receivable on the balance land cost is taxable under GST or not?”

The applicant submitted that the interest collected/ collectable from the entrepreneurs do not fall under the category of entry 27 in notification No.12/2017 – Central Tax (Rate), dated 28th June, 2017 and thus, the interest amount is not exempt from tax and it is liable to GST @ 18 per cent. It was further submitted that section 15(2)(d) of the Act is not applicable to this case as sale of land is neither supply of goods nor supply of services as per schedule III of the Act.

Thus, the applicant wanted to know whether its view about taxation of interest is correct or not.

The learned AAR held that the sale of land is neither supply of goods nor supply of services, as per para 5 of Schedule III, which reads as under:

“Schedule III [See section 7] Activities or Transactions which shall be treated neither, as a Supply of Goods nor a Supply of Services.

5. Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.”

However, it is held that the contract/ agreement that is executed between APIIC and its beneficiaries is to be treated as supply of service as per para 5(e) of Schedule- II, which reads as under,

“Schedule II [See section 7] Activities To Be Treated As Supply Of Goods Or Supply Of Services

5. Supply of services

(e) agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act; and”

The ld. AAR held that the beneficiary is obligated to fulfill certain conditions of paying annual installments with interest @ 16 per cent p.a. at specified periods as per the contract between the applicant and beneficiaries. It is a supply of service by the applicant and the ‘interest’ component in the above transaction would form a part of taxable supply as per Section 15(2)(d) which reads as under:

“Value of taxable supply

(2) The value of supply shall include—

(a) ——

(b) ——

(d) interest or late fee or penalty for delayed payment of any consideration for any supply; and”

Accordingly, the ld. AAR ruled as under:

“In the instant case the applicant, APIIC had given a facility to the beneficiaries, by extending the service of fixation of annual installments with an interest @ 16% p.a. for delayed payment of 75% of total consideration over a period of time. In such a case, the interest on the credit facility allowed by the applicant is part of the value of taxable supply and shall be liable to GST.”

27. Incnut Lifestyle Retail Pvt. Ltd. (A.R.Com/05/2021 dated 15th July, 2022 – TSAAR No.46/2022) (Telangana)

Classification – Medicament vis-à-vis Cosmetics

The applicant herein dealt with various Ayurvedic products, medicament hair oils and shampoo. He applied for Advance Ruling about classification of its various products as to whether they fall in category of medicaments or cosmetics. There were about 52 products for which classification was sought.

All products were manufactured under the Ayush licences granted by the Ayush Department of Government of Telangana. The products were divided in six groups like:

i) For treatment of hair,
ii) For treatment of dandruff and other hair disorders,
iii) For treatment of facial disorders,
iv) For treatment of mouth and oral disorders,
v) For treatment of hair disorders, and
vi) For treatment of facial skin disorders.

The contention of the applicant was that they manufacture Ayurvedic products using Ayurvedic ingredients which are helpful in the treatment of specified disorders and that their products are primarily to prevent, control, cure or mitigate skin and hair related problems and that these medicaments have prophylactic properties also.

They further contended that these products are to be used for a specific period prescribed and that there is no requirement to continue the same once the physiological disorder is addressed.

The argument was that the products fall under HSN 30049011 i.e., medicaments and not under HSN 3304 which relates to cosmetics.

The ld. AAR observed that the commodity medicaments and skin care products are enumerated in Notification No. 01/2017 dated 28th June, 2017 under different schedules of the said notification.

The ld. AAR reproduced entries at serial numbers 178, 180, 188A in Schedule I and serial nos.62 and 63 of Schedule II which all related to medicament i.e. heading ‘30’. The ld. AAR also reproduced serial no.58 in Schedule III which relates to Chapter ‘33’ i.e., which are for beauty and make up preparations.

The ld. AAR thereafter referred to guiding judgment of Hon. Supreme Court in case of Commissioner of Central Excise, Mumbai IV vs. Ciens Laboratories (2013) 14 SCC 133 – 2013-VIL-11-SC-CE wherein the Hon. Supreme Court has formulated principles for determining the nature of a product as to whether it is a medicament or a cosmetic. The relevant observations are reproduced as under:

“Firstly, when a product contains pharmaceutical ingredients that have therapeutic or prophylactic or curative properties, the proportion of such ingredients is not invariably decisive. What is of importance is the curative attributes of such ingredients that render the product a medicament and not a cosmetic.

Secondly, though a product is sold without a prescription of a medical practitioner, it does not lead to the immediate conclusion that all products that are sold over/ across the counter are cosmetics. There are several products that are sold over-the-counter and are yet, medicaments.

Thirdly, prior to adjudicating upon whether a product is a medicament or not, Courts have to see what the people who actually use the product understand the product to be. If a product’s primary function is “care” and not “cure”, it is not a medicament. Cosmetic products are used in enhancing or improving a person’s appearance or beauty, whereas medicinal products are used to treat or cure some medical condition. A product that is used mainly in curing or treating ailments or diseases and contains curative ingredients even in small quantities is to be branded as a medicament.”

Similarly, the ld. AAR also referred to judgment in the case of Commissioner of Central Excise vs. Hindustan Lever Ltd. (25th August, 2015-SC) 10 SCC 742-2015-VIL-91-SC-CE. Reference also made in case of Commissioner of Central Excise vs. Wockhardt Life Sciences Ltd (2012) 5 SCC 585 – 2012-VIL-02-SC-CE wherein the Hon. Supreme Court has observed as under:

“In our view, as we have already stated, the combined factors that require to be taken note of for the purpose of the classification of the goods are the composition, the product literature, the label, the character of the product and the use to which the product is put.”

From the analysis of above judgments, the ld. AAR held that the following criteria is required to be seen for classification as a medicament:

a) The product should have a drug license.

b) The composition of the product should have medical ingredients.

c) The product label/character should indicate the function or the purpose for which it is used.

Against the above analysis, the ld. AAR made observations on each product of the applicant and noted its findings from literature as to whether there is indication for cure or care. Where there was no indication about curing or treating any ailment or disease it is held as not a medicament covered by Heading ‘30’ and where such indication is available it is held as medicament.

Accordingly, the ld. AAR gave ruling as under:

28. Siddartha Constructions
(AAR. No.02/AP/GST/2022 dated 24th January, 2022) (AP)

Classification – Works Contract Service to Government entity

The facts are that the applicant, M/s. Siddartha Constructions is engaged in construction services and is one of the successful bidders of online global open e-tenders floated by Andhra Pradesh Industrial Infrastructure Corporation Ltdd (“APIIC”), a Government of Andhra Pradesh undertaking and got selected for the below mentioned work:

“providing interior works, furniture and internal electrification in the area allotted to the Hon’ble Minister for Industries at APIIC Tower in IT park, Mangalagiri, Guntur, Andhra Pradesh”.

The scope of work order required the applicant to install power infrastructures, safety warning and alarm systems, fire-fighting measures and lighting systems for a non- residential / commercial building. They had also entered into an agreement /bond.

Based on above facts following questions were raised:

“1. In view of the services provided by the applicant to APIIC, is the applicant eligible to avail the concessional rate of GST at 12% as prescribed in S.No.3 (vi) of the Notification No.11/2017- Central Tax (Rate) dt: 28.06.2017, as amended?

2. If not, what is the appropriate rate and classification of GST to be charged by the applicant?”

The applicant submitted that the recipient APIIC is Government authority or Government entity. The applicant relied upon Sl. No.3(vi) of Notification 11/2017-Central Tax (Rate) dated 28th June, 2017 in which composite supply of works contract provided to the Central Government, State Government, Union Territory, Local Authority, Governmental Authority or Governmental Entity is eligible for the concessional rate of 6 per cent (12% GST).

The entry read as under:

(vi) Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017, other than that covered by items (i), (ia) (ib) (ic) (id) (ie) and (if) above provided to the Central Government, State Government, Union Territory, a local authority, a Governmental Authority or a Government Entity by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of –

a) A civil structure or any other original works meant predominantly for use other than for commerce, industry, or any other business or profession;

b) A structure meant predominantly for use as (i) an educational, (ii) a clinical, or (iii) an art or cultural establishment; or

c) A residential complex predominantly meant for self- use or the use of their employees or other persons specified in paragraph 3 of the schedule III of the Central Goods and Services Tax Act, 2017.

Explanation – for the purposes of this item, the term ‘business’ shall not include any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities, provided that where the services are supplied to a Government Entity, they should have been procured by the said entity in relation to a work entrusted to it by the Central Government, State Government, Union territory or local authority as the case may be.”

The applicant submitted that the APIIC satisfies the definition of ‘Government Authority’ as it exercises / performs statutory power/function of local bodies. In alternative, it was stated to be ‘Government entity’ because it is established by Government with 90 per cent or more participation by way of equity or control, to carry out any functions entrusted by the Central Government, State Government, Union Territory or a local authority.

It was pointed out that in AAR NO.02/AP/GST/2020 dated 17th February, 2020 – 2020-VIL-191-AAR, the Advance Ruling Authority of Andhra Pradesh had also held that APIIC will qualify as a Governmental Entity.

Having above background, it was contended by the applicant that reduced rate of 6 per cent CGST under entry 3(vi) would apply. Sub-clause (a) of clause (vi) of Sr. No.3 read as:

“a civil structure or any other original works meant predominantly for use other than for commerce, industry or any other business or profession”.

The explanation to the Sl. No.3(vi) to Notification No.11/2017 which was added vide Notification No.17/2018- Central Tax (Rate) dated 26th July, 2018 is also reproduced as under:

“Explanation – For the purposes of this item, the term ‘business’ shall not include any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities.”

It was submitted that the activities undertaken by APIIC for the present projects are not in the form of business, rather, they are offices for functioning of the Minister. Since the office of the Minister for Industries is involved, the concessional rate of 12 per cent (CGST+SGST) should be allowed as they are for the use of officers.

It was submitted that this particular contract is not for the business interests or transactions of APIIC but for propagating the industry and trade in the State of Andhra Pradesh and formulating the industrial plans of the State. Further, the said activity cannot be treated as commercial business since they function as a Governmental Authority and any activity or transaction entered into by them cannot be held as business. Therefore, there is no commercial activity or business or profession but the present contract is for a governmental authority to run its offices. Therefore, it was argued that the present contract must be allowed for the concessional rate of 12 per cent.

The ld. AAR examined the position as to whether contract is liable to 12 per cent or 18 per cent.

The ld. AAR concurred with applicant that APIIC is ‘Government entity’ being formed in 1973 by GO No: 831 dated: 10th September, 1973 issued by the Government of Andhra Pradesh (AP). The Government of AP including its nominees have 100 per cent of shareholding and thus it is covered under the definition of ‘Government Entity’ under the above said provisions.

However, the ld. AAR did not agree with contention of applicant that the APIIC is not in business. The ld. AAR held as under:

“The applicant claims that the works involved in the contract are used for the offices of the Hon’ble Minister for Industries and not for the business interests or transactions of APIIC. The point under discussion is whether the work involved, i.e., “providing interior works, furniture and internal electrification of the office space of Hon’ble Minister for Industries” is meant predominantly for use other than for commerce, industry or any other business or profession. The applicant rather emphatically claimed that the work is meant for the use of Minister for Industries, which is essentially meant for promotion of Business and Industry. Moreover, the recipient of the services, APIIC is basically engaged in business activities and even a close observation of the modus operandi of the organisation prove the same. This would be sufficient enough to come to a conclusion that the said construction is for conducting promotional activities, which are essentially business oriented and hence not eligible for concessional rate of 12% (6% CGST + 6% SGST) available under Notification No.24/2017 – CT (Rate) dated 21.09.2017.”

Accordingly, the ld. AAR held that contract is liable to tax at 18 per cent under SAC heading No.9954.

29. NBCC (India) Ltd.
(Order. No.01/Odisha-AAR/2022-23
dated 20th May, 2022) (Odisha)

Classification of Contract

The facts were that the applicant is principal contractor for the contract awarded by Steel Authority of India Ltd. (SAIL) for the construction of Ispat Post-Graduate Medical Institute and Super Specialty Hospital at Rourkela.

The applicant awarded sub-contract to URC Construction (P) Ltd. URC Construction (P) Ltd. applied for classification of contract to AAR and the ld. AAR has held the URC Construction (P) Ltd. is liable to pay tax at 12 per cent in term of entry 3(vi)(a)/(b) of Notification No.11/2017- Central Tax (Rate) dated 28th June, 2017. Thereafter, this application was filed by the above applicant, who is principal contractor. The same arguments reiterated that as a principal contractor he is also liable to pay tax at 12 per cent. However, since tax at 18 per cent was already paid they wanted ruling in their own case. Following questions were raised:

“a) The Authority for Advance Ruling vide its Order No 07/ODISHA-AAR/2020-21 dated 09.03.2021 – 2021-VIL-238-AAR held that Steel Authority of India Ltd. (SAIL) is a Government Entity and the construction work of ISPAT POST- GRADUATE MEDICAL INSTITUTE AND SUPER SPECIALIY HOSPITAL, at Rourkela is a work entrusted by Central Government; to SAIL, therefore M/s URC Construction (P) Ltd. executing the work under the Letter of Award between the Applicant and M/s URC Construction (P) Ltd. is leviable to a tax rate @ 6% each on Central GST and SGST.

Therefore, the Applicant being the Principal Contractor, whether the tax rate applicable to value of contract between the Applicant and M/s SAIL is also leviable at 12% [CGST @ 6% + SGST @ 6%] in terms of Entry no 3(vi) (a) or (b) of Notification No. 11/2017-Central Tax (Rate), dated 28-6-2017?

b) Where the tax rate is determined at 12% applicable to the value of works contract services provided by the Applicant to M/s SAIL, whether the rate of taxes so determined would be applicable to the entire value of the works contract covered by Memorandum of understanding dated 13.08.2018?

c) As the Applicant has till date of the ruling have paid 18% of tax on its Tax invoices raised to M/s SAIL pertaining to the underlying subject contract, whether the taxes to the extent of 6% (18% paid- 12% as per order) becomes taxes paid over and above the liability to pay as tax and can be regarded as tax in excess?

d) For that matter whether the excess tax to the extent of 6% so paid would be eligible to be refunded under Section 54 of the CGST Act, 2017?

e) What would be the proper procedure under GST provisions for claiming the excess amount so paid?”

The ld. AAR gave following ruling:

(i) As regards Question No. (a) & (b) (Para 3.0), we hold that Steel Authority of India Ltd., SAIL is a ‘Government Entity’, therefore the tax rate applicable to value of contract (works contract service only) between the Applicant and M/s SAIL is leviable at 12% [CGST @ 6% + SGST 6%] in terms of Entry no 3(vi) (a) or (b) of Notification No. 11/2017-Central Tax (Rate), dated 28-6-2017, as amended.

(ii) As Regards Question No. (c) (Para 3.0), It is seen that the question raised does not fall under the provisions of Section 97 (2) of the CGST Act, 2017; therefore, the said question does not merit discussion/consideration at the forum.

(iii) The next two questions, question no (d) & (e) (para 3.0) raised by the Applicant pertain to refund. The Applicant has asked as to whether the excess tax paid to the Government would be eligible for refund and if so, what is the procedure? In this regard, it is stated that Section 54 of the CGST Act, 2017 deals with refund of taxes; therefore, the Applicant can go through the procedure/ provision of said GST Section for claiming refund.

BCAJ Admin

Goods and Services Tax

I HIGH COURT

38 India Yamaha Motor Private Limited vs. A. C. Chennai & Others
(2022) 142 taxmann.com 369 (Madras)
Date of order: 29th August, 2022

Whether sufficient balance in Electronic Cash Ledger (ECR) and/or Electronic Credit Ledger (ECrR) is good enough to not attract interest u/s 50 when return filing is delayed. Held: No interest is payable

FACTS

The single issue involved in the writ petition relates to attracting interest u/s 50 of the CGST Act when petitioner had filed GSTR-3B for July to October, 2017 belatedly mainly on account of an inadvertent error committed in GSTR-3B of July, 2017 and a grievance petition filed seeking modifications of the return for July, 2017 was not addressed soon by the authorities, and until the outcome of the grievance petition, proper ascertainment of tax liability for subsequent months was hard to be computed and hence they were filed after delay. However, there was sufficient credit in both ECR as well as ECrR and hence there was no loss caused to the Revenue, as per the plea of the petitioner while challenging the order of the Adjudicating Authority wherein interest for belated remittance of GST was called upon. The petitioner also argued that the basis on which the proviso to section 50 was made retrospectively applicable should be adopted because by virtue of the same, interest is not payable on input tax credit available and it would be attracted only on the delayed cash payment.

HELD

The Hon. High Court replied that while payment in cash denotes the actual availability of cash to the credit of the assessee, deposit standing to the credit of the an assessee / petitioner does not, under all circumstances, imply that the balance lying in electronic cash or credit ledger is within the reach of the department. When the returns are actually not filed by the petitioner, and hence a debit is not effected to the ECR or ECrR to the extent of the tax payable, credit cannot be equated with cash remittances.

39 Raghav Metals vs. State of Haryana
2022 (63) GSTL 300 (P&H)
Date of order: 14th March, 2022

Proceedings u/s 129 of CGST Act, 2017 cannot be initiated merely due to negligible difference between quantity of goods stated in e-way bill and actual quantity of goods

FACTS

The petitioner was engaged in the business of copper wires and copper scraps. He sold copper scraps to a dealer in Rajasthan for Rs. 83,69,594. While in transit, the goods were intercepted by GST authorities at Manesar on 27th November, 2021 and sought e-way bill as well as invoice. The said documents were produced. However, the vehicle was stationed and Form GST MOV-02 was issued. The petitioner submitted a reply on 3rd December, 2021. On the same date, an Order of Detention was passed in Form GST MOV-06 stating that there was mismatch of 90.7 kgs between actual quantity of goods vis-a-vis that stated in invoice and e-way bill. Thereafter, a notice in Form GST MOV-07 was issued to petitioner alleging intent to evade tax due to short payment of tax of Rs. 11,000. Being aggrieved by such order of detention and subsequent issue of notice, the petitioner filed a writ petition before Hon’ble High Court.

HELD

The High Court relied upon the decision of M/s. Shiv Enterprises vs. State of Punjab and Others 2022 (58) GSTL 385 (P&H), whereby it was stated that the intent to evade a tax must have direct nexus with activity of trader. He cannot be blamed for avoidance of tax merely because of negligence on part of person not immediately linked to his activity. Also, where difference in quantity stated in e-way bill and actual quantity was less than 1 per cent, by any stretch of imagination it cannot be regarded as intent to evade tax and entail proceedings u/s 129 of CGST Act, 2017. Accordingly, the writ petition was allowed in favour of petitioner.

40 Sri Desikanathar Textiles Pvt. Ltd. vs. Union of India
2022 (62) G.S.T.L. 449 (Mad.)
Date of order: 24th February, 2022

Transitional Credit cannot be denied merely because of a technical mistake while filing Form TRAN-1

FACTS

The petitioner was a manufacturer of grey woven fabric. He filed TRAN 1 in accordance with Section 140 of TNGST Act, 2017 and furnished the details in part 7(d) instead of part 7(c) of Tran-1. Due to this error, credit could not be transitioned to the petitioner’s electronic credit ledger. Petitioner sent various representations but did not get any favourable response and subsequently filed a manual return dated 18th June, 2020 and requested the respondents to transition the credit manually. However, the petitioner’s request was rejected as it was filed beyond the period of limitation. Being aggrieved by such rejection of credit, the petitioner preferred a writ petition before this Hon’ble High Court.

HELD

It was held to allow transition of credit which could not be transitioned due to wrong declaration in form Tran-1. The Court also directed the concerned jurisdictional officer to examine the records and arrive at an independent conclusion about the petitioner’s entitlement to the said credit. Pursuant to such conclusion, if credit was available, the petitioner shall be allowed to either file a revised Tran-1 or directly by making credit entry in electronic credit ledger.

41 Golden Cashew Products Pvt Ltd vs. Commercial Tax Officer, Puducherry
2022 (63) GSTL 26 (Mad)
Date of order: 3rd February, 2022

Transitional credit cannot be denied merely because petitioner failed to include amount of eligible CENVAT credit at the time limit of filing Form TRAN-1

FACTS

The petitioner was required to file the Tran-1 on GST Portal on or before 27th December, 2017. However, the petitioner had not filed TRAN–1 on time. Instead, he sent a representation dated 15th March, 2019 to the Commercial Tax Officer stating that there was a technical error and resubmitted TRAN-1 as per notification No.48/2018 – Central Tax to claim ITC of Rs. 28,29,208. On verifying the GST portal, the respondent could not find the return filed by the petitioner and asked him to resubmit the letter along with an evidence of filed TRAN-1. The petitioner submitted the letter on 29th March, 2019 enclosing the screenshots of TRAN-1 which displayed that TRAN-1 was not filed. Respondent ordered that filing of TRAN-1 was not available after the due date. Therefore, the petitioner was not entitled to the transition of credit. Being aggrieved by such an order rejecting transitional credit, the petitioner filed a writ petition before this Hon’ble High Court.

HELD

The Hon’ble High Court held that unutilized ITC on capital goods, service tax or inputs which has been availed validly under Central Excise Act, 1944, Finance Act, 1994 and VAT Act, 2006 cannot be denied. It was further held that merely because GST portal did not permit to rectify mistake in TRAN 1, the petitioner cannot be deprived of its indefeasible right of credit. The High Court directed the respondent to examine the validity of the petitioner’s unutilized amount existing in CENVAT account, and VAT returns and the amount shall be either refunded or allowed to be transitioned irrespective of the fact that petitioner may have failed to file Tran-1 in time. Accordingly, the petition was disposed of in favour of petitioner.

42 Rajdhani Security Force Pvt. Ltd. vs. Union of India
2022 (63) GSTL 299 (M.P.)
Date of order: 25th April, 2022

Unexplained delay in filing appeal is not condonable

FACTS

The petitioner was a registered company engaged in providing security services. However, on account of non-filling return, GST registration of the petitioner was cancelled on 19th June, 2019. Hence, the petitioner preferred an appeal against the order cancelling registration on 30th January, 2021. The same was dismissed by the respondent as it was filed after unexplained delay of one and half years. Being aggrieved by the same, the petitioner preferred a writ petition before the Hon’ble High Court.

HELD

It was held that the appeal preferred by petitioner was filed almost after one and half years from the order of cancellation of registration without providing any sufficient cause for such delay. Accordingly, it was held that an order passed by respondent dismissing the appeal was proper.

43 Uni Well Exim vs. State of Gujarat
2022 (63) GSTL 289 (Guj.)
Date of order: 31st March, 2022

Refund of ITC cannot be denied by way of an order travelling beyond the show cause notice

FACTS

The petitioner was engaged in the business of tobacco trading. The Department had issued a show cause notice proposing to reject refund application merely on one ground that certain necessary documents were not furnished by petitioner. The petitioner replied to the notice and furnished the requisite documents. However, respondent passed an order rejecting the refund application filed by the petitioner mentioning that transactions carried out by the petitioner were doubtful. Being aggrieved by such rejection, the petitioner is before this Hon’ble High Court.

HELD

It was held that the refund of ITC could not be denied by an order travelling beyond show cause notice. Moreover, if the authority had any further doubt in respect of certain transactions it could have easily given an opportunity to the petitioner before passing the refund rejection order. Accordingly, the order was quashed and the matter was remanded back for fresh adjudication.

44 TVL.G.K. Digital Printing vs. Assistant Commissioner (Circle), Tiruppur
2022 (63) GSTL 34 (Mad.)
Date of order: 1st April, 2022

Even if appeal against cancellation of GST registration is dismissed, still registration is liable to be restored

FACTS

The respondent issued a show cause notice dated 1st October, 2019 for seeking a response as to why the petitioner had not filed returns for a continuous period of six months. The petitioner failed to respond to above mentioned notice and as a result, GST registration was cancelled vide order dated 16th October, 2019. The petitioner preferred an appeal against the cancellation order, which was also dismissed on the ground of time bar. Hence, the petitioner filed a writ before Hon’ble High Court.

HELD

It was held that the petitioner’s case was squarely considered by this Court in Tvl. Suguna Cutpiece Center vs. Appellate Deputy Commissioner [2022 (61) GSTL 515 (Mad.)] wherein it was held that no useful purpose would be served if the registration is not revived. It will hamper the GST collection. Also, there are enough provisions under the GST law to prevent abuse by petitioners for non-payment of tax or filing of returns. Accordingly, relief was granted to the petitioner subject to fulfilment of certain conditions.

BCAJ Admin

Recent Developments in GST

I. INSTRUCTIONS

1. Instruction No.2/2022-23 (GST Investigation) dated 17th August, 2022

By above instruction, guidelines are given for the arrest and bail in relation to offences punishable under CGST Act, 2017.

2. Instruction No.3/2022-23 (GST Investigation) dated 17th August, 2022

By above instruction, guidelines on issuance of summons u/s 70 of CGST Act are given.

3. Instruction No.4/2022-23 (GST Investigation) dated 1st September, 2022

By above instruction, guidelines for launching of prosecution under CGST Act are given.

II. CIRCULAR

1. Filing/revising of TRAN-1/TRAN- 2 – Circular No.180/12/2022-GST dated 9th September, 2022

In above circular guidelines for filing / revising TRAN-1/ TRAN-2 in terms of order dated 22nd July, 2022 and 2nd September, 2022 of Hon. Supreme Court in the case of Union of India vs. Filco Trade Centre Pvt Ltd are given.

III. ADVANCE RULINGS

21 Rameshwar Havelia with Trade Name
M/s Doon Valley Logistics (A.R. 07/2022-23 in App.No.03/2022-23 dated 18th July, 2022)(Uttarakhand)

ITC on Building – Question not decided

The issue involved before the ld. AAR, Uttarakhand was about eligibility to ITC on inward supply used for construction of building. The applicant submitted that there is construction of building for use as warehouse which will be leased to earn rentals.

Since the inward supply is for earning rentals liable to output GST, the argument before the ld. AAR was that it complies with all conditions as per section 16(1) and the ITC do not get blocked as per section 17(5)(c)/(d).

The judgment of Orissa High Court in case of Safari Retreats Pvt. Ltd. vs. Chief Commissioner of CGST, Bhubaneshwar in WP(C) No.20463 of 2018 (2019-VIL-223-ORI) was cited in support of above argument.

The ld. AAR noted the facts and relevant sections and referred to section 17(5)(c)/(d) which blocks credit in relation to the construction of immovable property, even if it is in course of business. Though the applicant has made argument about double tax, intention of law, equality, the ld. AAR observed that the eligibility to ITC is subject to restrictions/conditions as stated in section 16(1) itself.

In case of Safari Retreats Pvt. Ltd, though the issue is decided in favour of the concerned petitioner, the Hon. Supreme Court has admitted appeal and hence the issue is sub-judice. Considering above pendency, the ld. AAR refrained from answering the question and thus disposed of application without any ruling.

22 Tutor Comp Infotech India Pvt. Ltd.
[A.R. No. KER/143/2021 dated 27th July, 2022]

Classification – Exemption as Educational Institution

The applicant has requested an advance ruling on the following:

“Whether the (i) transaction between applicant and individual student on a one-to-one basis; and (ii) providing education up to Higher Secondary School; falls under:

Sl. No. 66(a) of Notification No.12/2017 – Central Tax (Rate).”

The applicant submits that they are offering education services to students through its own online platform. The applicant provides services in the following categories:

a. Educational services to individual students.

b. Educational services to institutions and the students.

c. Educational services to the Government.

The applicant submitted the process of registration and the nature of services rendered by them. The main submission was that there is ascertainment of particular requirements of student, planning of lessons as per requirements in individual case and timings as per mutual suitability. The fees were charged describing ‘tuition fees’.

The claim was that they fall in entry at Sl. No. 66(a) of Notification No.12/2017-Central Tax (Rate) dated 28th June, 2017. It was also contended that they also fall in definition of ‘Educational Institution’ given in clause (y) in para 2 of said notification.

Further arguments were made on merits of case including meaning of ‘education’ and ‘institution’ as per dictionary and judgments.

Based on the same, the applicant submitted that “education”, means, (a) systematic instruction, schooling or training given to the young persons in preparation for the work of life; (b) bringing up; the process of developing and training the powers and capabilities of human beings; (c) is not merely the instruction received at school or college but the whole course of training – moral, intellectual and physical. It was also submitted that it is sometimes used as synonymous with ‘learning”. It was also contended that judgments make it clear that schooling is not the only method of providing education, and any kind of systematic training constitutes “education” and accordingly any training or instruction given to the young for their preparation constitutes education.

The ld. AAR examined above contentions on behalf of applicant. The entry at Sl. No. 66(a) of the Notification No.12/2017-CT (Rate) dated 28th June, 2017 was reproduced as under:-

Sl. No.	Chapter, Section, Heading, Group or Service code	Description of Services	Rate (per cent)	Condition
66	Heading 9992	Services provided (a) by an educational institution to its students, faculty and staff;…”	Nil	Nil

Sl. No.

Chapter, Section, Heading, Group or Service code

Description of Services

Rate (per cent)

Condition

Heading
9992

Services
provided

(a)
by an educational institution to its students, faculty and staff;…”

Nil

The classification of educational service under Heading 9992 in Notification No.11/2017-Central Tax (Rate) dated 28th June, 2017 was also considered.

The reference also made to term ‘educational institution’ as defined in clause (y) of Para 2 of Notification No.12/2017 CT(Rate) dated 28th June, 2017 which is as follows:

classification of educational service under Heading 9992 (in Notification No.11/2017-Central Tax (Rate) dated 28th June, 2017) was also considered.

The reference also made to term ‘educational institution’ as defined in clause (y) of Para 2 of Notification No.12/2017 CT(Rate) dated 28th June, 2017 which is as follows:

“educational institution” means an institution providing services by way of-

i. pre-school education and education up to higher secondary school or equivalent;

ii. education as a part of a curriculum for obtaining a qualification recognized by any law for the time being in force;

iii. education as a part of an approved vocational education course.”

The ld. AAR held that the entry exempts educational institutions from pre-school to higher secondary school or an educational institution which is equivalent to a ‘school’. It observed that, the applicant is not a formal school, but an institution providing special training / coaching to students enrolled in formal schools for education up to higher secondary or equivalent. Accordingly, the ld. AAR observed that even though the activity of training and coaching undertaken by the applicant can be claimed to be education services in layman’s understanding, those activities do not qualify to be classified under any of the Groups; 99921- Preprimary education services; 99922 – Primary education services or 99923 – Secondary education services as core educational services are provided by schools up to higher secondary or equivalent. The ld. AAR held that the services provided by the applicant are appropriately classifiable under Heading 9992 – Group – 99929 – SAC – 999293 as commercial training and coaching services. It is observed that the service of applicant also does not lead to any qualification recognised by any law. Accordingly, the applicant does not fall under the scope of educational institution as defined in sub-clause (i) of clause (y) of Para 2 of Notification No. 12/2017 CT (rate) dated 28th June, 2017.

The ld. AAR gave the following ruling:

“Question: Whether the (i) transaction between applicant and individual student on a one to one basis; and (ii) providing education up to Higher Secondary School; falls under Sl.No.66(a) of Notification No.12/2017 – Central Tax (Rate).

Ruling: The applicant is not an educational institution as defined in clause (y) of Para 2 of Notification No. 12/2017 CT (Rate) dated 28.06.2017. Therefore, the services provided by the applicant are not exempt under Sl. No. 66 of the said notification.”

23 Ess Ess Kay Engineering Company Pvt. Ltd.
(AAR/GST/PB/016 dated 16th August, 2022)

Classification – Roof Mounted AC package for fitment in LHB/LGB.

The applicant is a manufacturer of air conditioners for fitting in railway coaches. Following question was posed for ruling:

“The applicant has sought advance ruling on the classification of roof mounted Air-conditioning unit especially for use in railway coaches (manufactured as per railway design) i.e. whether they are classifiable under HSN- 8415 1090- IGST @ 28% or under HSN 8607 99 – IGST @ 18% as parts of Railway Coaches/ Locomotives?”

In hearing, the applicant made following submission:

“The applicant is inter-alia engaged in manufacture of “Roof Mounted Air-conditioning unit for Passenger Coaches of Railway as per RDSO specification and drawing” (in short impugned goods). The impugned goods are exclusively for use in railway coaches, it has no marketability except use in railways coaches. It is an integral / essential part of Air-conditioned railway coaches and accordingly classifiable under HSN 8607 99 of Customs Tariff Act as made applicable to GST vide Notification No. 1/2017 CT ® dated 28.06.2017.”

Various other judgments / rulings were cited. On behalf of Revenue, there was no objection to classification suggested by applicant. Revenue brought to notice of ld. AAR, the AR in case of Prag Polymers dated 14th February, 2020 – 2021-VIL-174-AAR by Authority for Advance Ruling-Uttar Pradesh and Hon. Supreme Court judgment in case of Westinghouse Saxby Farmer Ltd. vs. Commr. of Central Excise Calcutta -2021-VIL-33-SC-CE.

The ld. AAR analysed the subject with reference to Tariff under Customs Act. After elaborate reference, the ld. AAR observed that the Air Conditioners are covered in Chapter 8415 and classification of same cannot get altered on account of supply to Railway. Accordingly, the ruling is given classifying the product under Chapter 8415 rejecting contention of classification under Chapter 8607.

24 Krishna Institute of Medical Sciences Ltd.
(AAR No. 04/AP/GST/2022
dated 21st March, 2022)

Composite Supply – Administration of COVID Vaccines

The facts are that the applicant, M/s Krishna Institute of Medical Sciences Limited is a Public Limited Company and a multi-specialty hospital, rendering healthcare services and claiming exemption on the said service vide notification No. 12/2017 Central Tax Rate. The company has been permitted to administer COVID-19 vaccine and the process of administering it has been narrated to be critical administration. The health care staff is well trained for safe and effective vaccination. Elaborate process and the personnel involved in process are narrated in AR.

The actual vaccination involved pre-vaccine consultation, actual vaccination and post vaccination observation as well as follows up as may be necessary. The applicant approached this Authority with following questions:

“1. Whether administering of COVID-19 vaccination by hospitals is Supply of Good or Supply of Service?

2. Whether administering of COVID-19 vaccine by clinical establishments (Hospitals) qualify as “Health care services” as per Notification No. 12/2017 Central Tax Rate dated 28th June, 2017?

3. Whether administering of COVID-19 vaccination by clinical establishment is exempt under GST Act?”

Applicant was submitting that it is healthcare services covered by Sl. No. 74 of Notification No.12/2017 (CT) (Rate) dated 28th June, 2017. The meaning of ‘health care services’ given in above notification No. 12/2017 was also referred to.

The meaning of ‘authorized medical practitioner’ as given in Notification No.12/2017 was also placed for meaningful determination of the question.

The applicant referred to the definition of ‘composite supply’ given in section 2(30) of CGST Act, which reads as under:

“composite supply” means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply;”

It was submitted that the vaccine vial is not available in pharmacy / hospital, and the beneficiaries are not at liberty to get vaccinated by themselves or by other than medical practitioner. The various stages of vaccination bifurcated as under:

“*Sl. No.*	*Step*	*Components involved*	*Good or Service*
1.	Documentation and records maintenance	Service involved in verifying the documentation, processing and maintaining	Service
2.	Pre-consultation	Consultation service by medical professional	Service
3.	Disinfecting the skin by using Alcohol and cotton by a medical professional	Cotton, alcohol and services by medical professional	Both
4.	Injecting the vaccination to the person	Usage of Syringe, composition of drug and services by medical professional	Both
5.	Consultation including medical Advice	Post vaccination observation and consultation by medical professional	Service”

“Sl. No.

Step

Components involved

Good or Service

Documentation
and records maintenance

Service
involved in verifying the documentation, processing and maintaining

Service

Pre-consultation

Consultation
service by medical professional

Service

Disinfecting
the skin by using Alcohol and cotton by a medical professional

Cotton,
alcohol and services by medical professional

Both

Injecting
the vaccination to the person

Usage
of Syringe, composition of drug and services by medical professional

Both

Consultation
including medical Advice

Post
vaccination observation and consultation by medical professional

Service”

Based on above it was argued that the activity of vaccination is composite supply where health care service is principal supply and hence exempt.

The ld. AAR went to examine first as to whether the administering of COVID-19 vaccine by hospitals is supply of goods or services or both.

The ld. AAR observed that, two activities are involved in this transaction, ‘sale of vaccine’ under ‘supply of goods’ and ‘administering of vaccine’ under ‘supply of service,’ and when it comes to administering of the vaccine by hospitals, it involves a combination of two supplies, which are naturally bundled, i.e., ‘supply of vaccine’ and the ‘service component’ by way of administering the same. Therefore, it is composite supply.

It is further observed that both the supplies are intrinsically connected with each other, and viewed as a single package by the recipient, where he purchases the vaccine and gets it administered subsequently. The ld. AAR decided, which of the above two, is the principal supply. It observed that generally, the primary requirement of the recipient would be the receipt of the vaccine, basing on his choice i.e., Covishield or Covaxin. Thus, the ld. AAR held that the supply of goods constitutes the major supply. It is further held that the proper administration of the vaccine by a technically qualified personnel as prescribed by the guidelines of the government becomes the ancillary supply, which involves ‘service charge’. With above analysis, the ld. AAR held that the taxability of the total transaction in the instant case is based on the tax rate of the principal supply i.e., sale of vaccines which is at 5 per cent. It is also held that it is not healthcare service but sale of goods.

25 Sri Sairam Gopalkrishna Bhat
(AAAR No. KAR-AAAR/05/2022
dated 25th August, 2022)

Appeal to AAAR – Condonation of delay in Filing appeal

Appellant received Advance Ruling order No. KAR/ADRG/03/2022 dated 21st January, 2022 passed by AAR. Appeal filed to AAAR. The appeal was delayed by 65 days. The delay was sought to be condoned based on Supreme Court order in Suo Motu Writ (Civil) No.3/2020 dated 10th January, 2022 where in limitations are extended due to Covid lockdown. The date wise chart of events is as under:

“Actions relating to the impugned advance ruling	Dates as per Section 100 of the CGST Act of Situation 1	Dates computed as per Supreme Court order dt.10.1.2022 Situation 2	*Remarks*
Date of issue of AAR order	21.1.2022	21.1.2022	–
Date of receipt of AAR order by the Appellant	19.2.2022	19.2.2022
Date of limitation for filing an appeal	21.3.2022	30.3.2022	Period between 20.2.2022 to 28.2.2022 is excluded as per SC order”
Further period of 30 days condonable by AAAR	20.4.2022	29.4.2022
Date of filing appeal	26.5.2022	26.5.2022
No of days delay after condonable period	36	27

“Actions
relating to the impugned advance ruling

Dates as per Section 100 of the
CGST Act of Situation 1

Dates computed as per Supreme Court
order dt.10.1.2022 Situation 2

Remarks

Date
of issue of AAR order

21.1.2022

–

Date
of receipt of AAR order by the Appellant

19.2.2022

Date
of limitation for filing an appeal

21.3.2022

30.3.2022

Period
between 20.2.2022 to 28.2.2022 is excluded as per SC order”

Further
period of 30 days condonable by AAAR

20.4.2022

29.4.2022

Date
of filing appeal

26.5.2022

No
of days delay after condonable period

The ld. AAAR reproduced the operative part of above order of Supreme Court as under:

“5. Taking into consideration the arguments advanced by learned counsel and the impact of the surge of the virus on public health and adversities faced by litigants in the prevailing conditions, we deem it appropriate to dispose of the M. A No 21 of 2022 with the following directions:

I. The order dated 23.03.2020 is restored and in continuation of the subsequent orders dated 08.03.2021, 27.04.2021 and 23.09.2021, it is directed that the period from 15.03.2020 till 28.02.2022 shall stand excluded for the purposes of limitation as may be prescribed under any general or special laws in respect of all judicial or quasi-judicial proceedings.

II. Consequently, the balance period of limitation remaining as on 03.10.2021, if any, shall become available with effect from 01.03.2022.

III. In cases where the limitation would have expired during the period between 15.03.2020 till 28.02.2022, notwithstanding the actual balance period of limitation remaining, all persons shall have a limitation period of 90 days from 01.03.2022. In the event the actual balance period of limitation remaining, with effect from 01.03.2022 is greater than 90 days, the longer period shall apply.

IV. It is further clarified that the period from 15.03.2020 till 28.02.2022 shall also stand excluded in computing the periods prescribed under Section 23(4) and 29A of the Arbitration and Conciliation Act, 1996, Section 12A of the Commercial Courts Act, 2015 and provisos (b) and (c) of Section 138 of the Negotiable Instruments Act, 1881 and any other laws, which prescribe period(s) of limitation for instituting proceedings, outer limits (within which the court or tribunal can condone delay) and termination of proceedings.”

The appellant was relying on Para 5(III). The ld. AAAR did not agree with above submission observing that the limitation in present case expired after 28th February, 2022 and not prior to 28th February, 2022.

The ld. AAAR also examined the position from different angle as under:

“15. There is another reason why the directions at Para 5(III) extending the limitation period to 90 days from 28-02-2022 will not apply to this case. No doubt the Hon’ble Supreme Court has passed the orders on extending the period of limitation by exercising its power under Article 142 of the Constitution. However, it is a settled principle of jurisprudence that even while exercising that power, the Supreme Court cannot render the statutory provision otiose. The limitation period of 30 days as laid down in Section 100(2) of the CGST Act will continue to prevail with the exception that the 30 days period will be computed from 01-03-2022 as per the Hon’ble Supreme Court’s directions at Para 5(I) and not from 19-02-2022 which is the date of communication of the impugned order. Therefore, the appeal filed on 26-05-2022 is beyond the period of limitation prescribed under Section 100(2) of the CGST Act.”

The ld. AAAR also held that it is bound by 30 days’ time limit for condonation and no power to condone any delay beyond 30 days.

It is held that section 5 of Limitation Act is not applicable to appeals to be filed u/s 100(2). The appeal was rejected on ground of limitation.

BCAJ Admin

Service Tax

I. TRIBUNAL

15 Ishwar Metal Industries vs. Commr., C. EX. & CGST, Jaipur
2022 (62) G.S.T.L. 168 (Tri. – Del.)
Date of Order: 28th January, 2022

Limitation period to claim refund does not apply to service tax paid by mistake as the same was merely a deposit, not tax

FACTS

The Appellant had procured a work order contract under an open bid from Electricity Board and mistakenly paid service tax on such services, which were not liable to Service Tax. The Appellant did not charge any service tax from Electricity Board. Also, the price charged was fixed and independent of any variation. As per Appellant, the principle of unjust enrichment was not applicable since it had not collected any tax from Electricity Board. The Appellant, thus, filed a refund claim for the amount paid mistakenly. The refund claim was rejected by the Assistant Commissioner on the ground that the amount charged was inclusive of service tax, and the same was time- barred. The Commissioner of Appeals also rejected the Appellant’s refund claim. Being aggrieved by such rejection, the Appellant preferred an appeal before the Tribunal.

HELD
It was held that service tax paid mistakenly by the Appellant was merely a deposit and not tax. Accordingly, the limitation period u/s 11B of the Central Excise Act, 1944 to claim the refund did not apply to the amount deposited as the same was revenue deposit and not a tax. Accordingly, the impugned order was set aside, and the appeal was allowed.

16 Brose India Automotive Systems Pvt. Ltd. vs. Commr. of CGST & C.Ex., Pune-I
2022 (62) G.S.T.L. 40 (Tri. – Mum.)
Date of Order: 5th May, 2022

Refund of CENVAT credit shall be granted to Appellant for service tax paid in GST regime for services rendered in pre-GST regime

FACTS

The Appellant was liable to pay service tax under Reverse Charge Mechanism. The service was rendered in the pre-GST regime, but Service tax was paid in the GST regime. The Appellant finalised its Balance Sheet for F.Y. 2016-17 and the period April to June, 2017 on 30th November, 2017 and 31st December, 2017. The Service tax and interest were discharged in November, 2017 and January, 2018 respectively. The Appellant filed a refund application within the time limit specified u/s 11B of the Central Excise Act, 1944. The Adjudicating Authority rejected the refund claim on the ground that GST was payable since the booking was made in the books of accounts in the GST regime though the service was rendered in the pre-GST regime. The Commissioner (Appeals) also rejected the Appellant’s refund claim. Being aggrieved by such rejection, the Appellant preferred an appeal before the Tribunal.

HELD

It was held that as per Section 142 of the CGST Act, 2017, refund of CENVAT Credit accruing under the Central Excise Law shall be decided as per the Central Excise Law and be paid in cash. Further, as per Section 174 of CGST Act, 2017, an appeal filed under Central Excise Law shall be continued as if GST Law had not come into force. Accordingly, the Appellant was eligible for a refund of CENVAT credit along with interest. Thus, the appeal was allowed in favour of the Appellant and the order rejecting the refund was set aside.

17 Abdul Khalique vs. Commissioner of CGST, Delhi
2022 (62) G.S.T.L. 175 (Tri. – Del.)
Date of Order: 16th February, 2022

Penalty imposed cannot exceed the tax demanded

FACTS

The Appellant was engaged in providing work contract services. Based on audit findings, a show cause notice was issued demanding Rs. 1,22,174. Subsequently, due to a correction in Notification No. 1/2006, abatement at 67% was allowed for such services and simultaneously, the demand was reduced to Rs. 40,318. The Adjudicating Authority levied a penalty of Rs. 2,56,000, Rs. 5,000 and Rs. 40,318 u/s 77(1)(a), s. 77(2) and s. 78 of the Finance Act, 1994, respectively on the tax demand of Rs. 40,318. The Appellant preferred an appeal levying such an unreasonable penalty which was rejected by the Commissioner Appeals. Being aggrieved by the same, the Appellant preferred an appeal before the Hon’ble Tribunal.

HELD

The Tribunal relied upon the decision of M/s. Philips Electronics India Ltd. vs. State of Karnataka Petition Civil No. 9689/2006 dated 2nd January, 2009, where it was held that penalty could not exceed the tax amount. It was specifically stated that a penalty exceeding the tax amount was grossly disproportionate and arbitrary. Accordingly, the impugned order levying penalty was set aside, and the appeal was allowed.

BCAJ Admin

Goods and Services Tax

I. HIGH COURT

33 BLA Projects Pvt. Ltd vs. State of Jharkhand
2022 (62) GSTL 160 (Jhar.)
Date of Order: 2nd March, 2022

Show Cause Notice issued without stating the contravention made and without striking off irrelevant grounds was invalid

FACTS

Petitioner was engaged in the business of works contracts and mining-related activities. On scrutiny of returns, the Department issued a scrutiny notice in ASMT-10 seeking an explanation for a mismatch between GSTR 2A and GSTR 3B. Petitioner replied to show cause for such mismatch. Petitioner submitted a reply explaining his stand that the mismatch was for a partial amount. Later, a show cause notice (SCN) without striking irrelevant grounds and without indicating contravention made was issued along with a summary SCN in Form DRC 01 alleging excess availment of the input tax credit. Petitioner replied to SCN by highlighting the discrepancy between SCN and ASMT-10. However, ignoring the Petitioner’s submissions, a summary order was passed demanding tax, interest, and penalty. Aggrieved by such demand order, the Petitioner filed this writ petition before the High Court.

HELD

It was held that since SCN was issued without indicating the contravention and without striking off irrelevant grounds, it was liable to be quashed. Further, the order passed in violation of the principle of natural justice and mandatory procedures prescribed by the law was quashed and accordingly, the writ petition was allowed.

34 Union of India vs. Anand Bhavan Properties
2022 (62) GSTL 145 (Kar.)
Date of Order: 31st March, 2022

Provisional attachment cannot be done in the absence of a valid pendency of proceedings under Sections 62, 63, 64, 73 or 74 of CGST Act, 2017

FACTS

Respondent was engaged in the supply of renting of immovable property and had not discharged its GST liability. The Appellant issued a letter asking the Respondent to furnish certain documents. Also, the summons was issued to witnesses. Appellant had invoked Section 83 of the CGST Act, 2017, by issuing a provisional attachment notice. The Ld. Single Judge carefully examined the proceedings and concluded that the requirements of provisional attachment were not fulfilled, and accordingly, the Respondent’s writ petition was allowed. Being aggrieved, the Appellant preferred a writ appeal before the High Court.

HELD

The Hon’ble High Court held that no documentary evidence had been placed on record by the Appellant to show that the proceedings were initiated u/s 74 of the CGST Act, 2017 to pass a provisional attachment order u/s 83 of CGST Act, 2017. Moreover, it is settled law that where the Act specifically provides the requirements for invoking Section 83 of CGST Act, 2017, it ought to be complied with strictly. Merely referring to a letter that does not refer to section 74 of CGST Act, 2017 cannot be presumed as pending proceedings u/s 74 of CGST Act, 2017 to initiate provisional attachment u/s 83 of CGST Act, 2017. Thus, the writ appeal was dismissed in favour of the Respondent.

35 Drs Wood Products vs. State of U.P
[2022] 141 taxmann.com 263 (Allahabad)
Date of Order: 5th August 2022

A show cause notice issued or order passed for cancellation of registration without discussing the material on record and without giving the assessee the opportunity to file a reply against such material on record is liable to be set aside. Even if the Petitioner did not file the reply to the show cause notice, mere non-receipt of the reply cannot be the ground for cancellation of registration, and it does not absolve the officer in mentioning the basis for cancellation. The court further held that the approach of the authorities of relying upon some extraneous material in passing prejudicial order against the Petitioner without touching the evidence produced before it by the Petitioner in support of its claim cannot be appreciated and imposed a cost of Rs. 50,000 on the State for harassing the assessee

FACTS

Petitioner is a partnership firm carrying on the business of manufacturing and trading veneers and was granted the registration number under CGST Act 2017. In the pre-GST regime, it was registered under the UP-VAT Act and CST Act and assessed for A.Y. 2017-18. A show cause notice (SCN) was issued to the Petitioner, whereby it was alleged that based on the information which has come to the notice of the Assistant Commissioner, it appears that your registration is liable to be cancelled for the following reasons. The reason for the cancellation was given as “Taxpayer found Non-functioning/Not Existing at the Principal Place of Business”. Subsequently, the order was passed, cancelling the registration. The assessee applied for revocation of cancellation of registration. An SCN was again issued stating that the application for revocation is liable to be rejected as time-barred. In response to the SCN, the Petitioner moved an application seeking 15 days extension of time to reply. Without considering the said application, an order came to be passed rejecting the application for revocation of cancellation of the registration for the reasons as recorded in the SCN that no satisfactory explanation was received within the prescribed time. The Appellant preferred an appeal against the said order. The Appellate Authority dismissed the appeal, recording that an inspection was carried out in respect of the premises of the Petitioner and on the site in question, the committee comprising of three persons did not find any activity pertaining to the firm over the property in question. It also recorded that the partner of the firm was called on the phone, but he could not give any clear reply. It was also recorded that in the said inspection at the given place of interest, no stocks or commercial activity was found, and the firm’s partners did not cooperate in the inspection. It also records that in the inspection report another firm with another GST number was found working. It was also recorded that even earlier in a search carried out in 2018 by SIB, it has come to its knowledge that on the place in question, no activity of manufacturing or selling was being carried out and no commercial activities were found and based upon the said report, an opinion that the firm got registered only with a view to helping in tax evasion was formed. The Petitioner argued that the SCN is bereft of any facts based on which the Petitioner was called upon to file a reply. It was further contended that Appellate Authority has erred in dismissing the appeal on grounds which are totally extraneous to the proceedings as the inquiry of the year 2018 or inspection report were neither the basis of the SCN nor were ever supplied to the Petitioner nor was the Petitioner ever confronted to give reply and response to the said inquiry.

HELD

The Court held that the SCN only alleges that the taxpayer was found non-functioning/non-existing at the principal place of business and does not propose to rely upon any report or any inquiry conducted to form the opinion and on what basis the said allegations were made or as to when the inspection was carried. The Court held that a vague SCN without any allegation or proposed evidence against the Petitioner is clearly violative of the principles of administrative justice. The Court further held that the cancellation of registration is a serious consequence affecting the fundamental rights of carrying business, and in a casual manner in which the SCN has been issued clearly demonstrates the need for the State to give the quasi-adjudicatory function to persons who have judicially trained mind, which on the face of it is absent in the present case. The Court also held that the order of cancellation of the registration on the ground that no reply was given is equally lacking in terms of a quasi-judicial fervour as the same does not contain any reasoning whatsoever. In light of these facts, the Court held that the order rejecting the application for revocation of cancellation of registration takes the matter to the height of arbitrariness inasmuch as no reasons are recorded as to why the request for revocation of cancellation of registration could not be accepted. The Court held that the Appellant Authority has not touched upon the evidence produced by the Petitioner before him but has gone on a further tangent by placing reliance upon a report of 2018, which was neither confronted to the Petitioner nor was ever part of the record based upon which the orders have been passed. The Court criticised this aspect heavily and not only directed to renew the Petitioner’s registration forthwith but also imposed a cost of Rs. 50,000 on the State to be payable to the Petitioner.

36 Managing Director, Tamil Nadu State Marketing Corporation Ltd. (TASMAC) vs. K. Selvamani
[2022] 141 taxmann.com 56 (Madras)
Date of Order: 18th April, 2022

Penalty imposed on an employee in a disciplinary proceeding would not attract GST as the said penalty cannot be said to be ‘Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act’

FACTS

The Appellant filed an intra-court appeal aggrieved by the order of Ld. Single Judge dated 5th January, 2021. The issue before the Ld. Judge was whether the penalty imposed in a disciplinary proceeding in a service matter is liable for GST treating the same as ‘Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act’. The Ld. Judge held that the penalty imposed was in employee disciplinary proceedings, which would not attract GST. The said conclusions were drawn based on another order in some other writ petition (namely, WP(MD) No.10355 of 2020) decided on 18th December, 2020 holding that ‘post 1st July, 2017’, there can be no levy of GST on the amount of penalty’. The said order was put to challenge by the Appellants / TASMAC by filing W.A.(MD) No.679 of 2021 and was stayed by the Court in further appeal on 24th March, 2021.

HELD

The Court held that since the said interim order was subsequently obtained, it cannot apply to the facts of the present case and that the order of the Ld. Judge holds good as on 5th January, 2021, which warrants no interference.

37 Travancore Mats & Mattings (P.) Ltd vs. Assistant Commissioner
[2022] 141 taxmann.com 329 (Madras)
Date of Order: 15th March, 2022

When assessee agrees to pay incremental tax for the past period when it was having old registration number from its office in one State and avail ITC thereof in the office in the other State, the mere fact that there was a change in the constitution of the assessee’s entity from partnership firm to a private limited company resulting in change in GST numbers of supplying and receiving units would not come in way to claim ITC in respect of such incremental tax paid from the office supplying in the office receiving the same under its new GST registration number, if the assessee is otherwise entitled to ITC u/s 16 of the CGST Act

FACTS

The Petitioner is a dealer under GST and paid 12% GST on goods manufactured for the period July, 2017 to October, 2017. Subsequently, on the advice received by him, from November, 2017 till April, 2019 he paid GST at 5%. The Department objected to it and issued notices u/s 61 against the said Petitioner. The Petitioner challenged the same in writ petitions. However, in the course of the writ, the Petitioner agreed to pay the differential GST for the aforesaid period. The constitution of Petitioner’s entity was, however, changed from a partnership firm to a private limited company. Therefore, the number provided for the old Partnership Firm changed to the new number of a private limited company. The Petitioner has a branch office in Tamil Nadu and a head office in Kerala, and there was a transfer of goods from Tamil Nadu to Kerala under the cover of invoice. In this regard, the Petitioner raised apprehensions that a change in the GST registration number due to change in the constitution should not stand in the way of claiming the ITC by the Petitioner in Kerala where the Head office was otherwise entitled to ITC in respect of stock transferred from Tamil Nadu Branch to Kerala office under the old GST Registration Number.

HELD

The Court held that it is open to the Petitioner to make a claim for ITC at the jurisdictional GST Office in the State of Kerala, where the headquarter of the Petitioner company is located, and if such an availment is made by the Petitioner by filing the return at the Kerala Tax Authorities jurisdiction, the same shall be considered and decided as per the eligibility of the Petitioner within the meaning of the provisions of the GST Act, especially Section 16 and in this regard, the change of the GST registration number between old and new, in view of the change of composition of the Petitioner’s firm into private limited company, shall not stand in the way.

BCAJ Admin

Recent Developments in GST

I. NOTIFICATIONS/ORDERS

1. Order No.1/2022 – GST dated 21st July, 2022 is issued under Rule 96(4)(c) of CGST Rules, 2017, authorising the Principal Director General / Director General of Directorate General of Analytics and Risk Management, CBIC, to exercise the functions throughout the territory of India.

2. An Advisory dated 22nd July, 2022 is issued about upcoming changes in GSTR-3B.

3. E-Invoicing – Notification No.17/2022- Central Tax dated 1st August, 2022 – The turnover limit for implementation of E-invoicing is brought down to R10 crores in place of R20 crores. The above change will be effective from 1st October, 2022.

II. CLARIFICATIONS

1. FAQ on GST applicability on “Pre-Packaged and labelled” goods issued vide F.No.190354/172/2022-TRU dated 17th July, 2022.

It clarifies various issues relating to the above category of classification of goods.

2. The Directorate General of Taxpayer Services of CBIC has issued clarificatory communication about GST on Co-operative Housing Societies and RWAs.

3. The Deputy Director (Legal Metrology) has issued a communication bearing no. I-10/14/2020-W & M Section, dated 1st August, 2022, which gives the impact of GST on unsold stock of pre-packaged commodities.

III. CIRCULARS

a) Clarification regarding rates [Circular no. 177/ 09/2022-TRU, dated 3rd August, 2022.]

Clarifications are given about the applicable GST rates and exemptions on certain services considering various representations received by the CBIC.

b) GST on liquidated damages [Circular no. 178/ 10/2022-GST, dated 3rd August, 2022.]

The applicability of GST on liquidated damages, compensation and penalty arising out of breach of contract or other provisions of law is given.

c) Clarifications regarding GST rates [Circular no. 179/11/2022-GST, dated 3rd August, 2022.]

Clarifications regarding GST rates and classification (goods) based on the recommendations of the GST Council in its 47th meeting are given.

IV. ADVANCE RULINGS

18 Rod Retail Private Ltd.
[Order No. 03/DAAR/2022-23/1999-2004/ 21.6.2022 dated 23rd May, 2022] (DEL)

Sales from Retail outlet to outbound passengers

This was an appeal against Advance Ruling no. 01/DAAR/2018 dated 27th March, 2018.

The brief facts are that the appellant is in the business of retail sale of sunglasses. The appellant has several retail outlets in Delhi, and one such outlet is at Terminal-3 (International Departure), Indira Gandhi International Airport, New Delhi. The Advance ruling application was related to the question arising from transactions conducted from the said outlet at the International Airport.

The concerned retail outlet is in the Security Hold Area (SHA) on crossing the Customs & Immigrations. The said outlet is permitted to function beyond the Customs Area and within the SHA of the IGI Airport vide an arrangement with the Delhi International Airport Private Limited, dated 6th June, 2016. For sale from the said outlet, the appellant procures supplies from the Sunglass Hut brand owner M/s Luxottica India Private Limited, Gurgaon, after payment of integrated tax (Inter-state supply from Gurgaon to Delhi) @ 28%. The sunglasses procured from the supplier are further supplied by the appellant to international passengers travelling out of India. The appellant supplies goods only to passengers with a valid international boarding pass. The appellant charges SGST/CGST on such supply invoices. However, the appellant was of the view that, it’s supply of goods to international passengers is a zero-rated transaction, being ‘export sale’ within the meaning of section 2(5) of the IGST Act. The question raised before AAR was whether the location of the retail outlet of the appellant in the SHA of the international departure is outside India, though geographically, it is within the territory of India. Since the said area is after crossing the Customs Frontier of India, it was claimed to be situated outside the territory of India.

The AAR vide order referred to above held in negative, i.e., it is not export but liable to GST.

Against the above AR, this appeal was filed.

In appeal, the appellant submitted that the ld. Authority had not considered the judicial legacy of the term “Customs Frontiers of India”, which is vital for deciding the issue. It was submitted that the definition of ‘export’ is couched in such a manner that the words crossing “customs frontiers of India” are embedded in the definition itself- as no goods can be taken out of India to a place outside India unless the customs are crossed. Hence, it was reiterated that for all practical purposes, the definition of export can also be read as “taking goods after crossing customs frontiers of India to a place outside India”. The definition of customs frontiers of India u/s 2(4) of the IGST Act is not coterminous with the territorial extent of India, and thus it cannot be equated with definition of India given in section 2(56) of the CGST Act or section 2(27) of the Customs Act, 1962, and in that sense the goods having crossed the Customs frontiers are outside India, argued the appellant.

The historical background of “Crossing Custom Frontier of India” as exiting in the CST Act was referred to with reference to various judgments connected therewith.

The various peculiarities of having a shop in an SHA were also cited.

It was tried to show that the interpretation given in the AR to the territorial extent of India being co-terminus with the territorial waters by invoking section 2(56) of the CGST Act and section 2(27) of the Customs Act is in complete ignorance to the definition of “Customs Frontiers of India” in section 2(4) of the IGST Act and its relevance to the definition of ‘export’ u/s 2(5) of the IGST Act. It was submitted that the interpretation given in the ruling dates back to a period when the meaning to the words “Customs Frontiers of India” was not defined. It was stressed that the crux of the matter is that the words ‘taking goods out of India to a place outside India’ mentioned in the definition of export u/s 2(5) of the IGST Act are synonymous with the words “crossing customs frontiers of India” and the term “Customs frontiers of India” is defined in section 2(5) of the IGST Act hence the recourse to the definition of ‘India’ in the impugned ruling is uncalled for and erroneous. The judgment of the Supreme Court in M/s. Hotel Ashoka (India Tourism Dev. Corp Ltd) vs. Assistant Commissioner of Commercial Taxes & Another- 48 VST.443 (SC)) – 2012-VIL-03-SC was cited where the Hon’ble Court was examining section 5 of the CST Act. Attention was drawn to the observation of the Hon. Supreme Court that, “when any transaction takes place outside the customs frontiers of India, the transaction would be said to have taken place outside India”.

Accordingly, it was reiterated that the sale from the shop is outside India. Since the goods are to travel outside India, it was explained that it satisfied the condition of export.

The ld. AAAR examined the arguments of the appellant with reference to relevant definitions in IGST Act, CGST Act and Customs Act,1962.

By referring to such provisions, the ld. AAAR found that the location of the appellant’s shop in the SHA cannot by any stretch of imagination be said to be located outside India. It is observed that the appellant’s shop is located within India, as defined u/s 2(56) of the CGST Act, 2017 r.w.s. 2(27) of the Customs Act, 1962 and therefore the shop is in ‘India’.

The ld. AAAR further observed that “Export of goods” means taking goods out of India to a place outside India. Since the transactions of the appellant are taking place in the SHA, which falls well within the definition of ‘India, the ld. AAAR came to the conclusion that the sale transactions of the appellant cannot be equated to the ‘export of goods’ u/s 2(5) of the IGST Act, 2017 r.w.s. 2(19) of the Customs Act, 1962.

Since the transactions are not ‘export of goods’, they are also not ‘zero-rated supply’, observed the AAAR. In reference to judgments cited, the ld. AAAR held that they are pre-GST period and cannot be of any help to the appellant.

In the context of the aforesaid findings, the ld. AAAR also went to repel the appellant’s arguments that they should be treated on par with Duty-Free Shops (DFS). The ld. AAAR, in this respect, placed reliance on the judgment of Nagpur Bench of Bombay High Court in the case of A1 Cuisines Private Limited vs. Union Of India, and State of Maharashtra, reported at 2018 (12) TMI 1278 – Bombay High Court – 2018-VIL-575-BOM.

Accordingly, the ld. AAAR held that the transactions, i.e., supply of goods to outbound international travellers, fall within the definition of “taxable territory” and read in conjunction with section 7 of the CGST Act, 2017 forms “supply” and attracts the applicable GST on the date of supply of the goods. The AR was upheld.

19 Deepak & Co.
[Order No. 02/DAAR/2022-23/2005-2010/21.6.2022 dated 23rd May, 2022] (DEL)

Rate on supply of food, drinks and newspapers in trains or at platforms

This was an appeal against Advance Ruling no. 02/DAAR/2018 dated 28th March, 2018 – 2018-VIL-29-AAR passed by AAR.

The brief facts of the case are that M/s Deepak & Co., the appellant, has entered into an agreement with IRCTC/Indian Railways for the supply of food and beverages (packed/MRP/cooked) to the passengers on Rajdhani Trains and Mail/Express Trains. Pursuant to these agreements, the appellant is engaged in supplying food on board the trains to passengers vide the menu approved by the Indian Railways/IRCTC. Likewise, the appellant is also engaged in the supply of food items to passengers/public through food plaza/food stalls on the railway station.

There is different modus operandi with respect to the supply of food for human consumption on board a train which is indicated below:

Supply of food through the food plaza on the railway platform

In this case, there is fixed place, including space for the customer to consume food.

Supply of food on board the Rajdhani trains

a. In this case, the supplies are meals on board the train. There is a defined “MENU” as per which, meals are supplied to passengers. Food is supplied and served to passengers, and money for the same is charged from the Indian Railways/IRCTC by the appellant.

b. Further, in some cases, IRCTC supplies some items of dinner/lunch menu from its own base kitchens/approved sources to be picked-up by the appellant’s representative. The appellant charges money for the same from the Indian Railways/IRCTC.

c. The appellant also supplies newspapers to passengers. Railways pay the appellant for the supply of newspaper, as the prices of these items are also included in the ticket fare.

Supply of food on board the mail/express trains

The menu and the price at which the same are to be served on board the trains is defined by Indian Railways/IRCTC. The appellant supplies food from its pantry/ storage as per the defined menu to passengers desiring to obtain the same as per the menu price. Apart from the above, there are certain MRP items which are also supplied by the appellant. The same is supplied through the team of waiters who keep moving in the train, take orders and supply the food items/beverages to passengers and collects the price from them.

Based on above modes of supply, following Questions were raised before AAR:

“A) What is the applicable rate of tax on the activity of appellant of supplying food/beverages, in each of the cases mentioned above in light of the amendment made in Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017 vide Notification No. 46/2017 – Central Tax (Rate) dated 14.11.2017; amendment made in Notification No. 8/2017- Integrated Tax (Rate) dated 28.06.2017 vide Notification No. 48/2017 Integrated Tax (Rate) dated 14.11.17; amendment made in Notification No. 11/2017 – State Tax (Rate) dated 30.06.2017 vide Notification No. 46/2017 – State Tax (Rate) dated 28.11.17 in the NCT of Delhi?

B) What is the applicable rate of tax on supply of newspaper as elaborated in the cases mentioned above?”

In all the above cases, the AAR held that supply on trains to IRCTC or to passengers or at platforms etc., cannot be considered at par with restaurants and hence to be liable as pure supply of goods at respective rates. The supply of newspapers were held to be ‘NIL’ rated.

Against the above ruling, this appeal was filed.

In appeal, the appellant laid emphasis on the Board’s clarification dated 31st March, 2018 issued on a representation made by the Ministry of Railways. They asserted that their case is squarely covered by the said clarification, which is prospective in nature. To support the above contention, the appellant referred to section 168 of the CGST Act, 2017, which is statutory in nature and incorporated specifically for issuing clarifications on any issue by the Board.

The ld. AAAR observed that, after findings of the AAR on the issue, the relevant Notification No. 11/2017-Central Tax (Rate) dated 28th June, 2017 was amended vide Notification No. 13/2018-Central Tax (Rate) dated 26th July, 2018 and an entry No.7(ia), as reproduced below, was added,

“(ia) Supply, of goods, being food or any other article for human consumption or any drink, by the Indian railways or Indian railways catering and Tourism Corporation Ltd. or their licensees, whether in trains or at platforms.”

The rate of 2.5% of CGST was provided subject to the condition that no credit of input tax on goods and services used in supplying the service has been taken.

The ld. AAAR also reproduced the clarification issued by CBIC vide letter F. No. 354/03/2018-TRU dated 23rd March, 2018, wherein it has been clarified as under:

“2. Different GST rates are being applied for mobile and static catering in Indian Railways which is presently leading to a situation whereby the same licensee (selected by Indian Railways/IRCTC) supplying the same food would be subjected to different GST rates depending on whether it is mobile or static catering, as also which variant of mobile catering it is [pre-paid (without option), pre-paid (with option) or post-paid. The rate difference is resulting in the same food being supplied at two different rates to the railway passengers, which is anomalous.

3. The passenger is not aware as to the GST rate applicable to the food ordered by him/her. This may also lead to unnecessary litigation and thus further strengthens the need for uniform application of tax rate in respect of food and drinks in/by Railways.

4. With a view to remove any doubt or uncertainty in the matter and bring uniformity in the rate of GST applicable for all kinds of supply of food and drinks made available in trains, platforms or stations, it is clarified with the approval of GST Implementation Committee, that the GST rate on supply of food and/or drinks by the Indian Railways or Indian Railways Catering and Tourism Corporation Ltd. or their licensees, whether in trains or at platforms (static units), will be 5% without ITC.”

In light of the above facts, the ld. AAAR held that the GST rate on the supply of food and/or drinks by the appellant, whether in trains or at platforms (static units), will be 5% without ITC. AR is overruled to the above extent.

However, the ld. AAAR specifically declined to give any ruling on this order’s retrospective or prospective effect as the same was not before the AAR.

The ruling in respect of newspapers being exempt is confirmed.

20 Vodafone Idea Limited
[A.R. Com/02/2022 dated 11th July, 2022 in TSAAR Order no.36/2022] (Telangana)

‘Telecommunication services’ to local authority

The facts of the case are that the appellant, M/s. Vodafone Idea Limited is engaged in providing telecommunication services, and in the course of its business, it is also providing these services to the Greater Hyderabad Municipal Corporation (GHMC) by way of data/voice telecommunication services (SAC 9984). According to their submissions, these services provided to GHMC are not related to any specific project or scheme of the Government and are provided to GHMC to be used by its employees for general office and administrative purposes. It was submitted that under serial no.3 of Notification No. 12/2017 dated 28th June, 2017 their services qualify to be pure services rendered in relation to functions entrusted to a municipality under Article 243W of the Constitution of India. In light of the said notification, the appellant feels that such services are exempt from tax under GST and hence this application was filed, raising the following question:

“The Applicant would like to seek a ruling on whether the supply of ‘telecommunication services’ to local authority (Greater Hyderabad Municipal Corporation) by applicant is a taxable services under Section 9(1) of the CGST Act, 2017 and/or exempted vide Sr. No. 3 (Chapter 99) of Table mentioned in Notification No. 12/2017- Central Tax (Rate) dated 28 June 2017.”

The ld. AAR noted the functions entrusted under Article 243W of the Constitution of India to Municipalities. They are reproduced as under in AR:

“i. Preparation of plans for economic development and social justice.

ii. Performance of functions and implementation of schemes in relation to matters listed in 12th schedule.

iii. Under the schedule 12 to Constitution of India, the functions and schemes are as follows:

1. Urban planning including town planning.

2. Regulation of land-use and construction of buildings.

3. Planning for economic and social development.

4. Roads and bridges.

5. Water supply for domestic, industrial and commercial purposes.

6. Public health, sanitation conservancy and solid waste management.

7. Fire services.

8. Urban forestry, protection of the environment and promotion of ecological aspects.

9. Safeguarding the interests of weaker sections of society, including the handicapped and mentally retarded.

10. Slum improvement and up gradation.

11. Urban poverty alleviation.

12. Provision of urban amenities and facilities such as parks, gardens, playgrounds.

13. Promotion of cultural, educational and aesthetic aspects.

14. Burials and burial grounds; cremations, cremation grounds and electric crematoriums.

15. Cattle ponds; prevention of cruelty to animals.

16. Vital statistics including registration of births and deaths.

17. Public amenities including street lighting, parking lots, bus stops and public conveniences.

18. Regulation of slaughter houses and tanneries.”

The ld. AAR found that the services of the appellant are not covered directly in any of the functions mentioned above. The ld. AAR also referred to the meaning of ‘in relation to any functions’ with reference to judgments in cases of Doypack Systems Pvt. Ltd. vs. Union of India (UOI) and Ors. (12.02.1988 – SC) AIR 1988 SC 782 – 1988-VIL-02-SC and Madhav Rao Jivaji Rao Scindia vs. Union of India AIR 1971 SC 530.

The ld. AAR held that as per the meaning of ‘in relation’ also, there should be a direct and immediate link with covenant and not the independent existence of such covenant.

About the nature of work of the appellant, the ld. AAR observed that the appellant is providing data and voice services to GHMC and the employees of municipalities, and there is no direct relation between the services provided by the appellant and the functions discharged by the GHMC under Article 243W r.w. schedule 12 to the Constitution of India. Accordingly, the ld. AAR held that services do not qualify for exemption under Notification No. 12/2017.

BCAJ Admin

GOODS AND SERVICES TAX

I SUPREME COURT

23 Union Of India vs. Willowood Chemicals Pvt. Ltd.
2022 (60) GSTL 3 (SC)
Date of order: 19th April, 2022

Interest at 9% on delayed refund can be granted only where refund arises on account of an order of adjudicating/appellate/Tribunal/Court

FACTS
Respondent was engaged in the export of goods without payment of duty and claimed the refund application of unutilized ITC of inputs and input services. There was no dispute concerning the eligibility for a refund. However, there was a delay of 94 to 290 days on the part of the department in disbursing the refund. Respondent filed a writ petition before the Hon’ble High Court asking for interest at 9% for such inordinate delay. Subsequently, the High Court decided the matter in favour of the respondent and granted interest at 9%. Being aggrieved by such, the appellant filed this special leave petition before the Apex Court.

HELD
The Supreme Court held that since delay in granting of refund ranged from 94 to 290 days was not excessive or unreasonable; interest should be granted solely as per the GST Law. It was further held that interest at the rate of 9% is applicable only when there is a delay in granting a refund pursuant to an order passed by Adjudicating Authority or Appellate Authority or Tribunal, or Court. Thus, the Hon’ble Supreme Court held that the High Court had erred in granting interest at 9% on delayed refund, and the respondent is entitled to interest at the rate of 6% per annum only.

II HIGH COURT

24 Vodafone Idea Ltd vs. UOI
[2022] 140 taxmann.com 327 (Bombay)
Date of order: 4th July, 2022

The consideration received by Indian telecom operator from foreign telecom operator (FTO) for providing connectivity and roaming services in respect of subscribers of FTO is not performance-based services falling u/s 13(3)(b) of the IGST Act as subscribers are neither the customers of the Indian telecom operator nor can they be said to be acting on behalf of FTO. As per the agreement, FTO pays the consideration for such services and hence is the recipient

FACTS
The assessee provides telecommunication services in the nature of International Inbound Roaming Services (IIR) and International Long Distance (ILD) Services to Foreign Telecom Operators (FTOs). It is by virtue of the said IIR and ILD services that a subscriber availing services from a home telecom operator (HO) in one country can avail uninterrupted connectivity when he is travelling outside his usual place of residence by using the same phone number which he uses in his country of residence. In other words, the services rendered are in the nature of telecom services by way of allowing to make international long-distance calls and roaming telecommunication services. To cater to such needs, almost all telecom service providers have similar agreements with telecom service providers in different countries/circles to provide telecom services to their customers while travelling outside their country and vice versa. The assessee enters into a contractual agreement with FTO agreeing to provide such services in respect of FTOs’ subscribers traveling to India. The consideration is payable to the assessee by the FTOs depending upon the usage of the subscriber and the arrangement between HO and FTO, the assessee would issue invoices on FTO, and the consideration is payable in convertible foreign exchange.

The assessee’s refund application, treating the said services as a zero-rated supply of services u/s 16(3) of the IGST Act, was rejected on the ground that the place of supply of services provided by the assessee was the State of Maharashtra by virtue of section 13(3)(b) of the IGST Act, and cannot be considered as an export of services.

The Joint Commissioner (Appeals) disposed of two appeals directing refund for the period May, 2019 to September, 2019. The assessee filed a writ to issue direction for immediate implementation of the said order, whereas the Revenue filed a writ petition for quashing of the said order on the ground that the orders upon which reliance has been placed by the Joint Commissioner (Appeals) while allowing the appeal is challenged before the Hon’ble Bombay High Court and Hon’ble Supreme Court of India, and therefore the questions of law on the said issue are still open. There was, however, no stay granted in any of these matters.

HELD
The Hon’ble Court noted that as per section 2(93)(a) of the CGST Act, where the consideration is payable for the supply of goods or service, ‘recipient’ means the person who is liable to pay the consideration. In this case, consideration is payable by the FTO for the services rendered to it, and hence, the said FTO will become the recipient. The Court further observed that in this case, revenue has not disputed that the assessee enters into an agreement only with the FTO and not with the subscribers of the FTO, and that the consideration is also paid by the FTO. The Court, therefore, held that the subscriber of the FTO cannot be considered as a recipient of service as held by Adjudicating Authority. FTO is undoubtedly the recipient of service.

As regards the applicability of section 13(3)(b), the Hon’ble Court held that the provision of section 13(3)(b) applies in the case where services are supplied to an individual as the section starts with the words “service supplied to an individual”. As in the present case, the services are not supplied to the individual, but to the FTO, and the assessee has no idea of the subscribers of the FTO, the question of supplying service to an individual (subscribers) does not arise.

Applying the concept of ‘customer’s customer cannot be your customer’, the Court held that in this case, the customer of the assessee is the FTO and the subscribers of FTO are the customers of FTO. The Court also confirmed the decisions of Mumbai CESTAT in the case of Vodafone Essar Cellular Ltd. vs. CCE(2013) (31)STR 738(Tri-Mum) and CST vs. Bayer Material Science (2015) 38 STR 1206 (Tri-Mumbai), ABS India Ltd. vs. CST(2009) 13 STR 65 (Tri Bang), it was held that as the service in question does not fall within the services specified in sub-sections (3) to (13) of section 13, the place of service or supply of service is the location of the recipient of the service, i.e. location of the FTO, which is outside India.

25 Atlas Pvc Pipes Ltd vs. State of Odisha
[2022] 140 taxmann.com 162 (Orissa)
Date of order: 29th June, 2022

Filing of a certified copy of the order within 7 days of the filing of an appeal is provided merely as a procedural requirement and non-compliance thereto being a technical default does not warrant dismissal of the appeal without hearing the same on merit

FACTS
The Joint Commissioner of CT&GST rejected the appeal filed on 21st April, 2021 assailing the order dated 20th January, passed by the CT&GST Officer on the ground that the appellant has not submitted the certified copies within seven days of the filing of the appeal. The petitioner submitted that in addition to the filing of the appeal by electronic mode, self-attested hard copies of the documents, including a copy of the impugned order as made available to it in the GST web portal, were furnished to the Appellate Authority. Nonetheless, the petitioner received a notice dated 13th May, 2022 on 20th May, 2022 directing him to file a certified copy on or before 21st May, 2022. The petitioner applied for and obtained a certified copy of the required document on 21st May, 2022. Since the office of the Opposite Party No. 2 was closed on 22nd May, 2022, being Sunday, the step could only be taken on 23rd May, 2022 to comply with the terms of notice dated 13th May, 2022. However, the department refused to accept the same, stating that he had already passed the order of rejection of appeal and uploaded the same in the GST portal on 23rd May, 2022.

HELD
The Court referred to the decision of Shree Jagannath Traders vs. Commissioner of State Tax, Odisha, Cuttack, (W.P.(C) No.15061 of 2021) and Shree Udyog vs. Commissioner of State Tax, (W.P.(C) No.14887 of 2021), wherein in identical circumstances the Court had held that mere delay in enclosing a certified copy of the order appealed against along with the appeal should not come in the way of the petitioner’s appeal for being considered on merits by the Appellate Authority. The Court further referred to the order of Hon’ble Supreme Court in the case of In Re: Cognizance For Extension of Limitation being Miscellaneous Application No. 21 of 2022 and observed that even after rectifying the defect pointed out by the department, the same fell within 90 days period granted by the Hon’ble Supreme Court in the order dated 10th January, 2022. The Court held that the appeal was rejected without giving any further notice of proceedings to the petitioner, thereby causing a violation of natural justice. The Court further held that Rule 108(3) has not prescribed for condonation of delay in the event where the petitioner would fail to submit a certified copy of the order impugned in the appeal, nor is there any provision restricting the application of section 5 of the Limitation Act, 1963, in the context of the supply of certified copy within seven days and that the requirement to furnish a certified copy of the impugned order within seven days of the filing of an appeal is provided as a procedural requirement.

The Court, therefore, held that since the petitioner has enclosed the copy of the impugned order as made available to it in the GST portal while filing the Memo of Appeal, non-submission of a certified copy is to be treated as a mere technical defect and on the altar of default in compliance of such a procedural requirement, the merit of the matter in appeal should not have been sacrificed, and set aside the said impugned order restoring back the appeal to be decided on the merit.

26 Progressive Stone Work vs.
Joint Commissioner (ST)
[2022] 139 taxmann.com 531 (Madras)
Date of order: 16th June, 2022

The Court refused to entertain the writ petition challenging the assessment order resulting in demand consequent upon a mismatch of ITC as per GSTR-3B and GSTR-2A stating that such disputes can be best resolved by adopting the statutory mechanism of appeal prescribed in the law

FACTS
The petitioner challenged assessment orders for 2017-18 and 2018-19. There is a difference in the ITC claimed by the petitioner in its GSTR-2B and the information captured in the GSTR-2A as compared to the GSTR-1 of the supplier for the respective assessment years. The petitioner relied upon Circular No. 125/44/2019-GST (para 2.3), Circular dated 18th November, 2019 bearing Circular No. 125/44/2019-GST (Para 36), various other circulars and press releases dated 4th March, 2018 and 18th October, 2018 to submit that credit availed on the strength of invoices issued by the supplier under the provisions of the GST Act, 2017 cannot be denied as input tax credit was availed on the strength of the invoices on which tax charged by the supplier of the petitioner and the mistake committed by the supplier in not properly uploading the information in their GSTR-1 would not come in the legitimate ITC availment of the recipient petitioner. It was also contended that section 42 of the CGST has not been fully implemented, and therefore the impugned orders are not sustainable.

HELD
The Hon’ble High Court noted the entire scheme of GST law as regards the filing of returns by the supplier and claiming of input tax credit by the recipient and held that these matters are best left to be resolved before the hierarchy of the Appellate Authority prescribed under the Act. It further held that the Courts had recognised few exceptions to the rule of alternative remedy, i.e., where the statutory authority has not acted in accordance with the provisions of the enactment in question, or in defiance of the fundamental principles of judicial procedure, or has resorted to invoking the provisions which are repealed, or when an order has been passed in total violation of the principles of natural justice, such cases may be considered in the writ jurisdiction. However, none of the said exceptions is attracted in the facts of this case. Therefore, the writ was dismissed by allowing the petitioner to prefer an appeal against the said order in accordance with the provisions of section 107 of the CGST Act.

27 Sri Sri Engineering Works vs.
Deputy Commissioner (CT), Hyderabad
[2022] 140 taxmann.com 303 (Telangana)
Date of order: 5th July, 2022

Telangana Value Added Tax (Second Amendment) Act, 2017 made on 2nd December, 2017 though given retrospective effect from 17th June, 2017 extending the time limit for completion of assessments, re-assessments, revision etc. under certain provisions of the Telangana Value Added Tax Act up to six years, cannot be sustained as the same is devoid of legislative competence

FACTS
The petitioner challenged the Telangana Value Added Tax (Second Amendment) Act, 2017, which received the assent of the Governor on 29th November, 2017 and was first published in the Telangana Gazette on 2nd December, 2017, and came into force from 17th June, 2017 which extended the time limit for completion of assessments, re-assessments, revision etc. under certain provisions of the Telangana VAT Act up to six years on the ground that the State of Telangana was denuded of legislative competence to enact the Second Amendment Act after the Constitution (101st Amendment) Act, 2016, and after enactment of the CGST Act and TGST Act.

HELD
The decisions in the case of M/s. Pankaj Advertising vs. State of U.P (2020) 73 GSTR 235 (All), Jain Distillery Private Limited vs. State of U.P 2021 (10) TMI 583 (All) and Reliance Industries Limited 2020 (82) GSTR 32 (Guj.) were relied upon to hold that not only the Second Amendment Act cannot be traced to Article 246 of the Constitution read with Entry 54 of List II of the VII Schedule, the same cannot also be sustained as stand-alone legislation of the State under Article 246A of the Constitution in the absence of simultaneous legislation by the Parliament.

Referring to section 19 of the Constitutional Amendment Act, the Court held that all that section 19 does is to provide a period to eliminate or remove all laws inconsistent with the GST regime within an outer limit of one year period. Section 19 only allows the operation and levy of tax under the VAT Act, which is inconsistent with the GST regime for a period of one year or until the VAT Act is repealed or amended, whichever is earlier. This would mean that the State could continue to levy tax under the VAT Act for the window period of one year or till the VAT Act was amended or repealed to align it with the GST regime, whichever was earlier. Section 19 does not and cannot be construed to eclipse the amendments carried out in Entry 54 of List II to the VII Schedule or confer legislative competence upon the State Legislatures for making amendments to the VAT Act in respect of goods other than the five petroleum products and alcohol for human consumption covered by the amended (substituted) Entry 54 of List II. Accordingly, the Court held that section 19 of the Constitution Amendment Act could not be construed as a source of legislative power to enact the second amendment Act. Referring to Sheen Golden Jewels (India) Pvt. Limited vs. State Tax Officer 2019 SCC OnLine Ker 973, the Court held that it is merely a transitionary provision and not a saving provision in respect of suspending legislative competence to amend the VAT Act.

The Court held that legislative competence could not flow from earlier legislation, be it an ordinance or an enactment. It further held that the ostensible objective of the ordinance is to save any investigation, assessment, recovery of dues, legal proceedings, etc., pending on the date of coming into force of the Constitution Amendment Act. However, limitations across the board could not be extended by way of amendment to initiate fresh proceedings as fresh revision proceedings, which otherwise had become time-barred. Hence, although there was no challenge to the said ordinance, it was held that the provisions introduced by the said ordinance extending limitation to enable initiation of fresh proceedings are inconsistent with the scheme of the Constitution Amendment Act.

28 Pragati Engineers vs. Union of India
2022 (60) GSTL 45 (Del.)
Date of order: 15th November, 2021

Casual taxable persons are compulsorily required to take separate GST registration in every state from which they make taxable supplies

FACTS
The petitioner was registered under the GST law in Delhi. He successfully bid for a tender to supply goods and services in Hyderabad. The petitioner was of the view that, since it was already registered in Delhi and did not have any place of business in Hyderabad, it was not required to take registration in Hyderabad. However, the department contended that separate registration is required by the petitioner in every state it intends to conduct its business. To challenge the above stand, the petitioner preferred this writ petition before the Hon’ble High Court.

HELD
It was held that a plain reading of section 24 of the CGST Act clearly mandates a casual taxable person to take registration in every state from which it makes taxable supplies. Thus, the petitioner was directed to follow appropriate steps to take separate GST registration and meet the requirements of the tender.

29 Dantara Jewellers vs. State of Kerala
2022 (60) GSTL 46 (Ker.)
Date of order: 7th October, 2021

Refund cannot be denied on the ground of technical glitches in system

FACTS
The petitioner had paid tax and penalty as per the order issued u/s 129(3) of the CGST Act and SGST Act. Thereafter, the petitioner challenged such order before the Appellate Authority, and the petitioner was found not liable for any payment. Therefore, the petitioner claimed a refund u/s 54 of the CGST Act. However, the refund was rejected by the department stating that the amount paid at the first instance was made through a temporary account, and since the temporary account was no longer available, the refund could not be granted. Being aggrieved by such rejection, the petitioner preferred the writ petition.

HELD
It was held that the conduct of the respondent was not appreciable. Technical glitches occurring mainly due to the transition phase shall not stand in the way of providing an ultimate refund to protect the sanctity of the GST Law. Thus, the Hon’ble Court directed the respondent to grant a refund within 30 days from receipt of the judgement, and accordingly, the writ was allowed.

30 Senior Intelligence Officer, DGGI vs.
Shri Nandhi Dhall Mills India Pvt. Ltd.
2022 (60) G.S.T.L. 227 (Mad.)
Date of order: 23rd February, 2022

No amount towards tax liability can be recovered at the time of search even when taxpayer voluntarily pays the same

FACTS
The respondent was engaged in the supply of pulses, dal and flour. A search was conducted on the respondent’s business premises based on information that the respondent was involved in tax evasion. On the date of search, the managing director voluntarily paid a sum of Rs. 1 crore and agreed to pay the balance amount in instalments. The respondent paid the first instalment of Rs. 1 crore a week after the search. Later, the respondent applied for a refund of Rs. 2 crores and filed a writ petition stating that the amount was paid forcefully under threat and coercion.

HELD
The Hon’ble High Court directed the department to issue a show-cause notice to the respondent and asked the respondent to reply. The department was required to afford an opportunity of being heard, and the respondent to appear for personal hearing and make his submissions. After a hearing, the department would have to pass appropriate orders on merits determining the amount of tax. Meanwhile, the respondent was entitled to refund of the amount already paid.

31 Femina Shopping Mall Pvt. Ltd. vs. Assistant Commissioner of GST and Central Excise, Division-I, Tiruchirappalli
2022 (60) GSTL 38 (Mad.)
Date of order: 27th October, 2021

Inspecting officer was not the proper officer for issue of Show-cause Notice pursuant to Tamil Nadu State GST Circular No. 23/2021 dated 4th October, 2021

FACTS
A show-cause notice (SCN) was issued to the petitioner on 12th October, 2021 directly by the inspecting officer without sending the report to the jurisdictional officer. The petitioner contented that the inspecting officer did not have the jurisdiction to issue an SCN. Accordingly, the petitioner challenged the issue of SCN by way of a writ petition before this Hon’ble High Court.

HELD
It was held that on perusal of Paras 5.2 and 5.3 of the Tamil Nadu State Department Circular No. 23/2021 dated 4th October, 2021, after inspection conducted by the inspecting officer, he should have forwarded the report to the jurisdictional officer for further action. Accordingly, it was concluded that the inspecting officer was not the proper officer for the issue of SCN, and an interim stay order as desired by the petitioner was granted.

III AUTHORITY FOR ADVANCE RULING

32 Emcure Pharmaceuticals Ltd.
2022 (60) GSTL 231 (AAR Mah.)
Date of order: 4th January, 2022

Subsidised amount recovered for canteen and bus transportation facilities as well as amount recovered from employee by employer for not serving the notice period as a part of contractual agreement are not taxable under GST Law

FACTS
The applicant is a pharmaceutical company engaged in developing, manufacturing and marketing pharmaceutical products. The employment agreement included providing canteen facilities and bus transportation facilities to employees. Also, there was a condition for the recovery from employees if the notice period was not served. For providing canteen and bus transportation facilities, the applicant has engaged a third party. The applicant put forth three questions to the Advance Ruling Authority. First, whether subsidised amount recovered from employees for canteen facilities by the applicant is liable for GST. Second, whether subsidised amount recovered from employees for bus transportation facilities by the applicant is liable for GST. Third, whether notice pay recovered from employee for not serving or partly serving notice period is liable for GST.

HELD
The AAR held that the canteen and bus transportation facilities provided by the applicant as part of welfare and security measure to employees do not tantamount to the supply of services in the course or furtherance of its pharmaceutical business and thus does not qualify as a supply under GST Law. The AAR also held that the notice pay recovery, as part of the employment agreement, does not fall within the ambit of Schedule II of the CGST Act. Therefore, notice pay recovered from the employee for not serving or partly serving the notice period by the applicant is not liable for GST.

BCAJ Admin

RECENT DEVELOPMENTS IN GST

I. NOTIFICATIONS

The GST Council at its 47th Meeting on 28th June, 2022 took various policy decisions. For the sake of brevity, they are not mentioned in this feature. However, consequent to said decisions, relevant notifications are issued by authorities. The short gist of notifications is given below:

1. Notification No. 9/2022-Central Tax, dated 5th July, 2022

Section 49 and 50(3)
Provision of Clause (c) of Sections 110 and 111 of Finance Act, 2022 are made effective from 5th July, 2022. By section 110(c), section 49 is amended.

Balance available in E-cash ledger can be transferred from one tax type ledger to another tax type ledger like from IGST to CGST/SGST or vice versa.

The balance available in Electronic Cash Ledger of CGST/IGST can be transferred to a distinct person with a different GSTIN but having same PAN. This is a good facility made available to taxpayers.

By section 111 of Finance Act, section 50(3) is substituted from 1st July, 2017. As per the amendment, interest at the prescribed rate applies only upon utilization of the wrong ITC.

2. Notification No. 10/2022-Central Tax, dated 5th July, 2022

Section 44
Annual return for 2021-22 not required to be filed by a tax payer whose total turnover in F.Y. 2021-22 is up to
Rs. 2 crores.

3. Notification No. 11/2022-Central Tax, dated 5th July, 2022

Amendment to Notification No. 21/2019-Central Tax, dated, 23rd April, 2019
The due date of filing CMP-08 for Composition tax persons for April to June, 2022 quarter is extended from 18th July, 2022 to 31st July, 2022.

4. Notification No.12/2022-Central Tax, dated 5th July, 2022

Amendment to Notification No. 73/2017-Central Tax, dated. 29th December, 2017
Waiver of late fees up to the period 28th July, 2022 for GSTR-4 of F.Y. 2021-22.

5. Notification No.13/2022-Central Tax, dated 5th July, 2022

Modification of Notification 35/2020-Central Tax dated, 3rd July, 2020 read with similar notifications under IGST/Union Territory Act
Time for passing orders in various events like tax not paid/ short paid or ITC wrongly availed / utilized, erroneous refunds etc. for 2017-18, is extended by 6 months i.e., till September, 2023. The period from 1st March, 2020 to 28th February, 2022 is excluded for calculating limitation for filing refund applications u/s 54/55.

6. Notification No. 14/2022-Central Tax, dated 5th July, 2022

Amendment to various Rules effective from 5th July, 2022
(i) Deeming Clause added as 5th Proviso in Rule 21A(4), whereby it is provided that suspension of Registration Certificate due to non-filing of returns should be deemed to be revoked on furnishing of all pending returns.

(ii) Rule 43 provides for the manner of determination of ITC in respect of capital goods and reversal thereof. There is an explanation providing that aggregate value of exempt supplies should exclude certain items. Now, by insertion of clause (d) in the said Explanation, the value of Duty Credit Scripts specified in Notification no.15/2017-Central Tax (Rate) dated 13th October, 2017 is also excluded from the exempt category.

(iii) Amendment in Rule 46. Clause (3) is inserted. It is to give specific declaration on invoice where the taxpayer is otherwise liable to issue E-invoice, but not issuing in case of specific invoice. This can apply when exclusion clause in respect of issue of E-invoice is applicable.

(iv) Amendment in Rule 86. Rule 86(4B) is newly inserted. It is provided that where the amount of erroneous refund granted u/s 54(3) or u/r 96(3) is paid back by debit to E-cash ledger, then the amount of erroneous refund should be re-credited to E-Credit ledger by order in GST-PMT-03A.

(v) Rule 87(3) is amended wherein clauses (ia) and (ib) are inserted to provide facility of GST payment by UPI or IMPS.

(vi) By amendment in rule 87(5), in addition to RTGS, IPS is also included for generating challan.

(vii) Rule 87(14) is inserted pursuant to change in section 49. The facility to transfer balance in E-Cash Ledger to distinct person is permitted by GST-PMT-09 subject to condition that there is no unpaid liability in case of transferor.

(viii) Rule 88B is inserted for calculation of interest. By Rule 88B(1) it is provided that if supplies are declared in return and said return is filed belatedly, (except in proceeding u/s 73/74) the interest will be on cash portion paid towards such return. As per section 88B(2), in cases other than above, interest will be on tax remaining unpaid. As per section 88B(3), in case of wrong availment of ITC, the interest will be payable from date of utilization till date of reversal or date of payment of tax towards such wrong utilization. By Explanation, the extent of utilization and time points of utilization are clarified. This rule is applicable from 1st July, 2017.

(ix) In rule 89(1), procedural changes about reference to specified officer is made.

(x) As per section 89(2)(b), statement containing given particulars is required to be submitted along with RFD-01. However, electricity is excluded from such requirement.

(xi) By inserting Rule 89(2)(ba), a separate requirement of furnishing information is prescribed for claiming a refund in relation to the export of electricity.

(xii) Rule 89(4) provides formula for working out refund amount in case of zero-rated supplies under Bond or LUT. In the said rule, an explanation is inserted to provide that for said formula, the value of goods exported shall be taken as the FOB value or the invoice value, whichever is less.

(xiii) Rule 89(5) provides formula for working out refund on account of inverted duty structure. The formula is amended to consider utilization of ITC on account of inputs and input services in the same ratio, in which ITC had been availed during the said period.

(xiv) Rule 95A which provides for refund to retail outlets situated in international airports is omitted from inception i.e. from 1st July, 2019.

(xv) Clause (b) in Rule 96(1) is substituted from 1st July, 2017. Now, it is provided that if the applicant has furnished a valid return in GSTR-3B, and if there is any mismatch between the shipping bill and the statement of outward supplies in GSTR-1, then in such case, the date of filing will be the date when such mismatch is rectified.

(xvi) By amendment in Rule 96(4), clause (c) is inserted. The withholding power is extended where the verification of credentials of exporter is felt necessary.

(xvii) Rule 96(5) about intimation of withholding is omitted. New sub-rules (5A), (5B) and (5C) are inserted in Rule 96. The procedure for re-initiation of withheld refund in different situations is given in the above new sub-rules. Rules 96(6)/96(7) are omitted.

(xviii) There are various changes in various forms prescribed under Rules. However, for sake of brevity they are not discussed here.

7. Notification No. 15/2022-Central Tax, dated 13th July, 2022

Amendment in entry (4) in Notification No.10/2019-Central Tax dated 7th March, 2019
The original entry (4) read as under:

“Fly ash bricks or fly ash aggregate with 90 per cent. or more fly ash content; Fly ash blocks”. Now it is substituted as under:

“Fly ash bricks; Fly ash aggregates; Fly ash blocks”.

8. Notification No. 16/2022-Central Tax, dated 13th July, 2022

Amendment in entry (4) in Notification No.14/2019-Central Tax dated 7th March, 2019
Substitution made above by notification no.15/2022 is also made in this entry (4). The substituted entry (4) reads as under:

“Fly ash bricks; Fly ash aggregates; Fly ash blocks”

9. Notifications for changes in Rates

The Government of India has issued Notifications bearing no.3/2022-Central Tax (Rate) to Notification bearing no.11/2022-Central Tax (Rate), all dated 13th July, 2022. By these notifications, various changes are made in the rate of tax on the supply of goods or services as well as RCM and exemptions, as per decisions in the 47th Council Meeting. For sake of brevity the same are not discussed here in detail.

10. Notification No. 1/2022-Compensation Cess, dated 24th June, 2022

Cess Act
Notification is issued u/s 12(2) r.w.s. 8 of the GST (Compensation to States) Act, 2017. By the said notification, the operation of Cess Act is extended till 31st March, 2026.

II. CIRCULARS

a) Information to be supplied in form GSTR-3B – Circular No. 170/02/2022-GST, dated 6th July, 2022.
Clarifications about mandatory furnishing of correct and proper information of inter-state supplies and the amount of ineligible / blocked ITC and reversal thereof are given.

b) Fake Invoices – Clarifications – Circular No.171/03/2022-GST, dated 6th July, 2022
Various issues pertaining to fake invoices like assessment, ITC, action on issuer / receiver, are clarified.

c) Clarifications of certain issues – Circular No. 172/04/2022-GST, dated 6th July, 2022
Various issues pertaining to the following are clarified.

i. refund claimed by the recipients of supplies regarded as deemed export,

ii. interpretation of section 17(5) of the CGST Act,

iii. perquisites provided by employer to the employees as per contractual agreement, and

iv. utilisation of the amounts available in the electronic credit ledger and the electronic cash ledger for payment of tax and other liabilities.

d) Clarifications about refund under Inverted Duty Structure – Circular No. 173/05/2022-GST dated 6th July, 2022
The contents in earlier circular 135/05/2022-GST dated 31st March, 2020 regarding eligibility to refund in peculiar facts of the case under inverted duty structure are modified. It is stated that even if the output tax rate is lower due to any concessional notification, the refund will be eligible subject to other conditions stated therein.

e) Re-credit in E-Credit ledger – Circular No. 174/06/2022-GST, dated 6th July, 2022
The procedure to re-credit refund amounts where the erroneously granted refund is paid back in cash by DRC-03 is explained. The re-credit will be done through PMT-03A by jurisdictional officer on getting written request.

f) Refund upon export of electricity – Circular No. 175/07/2022-GST, dated 6th July, 2022
The manner of filing refund claim of unutilized ITC on account of Export of electricity is explained.

g) Withdrawal of Circular about refund to retail outlets – Circular No. 176/08/2022-GST, dated 6th July, 2022
By circular 106/25/2019-GST, dated 29th June, 2019, the procedure of refund to retail outlets situated in departure area of international airport was given. The said circular is withdrawn by the above circular, as Rule 95A itself is omitted.

III. INSTRUCTIONS

(i) Instruction No. 2/2022-GST, dated 22nd March, 2022 The Standard Operating Procedure (SOP) for Scrutiny of returns for F.Y. 2017-18 and 2018-19 is given.

(ii) Instruction No. 3/2022-GST, dated 14th June, 2022 Instructions are issued relating to sanction, post audit and review of refund claims. Various aspects are covered in above instructions.

IV. ADVANCE RULINGS

Swadeshi Empesa Pvt. Ltd.
[Order No. GUJ/GAAR/R/2022/29
dated 11th May, 2022]

Classification – ‘Fire Safety Product assembled on trolley’

The issue before the Gujarat AAR was about the classification of the above item. The contention of the applicant was that the said goods are covered by HSN 84241000. The learned AAR examined the facts and found that the above heading 8424 does not include fire-fighting pumps with or without internal reservoirs, whereas heading 8413 covers pumps for liquid whether or not fitted with a measuring device. The learned AAR also observed that HSN explanatory notes to 8424 have excluded such fire extinguishing goods and categorized them under heading 8413. Therefore, the learned AAR ruled that the said fire safety product trolley is classifiable under HSN 84131990.

BCAJ Admin

Service Tax

I. HIGH COURT

12 Ashwini Builders and Developers (P.) Ltd vs. Assistant Commissioner, Central Excise and Service Tax [2022] 139 taxmann.com 102 (Bombay) Date of order: 8th February, 2022

The application filed by the petitioner under SVLDRS continues to be under the “litigation category” and not as “arrears category” even if the petitioner has not filed an appeal against the Order-in-Original but against the rectification application sought against such order-in-Original and pending as on 30th June, 2019

FACTS
The department issued a show-cause notice to the petitioner for recovery of refund of the service tax followed by the Order-in-Original (OIO). The petitioner filed a rectification application under section 74 which was rejected by the department. The petitioner, therefore, preferred an appeal before the Commissioner (Appeals) in respect of such a rejection order. In the meantime, the petitioner filed an Application/Declaration under section 125 of the Sabka Vishwas (Legacy Dispute Resolution) Scheme, 2019 (‘scheme’) under “Litigation Category” in respect of the said pending appeal. The petitioner received notice in form SVLDRS-2 stating that the case was confirmed under the “Arrears Category”. The petitioner submitted form SVLDRS-2A explaining the reason why it could not be treated as a case under the “arrears category” but under a “litigation case”. The Designated Committee (DC) issued a notice/statement in form SVLDRS-3 requiring the petitioner to pay an amount computed treating the application under the “arrears category”. The pending appeal also came to be dismissed. Therefore, the petitioner filed a writ praying direction to set aside the notice/statement issued by DC in form SVLDRS-3 and sought order and direction to allow/accept the application filed by him under the scheme. The department contended that the petitioner has admittedly not challenged the OIO and that the pendency of appeal against the Order of assessing Officer refusing to rectify the mistake on the application filed under section 74, does not fall under the said Scheme.

HELD
Referring to the provision of Section 74 of the Finance Act, 1994, the Hon’ble Court held that it is clear beyond reasonable doubt that any Order allowing the application for rectification partly or fully would modify the Order-in-Original passed by the Assessing Officer in pursuance of show-cause notice issued by the Assessing Officer. Such Order of rectification has to be read with the Order-in-Original and hence the said Order is also appealable under section 85 of Finance Act, 1994. The Court thereafter referred to the definition of ‘order’ under section 121(o) of the said Scheme and held that Order-in-Original duly modified/rectified under section 74 would be also an order within the meaning of Section 121(o) of the said scheme. Thus rejecting the contention of the department, the Hon. Court held that there is no merit in the contention of the department that the declaration form filed by the petitioner could only fall under “arrears category” within the meaning of Section 121(c) on the ground that the petitioner had not filed any appeal against the Order-in-Original. Such a view being contrary to the objects and intent of the scheme for the benefit of the assessee and to bring them out of litigation forever pending under the pre-GST regime. The Hon’ble Court accordingly quashed the order passed by the designated authority treating the application under the “arrears category” and directed the revenue to process the declaration under “litigation category”.

13 Vice Chairman Settlement Commission vs. Zyeta Interiors (P.) Ltd [2022] 139 taxmann.com 225 (Karnataka) Date of order: 7th April, 2022

Although Section 68(2) and the Notifications issued thereunder prescribed specified percentages of service tax to be paid by the service receiver and the provider, once the fact is not disputed that the entire 100% tax is deposited combined by the service provider and service receiver, merely because the service receiver deposited tax in the lower ratio cannot be the ground for recovery of service tax from such service recipient for it would amount to double taxation

FACTS
The assessee requested the Settlement Commission for modification of its final order which came to be rejected. In terms of Section 68(2) of the Finance Act and amendments to the Notifications issued thereunder, the assessee being the recipient of the services, was liable to pay service tax in the ratio of 75% the balance being payable by the provider. Instead, tax was paid by both in the ratio of 50:50 as per the pre-amended provision which was not accepted by the settlement commission in its order. Being aggrieved, the assessee filed a writ petition before High Court which was allowed by Ld. Single Judge, and the matter was remitted to the Settlement Commissioner for consideration afresh. Aggrieved by the same, the department filed an appeal contending that the assessee was strictly required to adhere to the provisions of Section 68(2) of the Act and also advanced the reason that the photocopies of invoices produced by the assessee cannot be considered as required documents to award CENVAT credit prescribed under Rule 9 of the CENVAT Credit Rules, 2004 and hence the order of Single Judge remanding the matter for consideration afresh is incorrect.

HELD
As regards the issue of double taxation, the Court held that whatever the ratio, the tax in its entirety has reached the hands of the ex-chequer. Merely for the reason that there was no strict adherence to the ratio as envisaged during the relevant point of time for payment of tax by the assessee and the service provider, the assessee cannot be made liable to pay the double tax. What is significant to note is that the discharge of the entire tax amount is not disputed. Thus, the reverse charge mechanism would not lead to double taxation. As regards the remand issue, the Hon’ble Court noted that the Learned Single Judge has remanded the matter for fresh consideration mainly on the ground that the assessee is ready and willing to produce the original invoices. The Court accordingly disposed of the appeal by confirming the order of remand.

14 Way2Wealth Brokers Pvt. Ltd vs. Comm of C.T. Bengaluru [2022 (61) GSTL 349 (Kol)] Date of order: 16th September, 2021

Refund not hit by limitation of service tax is paid mistakenly on exempted services

FACTS
Appellant-assessee inter alia provided a stock broking service, collected late payment charges when customers delayed payment beyond stipulated time for stocks brought and paid service on the same during April 01, 2009 to March, 2011. Pursuant to a clarification circular dated 3rd August, 2011 by Central Board of Excise and Customs that service tax was not attracted on the LPC by the brokers, appellant filed a refund claim being service tax paid inadvertently which was not due as per the law. Out of the total claim, the claim period 2009-10 was held limitation and also rejected by Tribunal by upholding order of Commissioner (Appeals). Hence this appeal.

HELD
Tribunal’s reliance on the Supreme Court’s judgment in Asst. Commissioner vs. Annam Electric Manufacturing Co. 1997 (90) ELT 260 (SC) was distinguished because refund did not pertain to illegal levy collected but service tax paid by the assessee voluntarily under self-assessment under mistaken belief. Hence, reliance was placed on Commissioner vs. K.V.R. Construction 2012 (26) STR 195 (Kar) by Supreme Court dismissing Revenue’s appeal wherein it was held that Section 11B does not apply as mistaken notion does not come within realm of duty and hence limitation under section 11B of the Central Excise Act is not applicable. Hence appeal was held as deserved to be allowed.

[Note: Here contrary to the above, Madras High Court in 2022 (61) GSTL 355 (Mad) in Quest Global Engineering Services P. Ltd vs. Dy. Commr. GST & C.Ex, Chennai South around the same time for mistaken payment of GST on 20th December, 2017 (on account of the system picking up irrelevant invoices of earlier period) and the refund claims filed on 30th May, 2020 (beyond two years from the date of payment) thus delayed by about five months was held as “long after expiry of limitation” prescribed under section 54 of CGST Act, 2017 and hence the petition of the assessee was dismissed.]

BCAJ Admin

RECENT DEVELOPMENTS IN GST

I. NOTIFICATIONS

1. Waiver of Late fees for the F.Y. 2021-2022 for the delay in furnishing form GSTR-4-Notification No. 07/2022 – Central Tax dated 26th May, 2022:

The Govt. of India has issued the above notification whereby late fees payable for delay in furnishing of form GSTR-4 for the F.Y. 2021-2022 is waived for the period from 1st May, 2022 till 30th June, 2022.

2. Waiver of interest for specified Electronic Commerce operators – Notification No. 08/2022 – Central Tax dated 7th June, 2022:

The Govt. of India has issued the above notification whereby specified E-Commerce operators are exempted from interest for the specified months for specified period.

3. Instruction No. 01/2022-23 (GST-Investigation), dated 25th May, 2022 – Deposit of tax during search, inspection or investigation

The CBIC has issued the above instruction in which the manner and method of depositing tax during search/inspection is clarified. Inter alia it is clarified that if any complaint received from tax payer it should be enquired earliest and disciplinary action may be taken wherever necessary.

II. ADVANCE RULINGS

13 M/s. Adani Green Energy Ltd [Order No. GUJ/GAAR/R/2022/26 dated 11th May, 2022]

Intermediary

The facts, in this case, are that M/s Adani Green Energy Ltd (AGEL) wanted to raise working capital. Therefore, they issued Senior secured Notes (Notes). For the said purpose, they appoint managers who are registered out of India. The role of managers as noted by the learned AAR is as under:-

“i. Manager arranges & facilitates coordination between the AGEL who issues the Notes and the (potential) Investors subscribing to the Notes. Manager solicits and arranges investors for subscribing to Notes issued by AEG.

ii. Manager initiates the process of book building by informing potential investors about the coupon rate at which the AGEL intends to offer the Notes. For this purpose, Managers undertake a gamut of activities viz.

a. scheduling meetings/liasoning between the AEG and the investors,

b. arrange road-shows for prospective investors.

c. Manager also solicits counter offers from investors who are willing to invest in the issue. The offers and counter-offers are recorded in Bloomberg and then aggregated and negotiated by the Manager between AGEL and investors. Then after, AGEL communicates the final coupon rate, after which, the Manager seeks the final offer from potential investors. The Manager proceeds to confirm the subscription amount on basis of the confirmations from the investors. Manager is required to secure a requisite number of investors to subscribe to the Notes at a broadly agreed coupon rate, then after the Subscription Agreement would be executed and Issue be launched.

d. communicate with investors; collect proceeds of the subscription and transfer the same to the Note Trustee for payment to the AGEL.

iii. Manager distributes the disclosure documents prepared by AGEL in connection with the offering and sale of Notes.

iv. In case the Manager is unable to arrange for the requisite number of subscribers at the agreed coupon rate, AGEL may choose not to launch the issue for subscription. In such a situation, the Manager would not be entitled to any fee whatsoever.”

The issue before the ld. AAR was whether the managers can be considered to be intermediary. For said purpose Ld. AAR referred to meaning of ‘intermediary’ in Section 2(13) of IGST Act which reads as under:-

“2(13) “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 learned AAR also referred to meanings of facilitate/arrange in Merriam Webster Dictionary which are reproduced in AR as under:-

“Facilitate: to make (something) easier, to help cause (something); to help

(something) run smoothly and effectively.

Arrange: to bring about an agreement or understanding concerning; to make

preparations, to move and organise (things) into a particular order or position, to organise the details of something before it happens, to plan (something).”

Based on the above background, the Ld. AAR came to the conclusion that the Managers are like agents bringing the AGEL and investors together. Therefore, they are intermediaries.

The further issue was whether any GST liability attracted on service charges paid to intermediaries.

In this respect, the ld. AAR referred to the definition of ‘import of services’ in section 2(11) of IGST Act and ‘place of supply’ in section 13(8)(b) of IGST Act. The Managers are in non-taxable territory, the place of supply also falls in such territory and thus, the intermediary services fall in the not-taxable territory. Ld. AAR held that there is no liability on service charges paid to Managers under GST Act.

14 M/s. Indian Society of Critical Care Medicine [Order No. GUJ/GAAR/R/2022/28 dated 11th May, 2022]

Composite Supply/ITC

The applicant, Indian Society of Critical Care Medicine (ISCCM), herein is engaged in providing educational training by developing and running post-graduate fellowship courses and diplomas in the field of critical care medicines and providing basic training in intensive care for non-specialists.

The applicant intends to organize and manage conferences and exhibition in Ahmedabad, which will be attended by delegates, vendors, exhibitors from India and outside.

ISCCM will offer following facilities to the delegates at an all inclusive registration fees:

a. Technical Theme – based Seminars

b. Access to exhibition

c. Interactive workshop and scientific session

d. Hotel Room Accommodation

e. Cultural programs, lunch & dinner

f. Airport Pickup & Drop.

ISCCM also submitted that the interested local, national & international vendors will be offered to participate in the trade fair to showcase and exhibit their products against certain participation charges.

Further, various brand promotion packages will be offered to local, national & international vendors in the course of the event.

The applicant has sought to categorize delegate fees as composite supply, to be covered by service code 998596 attracting 18% tax.

In relation to exhibition fees, it has sought to categorize it in same service code 998596 liable to at the rate of 18%. The said service code 998596 is reproduced in AR as under:-

“444	Group 99859	Other Support Service
450		998596	Events, exhibitions, conventions and trade shows organisation and assistance services.
		998599	Other support services nowhere else classified.”

“444

Group 99859

Other Support Service

450

998596

Events,
exhibitions, conventions and trade shows organisation and assistance
services.

998599

Other support services nowhere else
classified.”

In relation to brand promotion packages it is submitted that said services will be offered in following way:-

“13. Those categories of brand promotion packages will be offered in the following ways:

(i) Branding on Stage Backdrop, Standby Taxi, E-Rickshaw, Chair Head, Rest Cover, Itinerary, Bottle Wrapper, Logo in media Stationery,

(ii) Display of their brand in a souvenir for the event (space will be allotted in the souvenier),

(iii) Presentation (for a specific time slot) and DVD Display.”

It is sought to be classified under Service code 998397 as “sponsorship and brand promotion services”, liable to tax at 18%. The heading 998397 is reproduced in AR as under:-

“356	Group 99839	Other professional, technical and business services
363		998397	Sponsorship services and brand promotion services.”

“356

Group 99839

Other professional, technical and
business services

363

998397

Sponsorship
services and brand promotion services.”

In respect of the inward supply, the applicant has submitted that mainly, it will be accommodation facility, taxi facility, catering for food and beverages and other related services.

Based on the above following questions were raised before the Ld. AAR.

“1. What shall be the nature of service and classification in accordance with

Notification No. 11/2017- CT(R), dated 28th June, 2017 read with annexure attached to it in relation the following services:
a. Service provided by ISCCM to the delegates;
b. Service provided by ISCCM to the exhibitors.

2. In relation to the brand promotion packages offered by ISCCM in the course of the event,
a. What shall be the nature of service and classification in accordance with Notification No. 11/2017-CT(R), dated 28th June, 2017 read with annexure attached to it?
b. Whether ISCCM is liable to pay tax on services provided to the brand promoters or the liability to pay tax on such services falls on recipient under reverse charge according to Notification No. 13/2017 -Central Tax (Rate)?

3. Whether Input Tax Credit is admissible for ISCCM in respect of tax paid on the following:
a. Services provided by the hotel including accommodation, food & beverages;
b. Supply of food and beverages by outside caterers;
c. Services provided by event manager like pickup & drop, exhibition stall setup, tenting, etc.”

The ld. AAR scrutinized the application and noted findings as under:-

“i. As per the brochure submitted, this Conference is for researchers, professors and doctors on topics of intensive care and the workshops will be revisiting the clinical practices, new technologies and drugs as well as the current initiatives to deal with pandemic and post pandemic scenario of critical care. The conference to be attended by physicians and Intensivist features the following workshops:

(i)   Comprehensive Critical Care Course
(ii)   CAM-ICU: Comprehensive Airway Management in ICU
(iii)   Intensive Care Ultrasound
(iv)   Essentials and Fundamentals of Mechanical Ventilation
(v)   Essentials and Fundamentals of Mechanical Ventilation
(vi)   Advanced Neuro Trauma & Critical care Support
(vii) Multiorgan (Extra Corporeal) Support & Therapy
(viii) Mechanical & Extracorporeal Cardiac Support & Therapy
(ix) Critical Communication & Soft Science
(x) Research & Statistical Methodology
(xi) Critical Learning Evaluation & Training Methodology
(xii) Basics of Resuscitation & Trauma Response
(xiii) Safety, Quality, Accreditation & Prevention of Errors
(xiv) Nursing.”

The Ld. AAR also noted that the ISCCM supplies a composite package to its delegates at an all-inclusive registration fees, comprising of the following services: Technical Seminars, Access to exhibition, Hotel Room Accommodation, Cultural program, lunch & dinner, Airport Pick Up & Drop. Therefore, Ld. AAR upheld contention of applicant that it is composite supply. The Ld. AAR held that the Professional Service Supply is principal supply.

Regarding Exhibition receipts the Ld. AAR held that ISCCM is organizing trade fair and exhibition. The exhibitors showcase and exhibit their products/ services. Therefore, the Ld. AAR held that the participation fees charged by ISCCM from these exhibitors is for the services of organizing exhibition for the exhibitors, which falls under entry at SAC 998596 under ‘events, exhibitions, conventions and trade shows organization and assistance services’ and accordingly concurred with classification suggested by the applicant.

In respect of brand promotion the Ld. AAR held that it is Sponsorship Service and not brand promotion. The Ld. AAR observed that a suitable place for any entity to promote itself is at sponsorship events such as trade fairs, exhibitions and events and hence it is sponsorship and not brand promotion. It is further noted that in relation to sponsorship services the tax is payable under RCM as per notification no.13/2017- CT(R) dated 28th June, 2017 and no tax on applicant.

Regarding ITC, the Ld. AAR concurred with submission of applicant that the inward supply of accommodation, catering etc., though otherwise in blocked credit u/s.17(5), applicant will be eligible as the inward is for further outward supply.

Ld. AAR gave ruling on given questions as under:-

“1(a) ISCCM supplies Composite Supply to its delegates, the principal supply being Professional Service supply. SAC is 998399.

1(b) ISCCM supplies ‘Exhibition, Trade show organization and assistance services’ to the exhibitors. SAC is 9985 96.

2(a) ISCCM supplies Sponsorship Services to its sponsors. SAC is 9983 97.

2(b) GST liability on sponsorship service is on the service recipient (if the recipient is a body corporate or partnership firm) if the recipient is in taxable territory. If the service recipient is not a body corporate/ firm, then GST is liable to be paid by ISCCM on forward charge.

3 ITC, as per Question 3 of the Application, is admissible to ISCCM.”

15 M/s. Naimunnisha Nadeals Saiyed (Legal Name), Star Enterprise (Trade Name)
[Order No. GUJ/GAAR/R/2022/32 dated 13th May, 2022]

Classification of Air Circulation Fans

The applicant desired to know rate of tax on its product namely Air Circulation Fans supplied mainly to Poultry House for the purpose of providing ventilation to live stock and that few fans are supplied in Industry.

The Ld. AAR, in short AR order, referred to the brochure submitted by the applicant and found that the applicant supplies Industrial grade fans. From the specifications submitted, the Ld. AAR noted that the electric motors of these fans have an output exceeding 125 W and these fans are Industrial fans, attracting HSN 84145930. Accordingly it is ruled that with effect from 15th November, 2017, these industrial fans are liable to CGST at 9% vide Sr no. 317B in Schedule III of Notification no. 1/2017-CT(R) dated 28th June, 2017 and therefore taxable at 18%.

16 Royal Carbon Black Pvt. Ltd [Order No. MAH/AAAR/AM-RM/06/2022-32 dated 2nd May, 2022]

Restoration of AR for deciding on merits

The appellant filed AR application to know classification of its production namely “Tyre Pyrolysis”.

The Ld. AAR, after admission, returned the application observing that the Test Report for chemical composition and manufacturing process not given.

Against above rejection order this appeal filed before the Ld. AAAR on appeal order the contentions from both sides are noted. Appellant submitted that the test report and manufacturing process have been submitted before AAR. Considering contradictory contentions and also finding that appellant ready to submit said material, Ld. AAAR remanded matter back to Ld. AAR for deciding on merits.

BCAJ Admin

Service Tax

I. TRIBUNAL

8 M/s Reliance Industries Ltd, Vadodara vs. The Commissioner of Central Excise and Service Tax, Mumbai [2022-TIOL-336-CESTAT-MUM-LB] Date of order: 18th April, 2022

CENVAT credit of service tax is available to the employer on premium paid towards medical insurance policy of employees under voluntary retirement scheme

FACTS
The Appellant is engaged in manufacturing petrochemical products at its Vadodara plant. It introduced a voluntary separation scheme for certain category of its employees. In terms of the scheme, the Appellant provided medical insurance policy to the employees who opted for it. The company claimed Rs. 1,33,37,699 as CENVAT credit on service tax paid on the policy. The CENVAT credit, thus availed by the Appellant, was disallowed on the grounds that the services are not confirming to the definition of ‘input service’ under Rule 2(I) of the CENVAT Credit Rules. The Commissioner raised a demand of the credit availed vide order dated 29th December, 2011. Aggrieved by the order, the Appellant filed the appeal before the Tribunal.

HELD
The Larger Bench of the CESTAT heavily relied upon the decision of the Supreme Court in Coca Cola India and Ultratech Cement. It observed that the medical insurance provided is a contractual obligation and not in the nature of gratuity. The scheme was necessary to keep the operations of the company cost-effective and profitable. The Tribunal referred to CAS-4 and CAS-7 and further concluded that future benefits such as Voluntary Retirement Scheme are integral part of employee costs. In view of the above, it was held that the premium paid on medical insurance policy towards employees has a direct relation with the company’s operations. Thus, it falls under the definition of ‘input service’ under Rule 2(I) of CENVAT Credit Rules, 2004, and CENVAT credit was allowed.

9 J J Patel and Brothers vs. Commissioner of Central Excise and Service Tax, Surat [2022-TIOL-398-CESTAT-AHM] Date of order: 11th April, 2022

Service tax not payable on reimbursement of electricity charges

FACTS
Appellant provided infrastructural support services to Gujarat Gas Ltd. by providing land, building, equipment, manpower, electricity connection, selling and billing of CNG gas, collection of bills etc. It received service charges from Gujarat Gas Ltd. at a rate based on per kg. The CNG gas sold in a month was subject to their selling minimum amount in terms of the contract. There was a substantial difference noticed by the department in the taxable value as disclosed in the ST-3 Returns and the amount of service charges received in the bank account, and for which Appellants provided the reason of receiving reimbursement of electricity expenses. After the due process of law, the demand thereon was confirmed with interest, penalties etc. As per Appellants, they earned commission income under the franchise agreement and acted as pure agent for payment of electricity charges for compressors, dispensers etc. in terms of the said agreement and inter alia relied on decisions of UOI vs. Intercontinental Consultants & Technocrats P. Ltd. 2018 (10) GSTL 401 (SC) and M/s. Kiran Gems Pvt. Ltd. 2019 (25) GSTL 62 (Tri.-Ahmd), wherein under similar circumstances, exclusion of electricity charges recovery was upheld by Tribunal whereas Revenue’s case was to include electricity cost in the gross value of taxable services and relied on the decision in the case of M/s. Bhagwathy Traders 2011 (24) STR 290 (Tri.-LB).

HELD
Hon. Bench observed that Appellants paid service tax on the fixed charges received from Gujarat Gas and observed that the case was squarely covered by the case of Kiran Gems (supra), wherein after relying on the decisions of ICC Reality (India) Pvt. Ltd. vs. Commr. 2013 (32) STR. 427 (Trib.) & Others, it was held that electricity reimbursed is not includable in the gross value of renting of immovable property service. The same principle being equally applicable, the issue thus no longer being res integra, the appeal was allowed.

10 M/s. Asveen Air Travels Pvt. Ltd. vs. CGST & Central Excise, Chennai [2022-TIOL-404-CESTAT-MAD] Date of order: 21st April, 2022

Incentives from CRS companies are not liable for service tax – Larger Bench decision of Kafila Hospitality followed

FACTS
Appellant, an air travel agent, paid service tax on the commission received from airlines. During investigation, it was found by the Revenue that Appellant received incentives from computerized reservation booking system offered by companies such as Galileo India, Amadeus India and Abacus Distribution System India. The case of the Revenue is that this is liable for service tax as ‘business auxiliary service’. Whereas, as per Appellant, the issue was no longer res integra as it is settled by the decision of the Larger Bench of the Tribunal in the case of Kafila Hospitality & Travels P. Ltd. 2021-TIOL-159-DEL.LB.

HELD
Citing and examining the decision in the case of Kafila Hospitality’s case (supra), it was inter alia observed that CRS companies provide OIDAR services to airlines. In lieu thereof, airlines pay consideration to them in the form of charges or commission. In turn, CRS companies allow IATA agents to subscribe to their portals to book tickets for their clients / sub-agents. On account of competition, these companies started to part with their consideration with IATA agents. Hence, it was observed that an air travel agent promotes his own business and not that of airlines or that of CRS companies. Air travel agent’s classification is ‘air travel agent’ not ‘business auxiliary service’ in terms of section 65A, and hence incentive received from CRS companies is not liable for service tax.

11 Circor Flow Technologies India Pvt. Ltd. vs. Pr. Commissioner of GST & C.Ex.,
Coimbatore [2022 (59) G.S.T.L. 63 (Tri. – Che.)] Date of order: 16th December, 2021

Refund of Service Tax paid for pre-GST Regime cannot be denied where no CENVAT credit was admissible post introduction of GST Laws

FACTS
The Appellant was engaged in the manufacture of valves and was holding registrations under Central Excise Act, 1944 and Service Tax Law. Appellant had entered into various transactions during the period January, 2017 to June, 2017 pertaining to import of software and belatedly paid the service tax under Reverse Charge Mechanism (RCM) in March, 2019. Appellant could not avail the CENVAT credit of service tax paid and hence filed an application for refund of the amount paid under RCM. However, the refund application was rejected by the Adjudicating Authority stating that tax had been paid voluntarily and no credit was eligible in the GST Regime. Further, Commissioner Appeals also upheld the same view. Being aggrieved by such rejection, the Appellant preferred an appeal before this Hon’ble Tribunal.

HELD
It was held that section 174(2) of the CGST Act specifically states that any right, privilege, obligation, or liability acquired, accrued or incurred under the amended Act or repealed Acts shall remain unaffected. Thus, if liability, under the erstwhile law of Finance Act, 1994 to pay service tax would continue even after the introduction of GST, then the right to avail the credit on similar lines cannot be denied. Also, section 142(3) of CGST Act states that CENVAT credit arising out of erstwhile law has to be disposed of in accordance with the erstwhile law, and any amount eventually accruing has to be refunded in cash. Consequently, the impugned order was set aside, and the refund was granted.

BCAJ Admin

GOODS AND SERVICES TAX (GST)

I. SUPREME COURT

12 Ganesh Ores (P.) Ltd. vs. State of Orissa [2022] 137 taxmann.com 164 (SC) Date of order: 28th March, 2022

There is nothing in section 74 (1) of the CGST Act to indicate that an order of refund granted after an adjudication cannot be sought to be reopened by issuing a show-cause notice u/s 74(1) and filing of appeal against the adjudication order cannot be said to be the only remedy available to the department

FACTS AND HELD
After the adjudication process on the petitioner’s application for a refund, the refund order was, in fact, passed in favour of the petitioner by the Joint Commissioner of CT&GST. Thereafter, a notice u/s 74(1) was issued by the same authority for the recovery of the said refund. The writ applicant contended that against an order of erroneous refund, it was open to the department to have filed an appeal u/s 107(1) of OGST Act, but having missed the time limit for doing so, the department cannot indirectly seek to reopen the refund already granted pursuant to an adjudication on the refund application by resorting to section 74 of the OGST Act. The Hon’ble High Court dismissed the writ petition [Refer [2022] 137 taxmann.com 163 (Orissa)], observing that there is no limitation placed by the Legislature on the powers exercisable u/s 74(1) of the OGST Act. In particular, there is no indication that an order that is otherwise appealable u/s 107 of the OGST Act cannot be sought to be revisited u/s 74(1) of the OGST Act. The High Court further held that section 74(1) of the OGST Act does not appear to make any distinction between refund orders passed without adjudication and those that have been passed after an adjudication. Also, there is nothing in section 74 (1) of the OGST Act to indicate that an order of refund granted after an adjudication cannot be sought to be reopened thereunder. Aggrieved by the said order, the petitioner filed a Special Leave Petition before the Hon’ble Supreme Court, which the Supreme Court dismissed.

II. HIGH COURT

13 Educational Initiatives (P.) Ltd vs. Union of India [2022] 137 taxmann.com 4 (Gujarat) Date of order: 18th February, 2022

Services concerning conduct of assessment tests (namely supplying the question paper and evaluating the same) for educational institutions is entitled to exemption under Entry No. 66(b)(iv) of the Notification No. 12/2017-Central Tax (Rate) dated 28th June, 2017 and merely because fees for such assessment tests are determined by the applicant and are remitted to it by educational institutions after deducting administrative cost would not mean that tests are not conducted by such educational institutions

FACTS
The writ-applicant has entered into contracts with various schools to provide education up to the higher secondary school. The schools have made it mandatory for their students to take up the Assessment of Scholastic Skill Through Educational Testing (ASSET) exams, which are being conducted by the schools on their own premises, and the marks obtained in the ASSET are considered and given due weightage to the students’ ASSET score in the semester and the final examination results. The writ applicant would set and prepare the question papers (either paper or online versions). The evaluation of the answers is done by the writ-applicant. The students are enrolled with the schools. The writ-applicant on seeking a ruling from the Gujarat Authority for Advance Ruling (AAR), the AAR decided the matter in favour of the applicant holding, that such services are provided to the “educational institution” as defined in the said notifications and that such services are also “relating to” conduct of examination by such institution. However, the Appellate Authority of Advance Ruling (AAAR) denied the exemption on the ground that schools have a minimum role in conducting ASSET and that schools are collecting fees for ASSET from students, as determined by the applicant and remits the same to the applicant after deducting its administrative cost. It was accordingly held that schools are not conducting the ASSET, rather the schools are facilitating the applicant to conduct ASSET, for which the schools get some amount towards administration cost. It was also further pointed out that there is also no submission by the applicant clarifying whether respective Boards (State Board, CBSE, ICSE etc.) recognise ASSET as an internal examination conducted by the schools, and accordingly, the exemption was denied. Aggrieved by the same, the applicant filed a writ before the High Court – whether their services in relation to the ASSET examination are exempted from the payment of the GST under Entry No.66(b)(iv) of the Notification No.12/2017-Central Tax (Rate) dated 28th June, 2017 as well as the Exemption State Act.

HELD
After referring to the reasoning given in the order of AAR, the Hon’ble Court held that when the appellate authority says that the schools are not conducting the ASSET, or rather, the schools are facilitating the writ-applicant to conduct the ASSET, for which the schools get some remuneration towards the administration cost, it is thereby trying to erroneously convey that instead of the writ-applicant providing services to the schools, the schools are providing services to the writ-applicant, for which the schools receive “administration costs”. The Hon’ble Court confirmed the finding of AAR that the basic nature of the ASSET service is an examination to be conducted by the Educational Institution (School) but outsourced to the Educational Initiatives (EI). Referring to the rules of interpretation of the exemption provisions, the Hon’ble Court held that the exemption notification must be construed having regard to the purpose and object it seeks to achieve and should be read as a whole and held that such services certainly fall within the exemption notification entries relied upon by the applicant.

14 I-Tech Plast India (P.) Ltd vs. State of Gujarat [2022] 137 taxmann.com 432 (Gujarat) Date of order: 7th April, 2022

The High Court directed the GST department to allow re-credit of ITC which was used by the petitioner for payment of tax on export of goods as the petitioner repaid along with interest, the amount of refund erroneously granted to it by GST department in contravention of Rule 96(10) of the CGST Rules without realizing that the petitioner was availing the benefit of advance license scheme in terms of Notification No.79/2017-Customs dated 13th October, 2017

FACTS
The writ applicant, a toy manufacturing company, was issued “advance licenses” for duty-free import of raw material under Notification No.79/2017- Customs dated 13th October, 2017, which was used in the manufacturing of its products which, in turn, are exported by the applicant. During F.Y. 2017-18 to 2020-2021, the applicant inadvertently cleared and exported its finished goods (produced using material imported under the advance license) upon payment of the Integrated Goods and Services Tax (for short, the ‘IGST’) instead of exporting it under the “Letter of Undertaking” (LUT). Since the exports were made upon the payment of the IGST, the writ-applicant periodically received an auto-refund of the IGST paid at the time of exports. Upon realizing this inadvertent mistake, the writ-applicant voluntarily paid the requisite IGST along with interest to the department for the period in question and filed the statutory forms GST DRC–03 on 13th August, 2020 for the period in question and informed the same to the GST department and also requested them to re-credit/restore the ITC credit in the electronic credit ledger (ECL) which was, inadvertently, utilized for payment of the IGST at the time of exports of the goods produced using raw-material imported under the advance license. Despite meeting various officials, including the Chief Commissioner of the SGST, and repeated follow-ups, the ITC was not restored as requested, and hence they filed this writ petition.

HELD
The Hon’ble Court held that in as much as the amount erroneously refunded was repaid by the writ-applicant along with interest, the first part of the transaction is nullified. However, once both these transactions are taken out from the equation, what survives is the reduction of the ITC originally effected from the ECL of the writ-applicant. Thus, the simple issue is one of restoration of the ITC, which was erroneously refunded and subsequently recovered. The Court held that if the authorities have accepted that there was an error and, resultantly, accepted repayment of the erroneous refund as a corollary, the credit of the ITC must be restored. It cannot be that for the purpose of repayment, there was an error, and for the purpose of restoration of the ITC, there was no error. There is no question of any refund of the ITC at all. The question is about restoring the ITC in the ECL and not a refund thereof. The Court accordingly directed authorities to re-credit/restore the amount of such ITC to the electronic tax ledger of the writ-applicant.

15 Ispat Ltd vs. Union of India [2022] 136 taxmann.com 403 (Jharkhand) Date of order: 22nd March, 2022

Where an adjudication order is passed demanding interest for delayed payment without issuing show-cause notice under sections 73/74 and even when the assessee objects to such payment by filing a detailed reply to the intimation issued in Form DRC-01A, such order is set aside for violating the principles of natural justice

FACTS
The Petitioners prayed for quashing summary orders issued in Form GST DRC-07 and the demand notices in Form DRC-01 without relating to different tax periods for recovery of interest without issuing a proper show cause notice under sections 73 and 74 of the Jharkhand GST Act, 2017. The petitioner submitted that interest u/s 50(1) of the Act cannot be demanded for the delay in filing monthly returns in Form GSTR-3B but for the delay in paying the taxes. It stated that only that amount of tax paid through Electronic Cash Ledger after the due date is liable to be charged.

HELD
The Hon’ble Court observed that the petitioner did not pay the amount of tax and interest intimated to him in Form GST DRC-01A and instead submitted his reply thereto, and the respondent, despite the stipulation contained in Form GST DRC-01, failed to issue any show-cause notice upon him u/s 73(1) of JGST Act, 2017. The Court, therefore, held that when the petitioner had disputed the demand of interest intimated to him, the adjudication order could not have been passed without proper show-cause notice. No order on merit is, however, given as regards the contention of the petitioner that mere delay in filing of GST returns would not attract interest u/s 50(1) on the amount of tax which has been paid in
accordance with section 49 of the Act before the due date of payment.

16 Dauji Ispat Pvt. Ltd vs. State of U.P. [2022 (59) GSTL 263 (All.)] Date of order: 10th November, 2021

Summary Order in Form DRC-07 issued without providing appropriate reasons is wholly defective and invalid

FACTS
The petitioner was issued a Summary Order in Form DRC-07 by the Respondent on the GST portal. The order copy available with the petitioner did not contain any reasons. As a result, the petitioner was unable to challenge the order issued in Form DRC-07 without knowing the reasons. The respondent had another copy of the same order which contained reasons. However, such a copy was not made available to the petitioner on the GST portal. Since the petitioner did not have the reasons to appeal against the non-speaking order, it preferred a writ before this Hon’ble High Court.

HELD
It was held that since a copy of the reasoned order was not available with the respondent, the petitioner did not have the right to challenge such an order. Thus, the impugned order was wholly defective and lacked vital aspects, namely the reasons for conclusions drawn in such order. Consequently, the writ petition was allowed, and the impugned order was set aside while remanding the matter back to the Assessing Officer for fresh assessment.

17 SBI Cards & Payment Services Ltd vs. Union of India [2022 (59) G.S.T.L. 270 (P&H)] Date of order: 8th October, 2021

Refund of tax paid under wrong head cannot be denied when such error is corrected by the assessee himself by making the tax payment under the correct head

FACTS
Petitioner was a Non-Banking Financial Company engaged in the business of issuing credit cards. During the GST regime, the petitioner paid CGST and SGST of Rs.108 Crore on a supply considering it to be an intra-state supply. However, later on, the petitioner himself realised that such supply was an inter-state supply. So, a refund application was filed to claim the refund of tax wrongly paid under CGST and SGST.

In response, the department asked the petitioner to deposit the amount of Rs. 108 Crore under the correct head, i.e. IGST and then claim the refund of the wrongly paid tax. Accordingly, the petitioner deposited IGST as required. Even then, the refund claim was rejected on the ground that the meaning of the term “subsequently held” as mentioned in section 77 of the Central Goods and Service Tax Act, 2017 and section 19 of the Integrated Goods and Service Tax Act, 2017 was restricted only to supplies that are subsequently held by adjudicating authority/tax officer as intra-state supply or inter-state supply, as the case may be. It does not cover the situation wherein the assessee himself realises the correct nature of supply. Being aggrieved by such rejection, the petitioner preferred this appeal before the Hon’ble High Court.

HELD
The High Court held that clarification of the given case had been already made in paras 3.1 and 3.2 of Circular F. No. CBIC-20001/8/2021/-GST dated 25th September, 2021 stating that the term “subsequently held” means a supply which was first considered as interstate/intrastate supply but was subsequently held to be an intrastate/interstate supply either by the adjudicating authority or by the tax officer or by the taxpayer himself. Further, in order to claim a refund, the petitioner had already paid tax under the correct head. Thus, the Hon’ble Court directed the respondents to grant a refund along with interest within one month and accordingly, the petition was allowed.

18 Bharat Mint & Allied Chemicals vs. Commr. of Commercial Tax [2022 (59) GSTL 394 (All.)] Date of order: 4th March, 2022

The opportunity of being heard has to be mandatorily granted before passing adverse adjudicating order against noticee even if it is not sought by noticee

FACTS
The petitioner was issued a Show Cause Notice dated 9th September, 2021 without giving any date, time and venue of personal hearing. An adverse order was passed by the respondent without granting a personal hearing u/s 75(4) of the Central Goods and Service Tax, 2017. Being aggrieved by such an order, the petitioner preferred this writ before the Hon’ble High Court.

HELD
It was held that an opportunity of being heard has to be mandatorily granted u/s 75(4) of Central Goods and Service Tax Act, 2017, where any adverse order is contemplated against the petitioner; otherwise, it will lead to a violation of the principles of natural justice. Accordingly, the impugned order was set aside, and the writ was allowed.

19 Sree Rajendra Steels vs. Assistant Commissioner (CT), Chennai [2022 (59) GSTL 265 (Mad.)] Date of order: 4th August, 2021

ITC cannot be denied by a non-speaking order in a cursory manner without considering the documents and detailed responses submitted by Petitioner

FACTS
Petitioner company was a registered dealer under the GST law and was asked to approach the departmental authorities when it had earlier approached the Court in Writ Petition No. 280 of 2021 for seeking a direction to unblock ITC. Accordingly, the petitioner submitted a written representation and provided all the necessary details. However, the claim of ITC was rejected and alleged as bogus since there was no movement of goods. Later, a show-cause notice was issued to the company on 30th March, 2021, and the opportunity of a personal hearing was afforded on 7th April, 2021. However, it could not be attended to due to lockdown. Thereafter an order dated 22nd June, 2021 was passed, disallowing the ITC by simply stating that the ITC was claimed by using fake invoices. Being aggrieved by such disallowance, the petitioner preferred this appeal before the Hon’ble High Court.

HELD
Hon’ble High Court held that the claim of ITC should have been decided based on the documents and reply submitted by the petitioner as well as the material available with the department and not in a superficial manner. Further, the respondent was directed to decide the claim of ITC after considering the documents submitted by the petitioner and by passing a reasoned speaking order in accordance with the law.

20 Manoj Handlooms Pvt. Ltd. vs. Union of India [2022 (59) GSTL 140 (All.)] Date of order: 9th September, 2021

A refund application cannot be rejected on the ground of non-submission of documentary evidence, once the same was found to be proper and complete and acknowledgment in Form GST RFD-02 was issued by the Department

FACTS
Petitioner made his first application to claim a refund of Rs.15 lakhs deposited in terms of order dated 11th July, 2019 on 5th February, 2021. The acknowledgement in Form GST RFD-02 was issued through the GST Portal. Respondent rejected the claim of the petitioner with the remark, “I hereby reject the claim for non-submission of any documentary evidence regarding payment of tax & penalty”. The petitioner was forced to file repeated applications, which were similarly rejected. Being aggrieved by such incessant rejections, the appellant preferred this appeal before the Hon’ble High Court.

HELD
The Hon’ble High Court held that, the acknowledgement in Form RFD-02 can be issued, only when the refund application is found proper and complete in all respects. Thus, it was not open to the respondent authority to pass an order rejecting the refund in Form GST RFD-06 on the ground that the application was incomplete in respect of documentary evidence.

BCAJ Admin

RECENT DEVELOPMENTS IN GST

I. NOTIFICATIONS

1. Extension of due dates for filing returns and tax payment [Notification No. 05/2022 – Central Tax – and Notification No. 06/2022- Central Tax- dated 17th May, 2022.]: The Government has issued the above notifications whereby the due dates for furnishing return in form GSTR-3B for April, 2022 is extended till 24th May, 2022, and similarly, the date for depositing tax in form GST-PMT-06 for April, 2022 (under QRMP Scheme) is extended till 27th May, 2022.

II. ADVANCE RULINGS

8 M/s. KPC Projects Ltd. [GST-ARA-66/2021-22/B-58 dated 4th May, 2022]

Works Contract Service vis-à-vis rate of tax

The Applicant has participated in an online global e-tender floated by Uttar-Pradesh Rajkiya Nirman Nigam Ltd. (UPRNN) to construct 228 staff quarters in Mumbai. The staff quarters were for the employees of Employee State Insurance Corporation (ESIC), Government of India. From the facts it appears that the ESIC has awarded contract to UPRNN and UPRNN has in turn appointed sub-contractor by the above e-tender. The contention of the Applicant was that the transaction is providing Works Contract Service as defined in Section 2(119) of the CGST Act, 2017. The Applicant further submitted that; the tax rate will be 12% in light of Entry at Sr. No. 3(vi) of Notification 11/2017- Central Tax (Rate) dated 28th June, 2017. It was further submitted that, the work to be done by applicant falls in the eligible criteria of sub-clause (a) of the above entry, which reads “a civil structure or any other original works meant predominantly for use other than for commerce, industry or any other business or profession”.

It was submitted that the above activity of construction of staff quarters is for employees, they are not for commercial purposes, and it is also not a business activity. Further, the Applicant being sub-contractor, is eligible to the above concessional rate of 12% read with Sr. No. 3(ix) of Notification No. 11/2017- Central Tax (Rate) dated 28th June, 2017.

The Ld. AAR observed that UPRNN is a government undertaking, i.e. Government Authority/Government Entity and observed that the transaction is for Civil Structure and not for commercial or business purposes. The Ld. AAR referred to Entry at Sr. No 3(vi) and reproduced the same as under:

Sr. No.	Chapter, Section or Heading	Description of Services	Rate (%)	Condition
3	Heading 9954 (Construction Services)	(vi) Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017, provided to the Central Government, State Government, Union Territory, a local authority, a Governmental Authority, or a Government Entity by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of- (a) a civil structure or any other original works meant predominantly for use other than for commerce, industry, or any other business or profession;	6	Provided that where the services are supplied to a Government Entity, they should have been procured by the said entity in relation to a work entrusted to it by the Central Government, State Government, Union territory or local authority, as the case may be.
		(continued) (b) ………………; or (c) ………………… Explanation. – For the purposes of this item, the term ‘business’ shall not include any activity or transaction undertaken by the Central Government, a State Government, or any local authority in which they are engaged as public authorities.

Sr. No.

Chapter,
Section or Heading

Description of Services

Rate
(%)

Condition

Heading 9954 (Construction Services)

(vi) Composite supply of works contract as defined in
clause (119) of section 2 of the Central Goods and Services Tax Act, 2017,
provided to the Central Government, State Government, Union Territory, a
local authority, a Governmental Authority, or a Government Entity by way of
construction, erection, commissioning, installation, completion, fitting out,
repair, maintenance, renovation, or alteration of-

(a) a civil structure
or any other
original works
meant predominantly for use other
than for commerce, industry, or
any other
business or profession;

Provided that where the services are
supplied to a Government Entity, they should have been procured by the said
entity in relation to a work entrusted to it by the Central Government, State
Government, Union territory or local authority, as the case may be.

(continued)

(b) ………………; or

Explanation. – For the purposes of this item, the term
‘business’ shall not include any activity or transaction undertaken by the
Central Government, a State Government, or any local authority in which they
are engaged as public authorities.

The Ld. AAR observed that by Notification No. 15/2021- Central Tax (Rate) dated 18th November, 2021, which is effective from 1st January, 2022, the reference to Government Authority/Government Entity in the above entry is omitted. In view of the above, the Ld. AAR held that the above concessional rate of 12% cannot apply to Applicant. It is held that the transaction is liable at the rate of 18% as per clause (xii) of Sr. No. 3 of Notification 11/2017- Central Tax (Rate) dated 28th June, 2017.

9 M/s. OM Construction Company [KAR ADRG 14/2022 dated 30th April, 2022]

Affordable housing project vis-à-vis rate of tax for sub-contractor

The issue involved in this application was the applicable tax rate under GST. The brief facts as noted by Ld. AAR in the order is as under:

“The applicant submits that they are engaged in the business of construction of residential apartments as a sub-contractor and has filed the instant application on the basis of memorandum of understanding entered into with M/s KG Foundations Private Limited (builder), Chennai, for proposed construction of residential project at PERUMBAKKAM. The said project is a residential project of affordable Housing scheme (low-cost housing) for economically weaker section comprising of 292 Units, under the Pradhan Mantri Awas Yojana (PMAY) scheme, with the carpet area of each flat is less than 60 Square meters & the gross amount charged is not more than forty-five lakh rupees. Further, more than 50% of Floor Space Index (FSI) area shall be utilized towards construction of Low Cost housing of the project so as to qualify as ‘Affordable Housing Project’ (AHP) and also to get infrastructure status in terms of the Notification F.No. 13/6/2009-INF dated 30.03.2017 issued by the Department of Economic Affairs (DEA Notification). In the instant case, entire 100% Land area is used towards construction of the residential flats/units, having carpet area of 60 Sq. Mtrs. or less and hence the said project would qualify as an ‘Affordable Housing Project’ (AHP).

The applicant contends that they are eligible for concessional rate of CGST/KGST @ 0.75% for construction of affordable residential apartments by a promoter in a Residential Real Estate Project (herein after referred to as RREP) as per Sl. No. 3(i) of the Notification No. 11/2017-Central Tax (Rate), dated 28th June, 2017 as amended by notification No.30/2018-Central Tax (Rate) dated 31st December, 2018 and further amended by Notification No.03/2019-Central Tax (Rate) dated 29th March, 2019, which commences on or after 1st April, 2019 and the promoter, therefore, would be charging CGST 0.75% (after deduction of 1/3 land cost on money consideration received).”

The Ld. AAR held that the concerned Entry at Sr. No 3 (i) of the Notification No. 03/2019 Central Tax (Rate) dated 29th March, 2019 applies to a promoter and not to a sub-contractor. Accordingly, the Ld. AAR held that the Applicant is not eligible for concessional rate as per the above entry.

10 M/s. NBCC (India) Ltd [AR No. order No. 1/ODISHA-AAAR/Appeal/2021-22 dated 15th March, 2022]

Allowable/non-allowable questions under Advance Ruling

The facts are that the Appellant herein, i.e. M/s. NBCC (India) Ltd. has applied for determination of the nature of the transaction and applicable rate to the Odisha AAR. The Ld. AAR held the activity of Appellant to construct the IIT Bhubaneswar campus on a turnkey basis as not amounting to a works contract and therefore not eligible under notification 11/2017- Central Tax (Rate) dated 28th June, 2017.

Against the above AR order, appeal was filed before Ld. AAAR. The Ld. AAAR passed the order dated 19th March, 2021. The main issue i.e., the nature of activity, was held to be a works contract, i.e. service and also held that the transactions are eligible under Sr. No. 3 (vi) of Notification no. 11/2017- Central Tax (Rate) dated 28th June, 2017. However, the Appellant felt that certain issues are still not clear from the above appeal order dated 19th March, 2021. Therefore, the Appellant filed one more AR application before Ld. AAR raising six questions. The Ld. AAR did not entertain the application on the ground that it is not maintainable u/s 97(2) of the CGST Act vide order dated 12th November, 2021. Against the above AR order, the Appellant filed an appeal before the Ld. AAAR. After hearing, the Ld. AAAR reproduced the six questions and also replied on the same. The questions and answers of the Ld. AAAR is given below:

“(a) Whether the classification and rate of taxes so determined by the Appellate Authority for Advance Ruling in its order no. 02/ODISHAAAAR/Appeal/2021 dated 19.03.2021 would be applicable to the entire value of the works contract executed between the applicant and IIT Bhubaneswar vide agreement dated 02.05.2016?

Ans: Yes. The tax rate determined in the appeal order will apply to entire works contract value.

(b) Whether the value of supplies taxable under GST, on or after 01.07.2017 would be liable to the tax rate of 12% vide clause 3(vi) (b) of the rate notification 11/2017 dated 28.06.2017 made effective from 01.07.2017 i.e., appointed date under GST laws?

Ans: Yes, from appointed date.

(c) As M/s. NBCC (INDIA) Limited, Bhubaneswar, prior to pronouncement of the ruling have paid 18% of tax on its invoices raised to IIT-Bhubaneswar, whether the taxes to the extent of 6% (18% paid- 12% as per order) become taxes paid over and above the liability to pay within the four corners of law and can be regarded as tax in excess?

Ans: Confirming decision of the Ld. AAR, held that the question is not maintainable.

(d) Whether the excess tax so paid would be eligible to be refunded under Section 54 of Central Goods & Service Tax Act, 2017?

Ans: Confirming decision of the Ld. AAR, held that the question is not maintainable.

(e) What would be the proper procedure under GST provisions for claiming the excess amount so paid?

Ans: Confirming decision of the Ld. AAR, held that the question is not maintainable.

(f) Whether the effective date of applicability of the rate of tax of 12% in place of 18% is applicable prospectively or retrospectively for refund purpose?”

Ans: In this regard, the Ld. AAAR replied as under:

“In this regard, we have the considerate view that unless a specific effective date is mentioned in a notification the date from which rate of tax is applicable is the date of issuance of such a notification. The notification No. 11/2017 CT(R) dated 28-06-2017 which prescribes the applicable tax rate of 12% on work contract service provided to IIT Bhubaneswar which is an educational institution is effective form the date of notification. The said notification being come into force with effect from 1st July 2017, we are of the view that the concessional rate of GST of 12% pertaining to the case of applicant is effective retrospectively.”

In above para, there is useful guidance about date of operation of notification.

Accordingly, appeal is disposed of.

11 The Joint Commissioner of State Tax, Shahabad Circle, Arrah [AAAR/01/2021 dated 7th December, 2021]

Rate of Tax on leasing right for minerals from 1st July, 2017 to 31st December, 2018

The issue involved in this Appeal was out of the AR order passed by the Ld. AAR. In the said AR order, it was held that the royalty in respect of the mining lease paid to the mining department of the State Government is liable to tax at the rate applicable to the mineral involved in the mining (in this case ‘sand’) up to 31st December, 2018. Accordingly, the rate held to be 5% as applicable to sand. From 1st January, 2019, the rate was held to be 18% as per Notification No. 27/2018 Central Tax (Rate) dated 31st December, 2018 read with main Notification No. 11/2017- Central Tax (Rate) dated 28th June, 2017.

Against the above ruling, the department filed an appeal before the Ld. AAAR. It was the contention of the Appellant that there is no actual transfer of right to use minerals, but it is a licence to explore the minerals. Therefore, it was contended that even for the period from 1st July, 2017 to 31st December, 2018, the rate will be 18% and not 5% as held by Ld. AAR.

The Ld. AAAR discussed the issue and considered the proceeding before the GST Council. About the nature of the transaction, the Ld. AAAR observed as under:

“The Council has clarified vide Para 9.3.1 of the impugned circular that service by way of grant of mineral exploration and mining rights most appropriately fall under service code 997337, i.e., “licensing services for the right to use minerals including its exploration and evaluation”. A careful consideration of the said classification would reveal that it refers to “licensing services”. In the matter at hand, what actually transpires between the Government and the Respondent is the grant of a license by the Government to the Respondent in pursuance whereof the Respondent is entitled to explore, dig for, extract sand from the riverbeds to sell the said sand (as opposed to using the sand). The Government grants a lease to the Respondent to explore/extract and sell sand instead of merely assigning the right to use the sand so explored or extracted.”

Considering the above position, the Ld. AAAR held that the rate on the concerned Royalty will be 18% for period up to 31st December, 2018 also and accordingly modified the AAR order.

12 M/s. Shri Vinayak Buildcon [Order No. RAJ/AAAR/06/2021-22 dated 25th February, 2022]

Completed transaction-maintainability of AR application

The issue involved was out of the order passed by Ld. AAR dated 1st October, 2021. The brief facts are that the Appellant has entered into an agreement for performing labour work with the builder from 1st April, 2019 till 31st March, 2021. The application for Advance Ruling in relation to such contract was filed on 6th July, 2021 and the Ld. AAR has delivered the AR order dated 1st October, 2021. Vide said order, the Ld. AAR held that the application for AR is not maintainable as the transaction was already completed. The Appellant has filed this appeal against the above AR order. In the appeal, the Appellant was arguing that the application is maintainable, more particularly when the work is continuing as the period of execution is extended till 16th October, 2022 vide order dated 3rd September, 2021 issued by the builder.

Regarding the scope of section 97, the Ld. AAAR observed that the ruling could be obtained in respect of the proposed activity or at the most ongoing activity. However, the ruling cannot be asked in relation to a completed transaction. In this case, when the application was filed, the original agreement period was over, and the extended period was not in existence. Therefore, the Ld. AAAR held that rejection of the application by the Ld. AAR was justified. The appeal is rejected.

BCAJ Admin

Service Tax

I. TRIBUNAL

3 Sporty Solutionz Pvt. Ltd. vs. Commissioner, CGST, Noida [2022 (58) G.S.T.L. 336 (Tri. – All.)] Date of order: 28th September, 2021

Service tax cannot be demanded where the service is provided outside the taxable territory and the place of service is outside India

FACTS
Appellant was engaged in providing the service of telecasting/broadcasting rights of sports events. Appellant had acquired the telecasting/broadcasting rights from M/s. Taj TV Ltd. (Mauritius), on payment of licence fee for broadcasting cricket matches between Zimbabwe and Bangladesh, held in Zimbabwe and Bangladesh. It further sub-licensed the broadcasting rights to other parties for consideration received in the form of license fees. Adjudicating Authority demanded tax on Reverse Charge Mechanism (RCM) basis by categorising the service under ‘Commercial Exploitation of Rights of Sporting Events’ which would qualify as import of service. The same stand was further taken by the Commissioner (Appeals). Being aggrieved by the order passed by Commissioner (Appeals) demanding tax, interest and penalty the Appellant preferred an appeal before this Hon’ble Tribunal.

HELD
The Tribunal observed that as per section 66B of Finance Act 1994, no service had been provided in the taxable territory by one person to another. Further, Rule 6 of the Place of Provision of Service Rules, 2012 states that in case of any cultural or sporting event, place of service should be the place where the event was held which is Zimbabwe. Hence, it was held, that services cannot be said to be imported into India. As a result, the appeal was allowed, and the Tribunal set aside the impugned order.

4 Astrazeneca India Pvt. Ltd. vs. Commissioner of Central Tax, Bangalore North [2022 (58) GSTL 339 (Tri. – Bang.)] Date of order: 16th August, 2021

A fresh refund application is not required to be filed at every stage of adjudication

FACTS
Appellant was engaged in the export of services and registered with the service tax Department. They filed a refund application on 17th July, 2007 for claiming a refund under Rule 5 of the CENVAT Credit Rules, 2004 for 2006-2007. A show cause notice (SCN) was issued to the Appellant proposing to deny the refund. Appellant filed a reply to SCN, after which refund claim was partially allowed. Appellant preferred an appeal before Commissioner (Appeals). The Commissioner (Appeals) allowed a certain portion of such rejected refund claimed. Being aggrieved by the partial rejection of refund, the Appellant preferred an appeal before Tribunal, wherein the Tribunal allowed the appeal and set aside the order rejecting the refund claim. Thereafter, the decision of the Tribunal was not challenged by the Department. After three months of the decision of the Tribunal, the Appellant filed a letter dated 21st February, 2017 and requested the Department to grant a refund. However, Assistant Commissioner asked the Appellant to file a fresh refund application. The Appellant submitted such fresh application on 15th July, 2019. Department rejected the refund claim filed on 23rd November, 2019 on the ground of limitation, stating that the refund application was not filed within one year from the date of receipt of the order. Commissioner (Appeals) upheld the decision of the Original Authority. Being aggrieved by such rejection, the Appellant preferred an appeal before the Hon’ble Tribunal.

HELD
Tribunal held that refund application need not be filed at every stage of the adjudication process. Further, relevant date to file refund application as per section 11B(2) of Central Excise Act, 1944 applies only to the first application. Consequently, the order rejecting refund was set aside, and refund was granted along with interest.

5 Syndicate Bank vs. Commissioner of Central Excise, Mangalore [2022 (58) GSTL 440 (Tri. – Bang.)] Date of order: 18th February, 2020

CENVAT credit cannot be denied by an order for a ground that was not raised in SCN

FACTS
Appellant was engaged in providing banking and financial services, business auxiliary services, services of renting of immovable properties, etc. On verifying the ST-3 Returns, the Department observed that the Appellant had wrongfully utilised CENVAT credit. Thus, a show cause notice (SCN) was issued on the ground that proper documentation and records were not maintained. However, the order was passed on a different ground that input services were not directly or indirectly related to output services provided by Appellant. Being aggrieved by the denial of CENVAT credit, Appellant preferred this appeal before the Hon’ble Tribunal.

HELD
It was held by Hon’ble Tribunal that SCN was issued on the ground that the Appellant did not maintain proper documentation and accounts under Rule 9 of the CENVAT Credit Rules, 2004. However, order was passed on a different ground, i.e. absence of correlation between input service and output service. Hence, by denying the CENVAT credit, the order had travelled beyond the scope of SCN, and hence it was set aside.

6 Quest Engineers & Consultants Pvt. Ltd. vs. Commissioner, CGST & C. EX., Allahabad [2022 (58) GSTL 345 (Tri. – All.)] Date of order: 28th September, 2021

Form 26AS of Income Tax cannot form the basis for issuing show cause notice and determining taxable turnover under service tax

FACTS
Appellant was engaged in providing ‘Consulting Engineer Service’. A show cause notice was issued based on Form 26AS, alleging that the Appellant had suppressed the taxable value of consulting engineer services. Accordingly, service tax was demanded along with interest and penalty. Also, the extended period of limitation was invoked by stating suppression of facts by the Appellant would have gone unnoticed if Department would not have conducted the enquiry. Commissioner upheld the decision of adjudicating authority. Being aggrieved by the same, the Appellant preferred an appeal before the Hon’ble Tribunal.

HELD
Tribunal held that Form 26AS is not a statutory document to determine the value of taxable service. Also, Appellant was registered and regularly filing returns and paying taxes. Therefore, the allegation of suppression of facts for invoking extended period was not maintainable.

7 Gujarat Mineral Development Corporation Ltd. vs. Commr. of C. EX. & S. T., Vadodara-II [2022 (58) GSTL 49 (Tri.-Ahmd.)] Date of order: 6th October, 2021

CENVAT credit cannot be denied where exempted products were generated unavoidably as by-product along with the main product

FACTS
Appellant was engaged in outsourcing contracts for excavation of lignite. During the mining process, silica sand and ball clay were excavated, which was unavoidably generated along with the main product, lignite. Department demanded the reversal of CENVAT credit under Rule 6 of CENVAT Credit Rules, 2004 to the extent of silica sand and ball clay, as they were exempted from service tax. Appellant was of the view that both these products namely silica sand, and ball clay were by-products and therefore, no CENVAT credit reversal was required. However, the Respondent rejected the said claim. Being aggrieved by such rejection, the Appellant preferred an appeal before the Tribunal.

HELD
Tribunal held that the main contract was for mining lignite, and while doing so, the by-products were unavoidably generated, namely silica sand and ball clay. Hence, CENVAT credit cannot be denied or varied on any input/input services contained in any by-product. Thus, no demand under Rule 6 of CENVAT Credit Rules, 2004 was sustained, and the impugned order was set aside by allowing the appeal.

BCAJ Admin

GOODS AND SERVICES TAX (GST)

I. HIGH COURT

9 OPC Assets Solutions Pvt. Ltd. vs. State of Tripura [2022 (58) GSTL 44 (Tripura)] Date of order: 31st August, 2021

Show Cause Notice issued in a printed blank format seeking to cancel GST registration without specifying non-compliance of a specific provision is violative of minimum requirement of natural justice

FACTS
Petitioner, registered under the Companies Act, was engaged in the business of providing goods on a rental basis to its customer across the country, including in Tripura. Petitioner had taken a premise on lease (which was periodically renewed). Later, a new premise was taken on rent. The Petitioner received a Show Cause Notice (SCN) in a printed blank format without mentioning any specific non-compliance. The Petitioner, in its response to the SCN, prayed for revocation for cancellation of registration. However, an order was passed cancelling the registration w.e.f. 1st July, 2017 and demanded Central Tax, State Tax and Integrated Tax. Being aggrieved by the order cancelling registration, the Petitioner preferred a writ petition before Hon’ble High Court.

HELD
The Hon’ble Court referring to its judgement of the Division Bench in Dayamay Enterprise vs. State of Tripura dated 22nd December, 2021 [W.P. (C) No. 89 of 2021], held that notice issued without any specific reasons for non-compliance is violative of basic principles of natural justice. Further, the order passed by Respondent was based on legal issues which were not relevant to the case on hand. Thus, the order cancelling registration was set aside, and the petition was allowed.

10 Balachandran Iyyadurai vs. Commissioner (Appeals)-V [2022-TIOL-343-HC-Kerala-GST] Date of order: 11th February, 2022

Hyper-technical approach of appellate authority during pandemic situation is incorrect-Appeal restored on conditions

FACTS
Petitioner preferred an appeal against an adverse order issued u/s 129 of CGST Act, 2017. Respondent had pointed out certain defects to the Petitioner and asked to cure them in seven days. The Petitioner could not rectify the defects for about ten days, and hence the appeal got dismissed. Petitioner submitted that the Respondent adopted a hyper-technical approach by dismissing the appeal for a lapse of three days (beyond the time permitted), and more so during the pandemic when the Supreme Court extended the limitation period considering the extraordinary situation (so that litigants were not prevented from obtaining justice). Also, the Petitioner was willing to clear the defects.

HELD
The Court held a view that adopting a liberal approach, at least one more opportunity ought to be granted to Petitioner though he is bound to cure the defects. Accordingly, Respondent was directed to restore the appeal on a condition that Petitioner would rectify defects within 15 days of the receipt of this order failing which the Respondent would be free to proceed with the law.

11 M/s. Ganges International Pvt. Ltd. vs. A.C. of CGST & Central Excise, Puducherry & Others [2022-TIOL-325-HC-MAD-GST] Date of order: 22nd February, 2022

Service tax paid during EA 2000 audit after 27/12/2017. Thus credit came into existence only post 01/07/2017. In a peculiar situation, the tax payer could not be rendered remediless. Hence not a cash refund but an application directed for reconsideration for carrying forward accrued credit in electronic credit ledger and dispose off applications u/s 142(3) of the CGST Act, 2017

FACTS
Petitioner was pointed out during EA 2000 audit that service tax remained to be paid under reverse charge on royalty payment made to the Government for services provided at two quarries. Hence about Rupees 26.88 lakh of service tax was paid in December 2017 for the period 1st April, 2016 to 30th June, 2017, by which time GST was already in force from 1st July, 2017. Since the Petitioner was unable to make an application under GST TRAN-1 (extended till 27th December, 2017) for transfer of credit to the electronic credit register, the Petitioner applied for a refund of the amount so paid under RCM, which was rejected for the reason of non-availability of provisions of law. Petitioner, therefore, was before High Court requesting that the route of section 142(3) of the CGST Act, 2017 is available for the Respondent. Hence, the order of refund rejection could be interfered with and set aside. Therefore, if not refund, at least credit be permitted to be transferred for service tax paid under RCM. Similar facts were presented in two other cases also.

The situation was peculiar wherein service tax paid was input tax, and the credit could be taken only under the erstwhile CENVAT Credit Rules. It was submitted for the Petitioner that transition provisions were contained in sections 140 to 142 of CGST Act, 2017 and sub-section (3) of section 142 enabled any person to file a claim of refund before on or after the appointed date of 1st July, 2017 and heavily relying on the same, it was pleaded that the refund had to be granted in accordance with the provisions of existing law that prevailed prior to 1st July, 2017 as it was an eligible input tax credit under CENVAT Credit Rules, 2004, i.e. the erstwhile law.

The Revenue’s submission inter alia was that the credit did not accrue as of 30th June, 2017 and the claim in TRAN-1 was not made on or before the extended period granted till 27th December, 2017. Further that section 142(3) did not relate to transfer of credit but only to refund in cash. However, the eligibility of the person claiming a refund needed to be satisfied wherein the amount claimed could not be considered CENVAT credit as in all the 3 cases, it was paid much after 30th June, 2017.

HELD
In this kind of special situation wherein the transitional provision came into effect from 1st July, 2017 and u/s 140(1) of the Act, the persons like the Petitioner could claim credit that accrued as of 30th June, 2017, whereas the credit emerged only subsequent thereto and hence the claim u/s 140(1) could not have been made. Hence the chance of making an application for refund or otherwise credit could not be denied. In para 42 of the judgment, the Court observed that except for section 142(3), no other eligible provision is available. Therefore considering it a dire necessity, there could be no impediment to invoking section 142(3) by invoking the ‘Doctrine of Necessity’. Discussing in detail the said doctrine and judicial precedents in relation thereto, it was observed that if it is not applied to the present situation, it will render the taxpayer remediless. Hence in the opinion of the Court, it is invokable. However, though the said provision only deals with a refund claim and the Petitioner had also made a refund claim, under the erstwhile law, the Petitioner was not eligible for refund, the Court remitted the matter back to the Respondent to reconsider the application of the Petitioner. It directed further to dispose it off u/s142(3) not for cash refund but to allow carrying forward the accrued credit of the service tax amount paid under RCM to the electronic credit ledger in the GST regime and to pass an order within six weeks of the receipt of this judgement after providing an opportunity of being heard. The Court observed this conclusion as a different route than section 140 and the only way to deal with the said peculiar situation.

BCAJ Admin

RECENT DEVELOPMENTS IN GST

I. NOTIFICATIONS

1. Appointment of Common Adjudicating Authority [Notification No. 02/2022 – Central Tax – dated 11th March, 2022.]: The Govt. of India has issued above notification whereby a common adjudicating authority for adjudicating SCN issued by DGGI under GST is nominated.

2. Brick Kilns [Notification No. 03/2022 – Central Tax – dated 31st March, 2022.]: Vide Notification no. 10/2019 Central Tax dated 7th March, 2019, the exemption from registration is granted to persons who are engaged in the exclusive supply of goods and whose aggregate turnover in the financial year does not exceed forty lakh rupees except ‘excluded categories’. For ‘excluded category’ there is a table. Now, such ‘excluded category’ is extended by the above notification. The persons dealing in fly ash bricks, bricks of fossil meals, building bricks and earthen or roofing tiles are included in the above ‘excluded category’ table. The change is effective from 1st April, 2022.

3. Brick Kilns [Notification No. 03/2022 – Central Tax – dated 31st March, 2022.]: Vide notification no. 14/2019 Central Tax dated 7th March, 2019, composition scheme u/s 10 is allowed to eligible registered person, whose aggregate turnover in the preceding financial year did not exceed one crore and fifty lakh rupees. However, there is an excluded list in the table. Now, the list in the table is extended and the categories mentioned in the above notification no. 03/2022 are also included for exclusion from the above composition scheme. The change is effective from 1st April, 2022.

4. Change in rate [Notification No. 01/2022 – Central Tax (Rate) dated 31st March, 2022 and Notification No. 01/2022- Integrated Tax (Rate) dated 31st March, 2022.]: By above notification, the rate of tax on above fly ash bricks, bricks of fossil meals, building bricks and earthen or roofing tiles etc. is made 6%/12% by removing the same from Schedule-I of the 2.5% rate. The change is effective from 1st April, 2022.

5. Special rates [Notification No. 02/2022 – Central Tax (Rate) dated 31st March, 2022 and Notification No. 02/2022- Integrated Tax (Rate) dated 31st March, 2022.]: For above Brick items i.e. fly ash bricks, bricks of fossil meals, building bricks and earthen or roofing tiles etc., the rate of 3% is prescribed for intra-state/inter-state supplies subject to restrictions about ITC. The change is effective from 1st April, 2022.

II. CIRCULARS

(a) Amendment to earlier circular [Circular No. 169/23/2022-GST dated 12th March, 2022.]: The CBIC has issued the above circular to amend earlier circular no. 31/05/2018-GST dated 9th February, 2018. The circular dated 9th February, 2018 was relating to clarification about ‘Proper Officer u/s 73 & 74 of the CGST Act’. Now, by an amendment more clarifications are given wherein the designated authorities are specified for adjudicating show cause notices issued by the officers of DGGI.

III. INSTRUCTIONS/ADVISORY

(a) The CBIC has released standard operating procedure (SOP) for scrutiny of returns for F.Y. 2017-18 and 2018-19 vide Instruction no.02/2022-GST dated 22nd March, 2022.

(b) Advisory is also issued about Restoration of Cancelled Registration based on Appellate order vide Registration Advisory No.07/2022 dated 23rd March, 2022.

IV. ADVANCE RULINGS

5 M/s. Kerala Books and Publication Society [AR No. KER/125/2021 dated 31st May, 2021]

Printing Services – Exempt/Non-exempt

The applicant is a society constituted by the Government of Kerala. It has its own printing press. The governing body of the society consists wholly of officers from the government. They print textbooks for the government. They also started printing lottery tickets for the government. In addition, they also started printing brochures, diaries, calendar etc. for the government and its allied other institutions and departments. Based on above facts, the following issues were raised before Ld. AAR for its ruling:

“a. Whether our following activities fall within the ambit of scope of ‘supply’ under GST?

(i) printing text books for supply by the State Government to its allied educational institutions.

(ii) printing of Lottery tickets for vending by the State Government to the general public.

(iii) printing of stationery items like calendars, Diaries etc. for supply by the State Government to its offices and other institutions.

b. Whether, even though if the said activity were to fall within the ambit of ‘supply’ under GST, are we eligible to avail the exemption from levy of GST under Notification No. 12/2017 Central Tax (Rate) dated 28.06.2017 as amended.

c. Whether, we are liable to be registered under GST, if our activity does not fall within the ambit of ‘supply’ or if we are exempted by Notification 12/2017 as amended?

d. Whether, we or our customer; i.e. Kerala Government are required to deduct TDS (under the GST provisions), if our activity does not fall within the ambit of supply or is exempted from tax liability under GST, even if we are required to be registered or are not registered under GST?”

The contention of the applicant was that they being government authorities/entity they are not supplier in view of section 7(2)(b). In other words, it was canvassed that the applicant is engaged in above activities as public authorities and hence excluded from section 7 which defines supplier.

In alternative, it was also argued that they are not liable in view of exemption as per entries at Sr. No. 3, 4 and 5 of notification no. 12/2017 Central Tax (Rate) dated 28th June, 2017, as amended.

The department argued that the applicant is covered within the scope of supply as per section 7 of CGST Act.

The ld. AAR examined the above issues in respect of exclusion from section 7. The ld. AAR held that since the applicant is not a government by itself nor its activities are notified to be exempt, it is not excluded from section-7 and hence section 7 applies to it. The activities are ‘supply’ as per section 7.

In respect of printing services of textbooks, it is observed by the Ld. AAR that such printing is integral to the function of the education and also covered by functions entrusted to a panchayat under Article 243G. Therefore, the service of printing of textbooks supplied to the State Government is held exempt as per Sr. No. 3 of the notification no. 12/2017 dated 28th June, 2017.

In respect of the service of printing of lottery tickets to the state government it is observed by the Ld. AAR that such services are directly not covered under the functions entrusted to a Panchayat under Article 243G or to a municipality under Article 243W of the Constitution, and hence not exempt under entries 3, 4 or 5 of notification no. 12/2017-Central Tax (Rate) dated 28th June, 2017. Accordingly, the activity is held liable to tax at 18% under entry 27(ii) of notification no. 11/2017- Central Tax (Rate) dated 28th June, 2017. Similarly, the supply of items like diaries and stationery items are held liable to tax at 18% under the above said entry. The supply of calendars is held liable to tax at 12% under entry 27(i) of notification no. 11/2017- Central Tax (Rate) dated 28th June, 2017.

Regarding the question raised about TDS, the ld. AAR held that, such liability is not on the applicant and therefore, the questions posed on above line are not maintainable before the ld. AAR. Therefore, no ruling is given on above issue.

6 M/s. Uralungal Labour Contract Co-Op Society Ltd. [AR No. KER/126/2021 dated 31st May, 2021]

Education Institution – Exempt/Non-exempt

The applicant is primarily engaged in construction of roads, bridges and other public infrastructure to government and other institutions. The applicant entered into an agreement with the Kerala Academy for Skills and Excellence (KASE), the State Skill Development Mission of the Government of Kerala for setting up and operation of Indian Institute of Infrastructure and Construction (IIIC). The question posed by the applicant is as under:

“In view of the Notification No. 12/2017-Central Tax (Rate) dated 28-06- 2017, we would like to get clarified as to whether the educational courses which are conducted in Indian Institute of Infrastructure and Construction (IIIC) fall under the taxable service or not?”

Applicant explained that the objective of IIIC is establishing the world class Skill Centre, a centre of excellence for imparting international quality skill to persons in the construction industry. The applicant is the operational partner of KASE. It is also affiliated with National Skill Development Corporation (NSDC) as a training partner for conducting various courses. The Government of Kerala by G.O.(P) No. 95/2019/LBR dated 24th October, 2019 of the Labour and Skills Department has declared that Indian Institute of Infrastructure and Construction, Chavara is a government owned institute, and the courses that are being conducted in the institute are approved by the Government. Accordingly, the activity was claimed to be exempt as ‘Educational Institution’. The department objected to the above proposal.

The ld. AAR referred to Entry 69 of the Notification no. 12/2017-Central Tax (Rate) dated 28th June, 2017 and reproduced the whole entry as under:

Sr. No.	Chapter, Section, Heading, Group or Service code (Tariff)	Description of services	Rate (per cent)	Condition
69	Heading 9992 or Heading 9983 or Heading 9991	Any services provided by- a) the National Skill Development Corporation set up by the Government of India b) Sector Skill Council approved by the National Skill Development Corporation. c) an assessment agency approved by the Sector Skill Council or the National skill Development Corporation	NIL	NIL
		(continued) d) a training partner approved by the National Skill Development Corporation or the Sector Skill Council, in relation to- (i) the National Skill Development Programme implemented by the National Skill Development Corporation; or (ii) a vocational skill development course under the National Skill Certification and Monetary Reward Scheme; or (iii) any other Scheme implemented by the National Skill Development Corporation.

Sr. No.

Chapter, Section,
Heading, Group or Service code (Tariff)

Description of services

Rate (per cent)

Condition

Heading 9992 or

Heading 9983 or

Heading 9991

Any
services provided by-

a)
the National Skill Development Corporation set up by the Government of India

b)
Sector Skill Council approved by the National Skill Development

Corporation.

c)
an assessment agency approved by the Sector Skill Council or the National
skill Development Corporation

NIL

(continued)

d)
a training partner approved by the National Skill Development Corporation or
the Sector Skill Council,

in
relation to-

(i)
the National Skill Development Programme implemented by the National Skill
Development Corporation; or

(ii)
a vocational skill development course under the National Skill Certification
and Monetary Reward Scheme; or

(iii)
any other Scheme implemented by the National Skill Development Corporation.

After analysis, the ld. AAR held that, the applicant is not covered by the above notification.

The ld. AAR examined the alternative argument that the courses conducted by IIIC are approved by the Government of Kerala and the activity is covered by Entry at Sr. No. 66 of the notification no. 12/2017-Central Tax (Rate) dated 28th June, 2017. The said entry is regarding services provided by educational institutions, etc.

On the basis of documents produced by the applicant, the ld. AAR found that IIIC is a government owned institute and the approval of the courses conducted by IIIC by the Government of Kerala, IIIC has attained the status of an institution providing services by way of education as a part of a curriculum for obtaining a qualification recognized by law. Consequently, IIIC qualifies to be classified as an ‘educational institution’ as defined under sub-clause (ii) of clause (y) of Paragraph 2 of the Notification No. 12/2017 CT (Rate) dated 28th June, 2017. Therefore, the courses conducted in IIIC is exempted from GST as per entry at Sl. No. 66 of Notification No. 12/2017 Central Tax (Rate) dated 28th June, 2017. Accordingly, the Ld. AAR ruled that the applicant is exempt under entry 66 referred to above.

7 M/s. Dishman Carbogem Amics Ltd. [AR No. GUJ/GAAR/R/22/2021 dated 9th July, 2021]

Canteen Facility – Whether Liable?

The Applicant is a company running a factory. It has canteen facilities for its employees. The facility is provided as per requirements of section 46 of the Factories Act, 1948. The facts narrated by the Ld. AAR are as under:

“They are having two manufacturing facility at Bavla and Naroda in Ahmedabad-Gujarat and have more than 250 employees at both the manufacturing location. Therefore, in terms of the Factories Act, 1948, it is mandatory for the company to provide canteen facilities to the employee.

They have contract with canteen contractor and agreed to pay him the fix per plate amount as per agreement. As per company policy, applicant provide the food facility to their employees and recovered of nominal amount from the employee and the said recovered amount is paid to canteen contractor. For more clarity they have given the following illustration.

Illustration: The company (Dishman) and canteen contractor (XYZ) have agreed to provide a dish @ 60/- per plate and the contractor charges the GST on such supply. The company pays Rs. 40/- directly to contractor and Rs. 20 recovered from employees and pay to the contractor. The company has not availed GST credit on such supply.”

Based on above facts, the ld. AAR observed that the applicant does not retain with himself any profit margin in this activity of collecting employees’ portion of canteen charges. Therefore, this activity is without consideration. Accordingly, the ld. AAR ruled that the amount representing employee’s portion of canteen charges which is collected by the applicant and paid to the canteen service provider is not liable to GST.

BCAJ Admin

SERVICE TAX

I. HIGH COURT

1 Linde Engineering India Pvt. Ltd. vs. Union of India
[2022 (57) GSTL 358 (Guj.)]
Date of order: 16th January, 2020

Services provided to foreign holding company would be qualified as export of service since foreign holding company outside India cannot be treated merely as an establishment of distinct person in accordance with item (b) Explanation 3 of Clause (44) of Section 65B of Finance Act, 1994

FACTS
Petitioner, a private limited company, was engaged in providing consulting engineering services and works contract services to various entities located in and outside India, including its holding company Linde AG, Germany and had claimed the benefit of export of services. Audit objection was raised where it was questioned that Linde Group Companies would be treated as mere establishment of petitioner and the services rendered to them would not fall under ‘export of service’ under Rule 6A of Service Tax Rules and consequently, fall under ‘exempted service’ under Rule 2(e) of CENVAT Credit Rules, 2004. The petitioner submitted a satisfactory response with no further inquiry. Thereafter Show Cause Notice was issued for recovery of tax for the period 2012-13 to 2016-17. Being aggrieved by the aforesaid show cause notice, petitioner preferred a writ before Hon’ble High Court.

HELD
It was held that services rendered by an Indian subsidiary company to its foreign holding company in non-taxable territory would be considered as export of service because foreign holding company cannot be termed as establishment of distinct person as per item (b) Explanation 3 of Clause (44) of Section 65B of Finance Act, 1994.

II. TRIBUNAL

2 Nasir Mohd. Rawat Contractor vs. Commr. of C. EX & S.T., Shimla
[2022 (57) GSTL 382 (Tri. – Chan.)]
Date of order: 19th August, 2021

Amount paid during the course of investigation is merely a deposit which cannot be appropriated towards service tax without issuing a valid show cause notice and hence the same is refundable

FACTS
Appellant was engaged in providing ‘Manpower Recruitment Supply Agency’ and ‘Works Contract Services’ in Himachal Pradesh. During the course of investigation, Rs. 13 lakhs were deposited. Thereafter neither the said amount was appropriated, nor was any show-cause notice issued to the appellant. Further, the appellant filed a refund claim of Rs. 7,41,939, which was rejected by the Adjudicating Authority, stating that the appellant was liable for Service Tax. Commissioner (Appeals) also reiterated that service tax was appropriated u/s 73(3) of Finance Act, 1994, and therefore, refund claim was not maintainable. Being aggrieved by the order rejecting refund, the appellant preferred an appeal before the Hon’ble Tribunal.

HELD
Tribunal held that since neither show cause notice was issued for appropriation of the amount nor for rejection of the refund claim, the order rejecting refund claim was bad in law, and the same was against the provisions of the Finance Act, 1994 as well as Central Excise Act, 1994. Hence it was without the authority of law, and the appellant was entitled for refund claim u/s 11B of the Central Excise Act read with Section 83 of the Finance Act, 1994. The appeal was thus allowed.

BCAJ Admin

Service Tax

I. TRIBUNAL

21 Shri S. Sakhtikumar vs. The Commissioner of GST and Central Excise [2022-TIOL-139-CESTAT-MAD] Date of order: 2nd December, 2021

Service tax paid by mistake cannot be barred by limitation and ought to be refunded

FACTS
Appellant had taken on lease the maintenance of toilets at the Central Bus Stand and the New Bus Stand at Tirunelveli in 2017. It was noticed that Tirunelveli Municipal Corporation had collected service tax from the appellant for the above services and paid the same in the Government treasury. Subsequently, it was noticed that the said service forming a part of Article 243W is exempted from payment of service tax. A refund claim was filed with respect to the above in 2019. A show-cause notice was issued rejecting the claim on the ground of time bar.

HELD
The Tribunal relied on the decision in the case of M/s 3E Infotech vs. CESTAT, Chennai [2018(18) GSTL 40 (Mad.)] which is binding and where it is laid down that when service tax is paid by mistake a claim for refund cannot be barred by limitation, merely because the period of limitation under section 11B had expired. Such a position would be contrary to the law laid down by the Hon’ble Apex Court, and therefore we have no hesitation in holding that the claim of the Assessee cannot be barred by limitation and ought to be refunded. In view of the above decision of the Hon’ble jurisdictional High Court, the rejection of refund is unsustainable. Hence, the impugned order of the First Appellate Authority is set aside.

[Note: Readers may also refer to a similar decision in the case of Ishwar Metal Industries vs. CCE & CGST dated 28th January, 2022 reported at [2022-TIOL-133-CESTAT-DEL]]

22 V.V. Minerals vs. Commissioner of GST & Central Excise, Madurai [2022 (56) GSTL 167 (Tri. – Chennai)] Date of order: 4th June, 2021

Refund of service tax paid by the exporter cannot be denied merely because the supplier of goods had violated the provision of local law

FACTS
Appellant is a 100% Export Oriented Unit engaged in the manufacture and export of ‘Garnet’ and ‘Super Garnet’. They had filed a refund claim of service tax paid for May 2016 to December 2016. It came to the knowledge of the department from the District Level Committee of Tirunelveli District about illegal mining of beach sand and unlawful transportation thereof. Respondents were of the view that Appellant was not eligible for the refunds claimed, inasmuch as, the sands had been exported by way of illegal mining and unlawful transportation. The Commissioner (Appeals) also rejected the refund claim of the Appellant. Being aggrieved by the order rejecting refund, the Appellant preferred this appeal before the Hon’ble Tribunal. Appellant submitted before the Hon’ble Tribunal that allegation of illegal mining was against M/s. V. V. Minerals [Mines], whereas the export is made by M/s. V. V. Minerals [100% EOU], which is a different entity from M/s. V. V. Minerals [Mines]. Appellant procures minerals from other licence holders and exports the goods after further processing. Since Appellant does not have any mining lease, the recommendation by District Level Committee is not applicable to them.

HELD
It was observed that merely because M/s. V.V. Minerals [Mines], i.e. supplier of goods, has committed violation of a local law, M/s. V. V. Minerals [100% EOU], i.e. the exporter who procured goods cannot be put into adverse situations, especially when there was no evidence with respect to abetment or collusion on the part of the exporter. Since all the conditions specified in Notification No. 41/2012-ST, which are necessary for a refund of service tax paid, are fulfilled, the Appellant is eligible for the refund of service tax, and the order rejecting refund was set aside.

23 Vandana Global Ltd. vs. Commr. of CGST, Central Excise & Customs, Raipur [2022 (56) GSTL 310 (Tri. – Delhi)] Date of order: 23rd June, 2021

Extended period of limitation cannot be invoked by alleging suppression of availment of CENVAT credit on ineligible services, where regular audit was conducted by the Department

FACTS
Appellant was engaged in the manufacture of Sponge Iron, M.S Billets and ‘Dolachar’. During the audit by Auditor General Raipur, it was noticed that during April 2012 to March 2016, CENVAT credit was availed on various input services such as membership fees, construction services, rent-a-cab services, general insurance of vehicles, repair services, etc. that were not ‘input services’. Assistant Commissioner disallowed CENVAT credit availed on car insurance, repair and maintenance of motor vehicles. Further, Commissioner Appeals also disallowed the CENVAT credit and being aggrieved by such disallowance; Appellant preferred an appeal before the Tribunal.

HELD
Tribunal held that since the records of Appellant was regularly audited by the Audit Authority, department had knowledge about the affairs including availment of CENVAT credit. As a result, invocation of the extended period of limitation was not available to the Revenue, and hence the impugned order was set aside.

24 Microsoft India (R&D) Pvt. Ltd. vs. Commr. of C. EX. & S.T., Bangalore [2022 (56) GSTL 29 (Tri-Bang.)] Date of order: 26th July, 2021

Department is estopped from taking a contrary view than the view taken for the previous period unless the order passed for the prior period is revised by the competent authority

FACTS
Appellant was engaged in providing customer care and product support services in relation to Microsoft Software products to the customers of Microsoft located in India and abroad. Appellant provides these services through its Global Technical Support Centre (GTSC), a 100% Export Oriented Unit located in Bangalore. The major portion of Appellant’s turnover qualifies as export of services, which results in accumulation of CENVAT credit on various input services. Appellant had been regularly filing refund claims of such accumulated credit. For the period April 2010 to March 2011, Appellant was denied CENVAT credit availed on event management service, outdoor catering, mandap service and rent-a-cab service mainly on the two grounds: firstly, there was no nexus between input services and output services and secondly, that absence of such input services will not directly have an impact on the quality and efficiency of its output services. Being aggrieved by the order of Commissioner, the Appellant preferred an appeal before the Honourable Tribunal.

HELD
It was held that the Appellant had given full justification and established nexus of all the above-mentioned services. Further, Appellant’s refund applications for the previous periods for the same input services were allowed. Tribunal pointed out the Principal of Consistency and held that once the nexus has been accepted by the department for the previous period, such nexus cannot be denied for a subsequent period. There cannot be two different yardsticks; one for allowing refund and another for deciding the eligibility of CENVAT credit. In view of this, the impugned order denying CENVAT credit was set aside, and the appeal was allowed.

25 Commissioner of CGST and Central Excise vs. M/s Ethics Infra Development Pvt. Ltd. [2022-TIOL-97-CESTAT-MUM] Date of order: 21st December, 2021

Service tax is not leviable on the activity of construction of residential complex to existing members as there is an absence of sale – Also when the service tax is discharged on the gross consideration received from new buyers there is no question of levy of service tax from the existing members

FACTS
Appellant is providing taxable service of re-development of residential complex. It was observed during audit that the assessee did not discharge service tax on services of construction of residential complex services rendered by them towards the flats allocated to existing members. It was noted that from 1st July, 2012 these services had become classifiable as ‘declared service’ under section 66E(b) of the Finance Act, 1994. Its valuation method also had been highlighted vide CBEC Circular no. 151/2/2012-ST dated 10th February, 2012 read with High-Level Committee clarification issued vide Board’s letter F. No. 354/311/2015-TRU dated 20th January, 2016. The adjudicating authority observed that flats given to existing members cannot be considered a sale and hence is outside the ambit of service tax. It was noted that the entire income in the present transaction had been generated from the sale of flats to customers other than the existing society members because those members were provided flats free of cost. Accordingly, the demand was set aside. Being aggrieved by the said order, revenue filed an appeal.

HELD
The Tribunal primarily noted that in the present case, the respondent had discharged the complete service tax liability on the consideration received by him for providing the taxable services to the buyers of the flats that the respondent could sell in an open market. Further, it was also observed that there was no material change in the provisions of law relating to construction service in the negative list based taxation. Hence the Circulars relied upon by the adjudicating authority were applicable. Once the tax liability was discharged on the consideration received from the service in respect of flats to new buyers, the demand of service tax for the flats handed over to the existing members of the societies without any consideration cannot be sustained. Reliance was placed in the case of Vasantha Green Projects [2019 (20) GSTL 568 (THyd)]. The Appeal of the revenue was accordingly dismissed.

BCAJ Admin

GOODS AND SERVICES TAX (GST)

I. HIGH COURT

36 R.K. Ganapathy Chettiar vs. Assistant Commissioner (ST), Kangeyam [2022 (56) GSTL 129 (Mad.)] Date of order: 11th August, 2021

Section 17(5)(h) of CGST Act – Input Tax Credit reversal is not required on invisible loss of inputs which automatically occurs during the normal course of manufacturing process

FACTS
Petitioner was engaged in the manufacture of ghee. The process of manufacturing invariably results in invisible loss of input through evaporation, creation of by-products etc. Department had rejected the Input Tax Credit to the extent of such loss by invoking section 17(5)(h) of the Central Goods and Service Tax Act, 2017 which talks about blocked credit in respect of goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples and asked Petitioner for reversal of such Input Tax Credit. Being aggrieved by the assessment order passed by Department, the Petitioner filed a petition before the Hon’ble High Court of Madras.

HELD
Hon’ble High Court strongly relied upon the judgement of A.R.S. Steels and Alloy International Pvt. Ltd. 2021 (52) GSTL 402 and held that the cases covered by section 17(5)(h) of CGST Act, 2017 indicate the loss of inputs that are quantifiable, involve external factors or compulsion. It does not cover the loss of inputs that arises from the consumption process, which is inherent to the process of manufacturing itself. Thus, reversal of Input Tax Credit is not contemplated under section 17(5)(h) of CGST Act, 2017 on the invisible loss of inputs during the manufacture of Ghee.

37 Ali Cotton Mill vs. Appellate Joint Commissioner (ST) [2022 (56) GSTL 270 (A.P.)] Date of order: 11th February, 2021

Rule 108 of Andhra Pradesh Goods and Services Tax Rules, 2017 – Appeal can be filed either electronically or manually

FACTS
Petitioner had first attempted to file an appeal electronically under Rule 108 of Andhra Pradesh Goods and Service Tax Rules, 2017. However, the same was not received by the department due to some technical glitches. As a result, the petitioner filed the same manually and obtained acknowledgement. Approximately 11 months later, Respondent rejected the appeal on the sole ground that the appeal was not filed electronically. Being aggrieved by such rejection, the petitioner preferred the writ petition.

HELD
It was held that when substantial justice is pitted against technical considerations, it is always necessary to prefer the ends of justice. Rule 108(1) of Andhra Pradesh Goods and Service Tax Rules, 2017 prescribes that an appeal can be filed either electronically or otherwise as may be notified by the Chief Commissioner. So, till the time Chief Commissioner specifies any particular mode of filing, the concerned appellant can choose to file the appeal either electronically or otherwise, i.e. manually. The view that, till the time Chief Commissioner specifies any other mode of filing, the appellant has to file an appeal electronically is contrary to the purport of Rule 108(1) of Andhra Pradesh Goods and Service Tax Rules, 2017. Thus, the petition was allowed, and the respondent was directed to receive the appeal, process the same and issue suitable check memos for compliance, in which case Petitioner shall comply the same within the prescribed time and resubmit the appeal either electronically or manually.

II. AUTHORITY FOR ADVANCE RULING

38 Kapil Sons [2022-TIOL-26-AAR-GST] Date of order: 8th February, 2022 [AAR-Maharashtra]

Drilling and blasting works include both services as well as goods in the form of explosives and tools and thus the service is classified as a works contract

FACTS
In relation to the work awarded under EPC Agreement, the main contractor engaged the applicant for a sub-contracting arrangement for the construction of tunnel by drilling and blasting method and issued a work order for subject work. Applicant seeks an advance ruling as to whether the activity carried out shall be classified as supply of goods or services or a composite supply of ‘Works Contract’ under Entry no. 3(iv) of 11/2017-Central Tax (Rate) and taxable @12%.

HELD
The Authority noted that the impugned supply undertaken by the applicant as per the Work Order is ‘drilling and blasting including all tools, materials, explosive vans etc. complete for approach roads and Tunnel Works’. There is definitely involvement of supply of services in the form of drilling and blasting and clearing of rubble etc. Further, to perform such services there is requirement of goods which include explosives. The service of drilling and blasting cannot be conducted without the use of explosives and, therefore, there is an element of composite supply. Thus the said supply will be covered under Entry 3(iv) of Notification No. 11/2017-Central Tax (Rate) dated 28th June, 2017 and is taxable @12%.

39 Rakesh Kumar Gupta [2022-TIOL-23-AAR-GST] Date of order: 6th January, 2022 [AAR-Madhya Pradesh]

Cash discount and incentives offered by supplier without reversing their output tax liability does not require proportionate reversal of credit – Credit is fully allowed on the basis of the original invoice

FACTS
The applicant is a rice dealer. The supplier offers an incentive for early payment by offering a cash discount if payment is made before the due date or within certain days. The credit note of cash discount is issued without considering GST on such discount. The supplier does not reverse its output liability of GST, and likewise, the applicant does not reverse its input tax credit on such commercial credit notes issued by the supplier. The question before the authority is whether input tax credit can be fully availed or proportionate reversal is required with respect to the cash discount received? And, whether GST is applicable on the cash discount offered by the supplier as an output supply?

HELD
The Authority noted that as per section 15(3), for the cases where supply has already been effected, and discount given after supply shall be in terms of prior agreement before effecting the supply of goods and specifically linked to relevant invoices, then such discount shall not be included in the value of supply and input tax credit has to be reversed by the receiver. In the applicant’s case, the supplier of goods is issuing a commercial credit note for cash discount for early payment and quantity discount after post supply without adjustment of GST. As per the applicant’s submission, the Authority observed that the commercial credit notes issued by the supplier/Principal Company do not satisfy the conditions prescribed in sub-section (3) of section 15 of the CGST/SGST Act; the supplier is not eligible to reduce the original tax liability. As the supplier of the goods is not reducing the original tax liability, the applicant will be eligible to avail the credit of the tax paid as per the invoice of the supplier subject to payment of the value of supply as reduced by the commercial credit notes plus the amount of original tax charged. In other words, the applicant will not be required to reverse proportionate input tax credit. Similarly, target incentives offered which is not as per the agreement and where the supplier has not reduced its output tax liability, proportionate credit reversal is not required. Further, the credit note issued is in the form of a discount and therefore cannot be considered as an output supply.

BCAJ Admin

RECENT DEVELOPMENTS IN GST

I. BUDGET 2022 – PROPOSALS

The Hon’ble Union Finance Minister has presented budget proposals in Parliament for 2022-2023 on 1st February, 2022. Some of the important changes proposed in GST law may be noted as follows:

1. Insertion of a new sub-clause (ba) in section 16(2) of the CGST Act, 2017 to provide that ITC for supply can be availed only if such credit has not been restricted in the details communicated to the taxpayer u/s 38.

2. In Clause (c) to Section 16(2), reference to Section 43A is deleted as the said Section has been omitted.

3. In Section 16(4), the time limit for availing the credit of any invoice pertaining to a particular Financial Year is extended from the due date of September Return to 30th November, following the end of the financial year.

4. The proper officer may cancel the Registration of a Composition person under Section 29(2)(b) if the said person has not furnished returns for a financial year beyond three months from the due date of furnishing the said return.

5. The proper officer may cancel the Registration of a registered person other than a composition person under Section 29(2)(c) if the said person has not furnished returns for a financial year for such period as may be prescribed instead of the six months provided earlier.

6. The effect of the GST Credit Note, pertaining to invoices of a particular financial year, can be given in the returns up to 30th November following the financial year. Time has been extended from the due date of September return to 30th November.

7. Section 37 relating to furnishing of outward supplies is amended, and reference to Section 42 and 43
relating to mismatch is removed as said sections are omitted.

8. Section 37(4) is inserted whereby a registered person may not be allowed to furnish details of outward supplies in GSTR-1 if the details of outward supplies for any of previous tax periods have not been furnished.

9. Entire Section 38 has been substituted with new Section 38. Basically, new Section 38 provides for communication of the details of inward supplies and input tax credit to the recipient. A system-generated statement shall be communicated to the recipient based on which ITC shall be availed. The system generated statement shall also give details of restrictions of ITC on account of time limit for availing ITC, suppliers who have: (a) defaulted in payment of tax and default continues for the prescribed period; (b) output tax as per GSTR–1 exceeds the output tax paid in GSTR–3B; (c) supplier has availed ITC in excess of the ITC available to Supplier in Section 38(2)(a); (d) supplier has defaulted in making payment of tax under Section 49(12); and (e) ITC from such class of persons as may be prescribed.

10. Time Limit for furnishing GSTR 3B by a non-resident registered person is reduced from 20 days to 13 days after the end of a calendar month.

11. First Proviso to Section 39(7) is substituted to provide an additional method of payment in lieu of
the Self-assessment tax dues in such manner and subject to such conditions and restrictions as may be prescribed.

12. As per amended Section 39(9), any omission or correction in GSTR – 3B shall be corrected in GSTR 3B up to 30th November following the end of the Financial Year.

13. Section 41 has been substituted entirely. As per substituted Section 41, proviso specifically provides that the recipient may re-avail the ITC when paid by the supplier in the manner as may be prescribed.

14. Sections 42, 43 and 43A are omitted.

15. Necessary amendments proposed to be carried out in Section 47 and 48 for omitting reference to ‘inward return’ and Section 38.

16. Sub-Section (12) to Section 49 has been inserted, which provides power to restrict usage of ITC for making payment of Output liability at the prescribed percentage as may be recommended by GST Council.

17. Retrospective amendment carried out to Section 50(3) w.e.f. 1st July 2017 to provide that interest shall be applicable only on ITC ‘availed and utilised’.

18. Time limit in Section 52(6) extended to 30th November following the Financial Year.

19. As per amended Section 54(10), now any refund can be withheld till default has been cleared by the Registered Person.

20. Necessary retrospective amendments have been brought in Notifications pursuant to Section 38, Section 50, etc.

II. ADVANCE RULINGS

(A) Agent vis-à-vis Transportation

M/s Dheeraj Goyal (AAR No. 08/AP/GST/2021 dated 18th January, 2021)

The applicant in the present case acts as an intermediary between truck owners and good transport agencies. The applicant arranges truck from trunk owner to Goods Transport Agencies (GTA). The applicant submits that he is not exempt under transportation of goods nor he is GTA as he does not issue consignment notes. He submits that he is a commission agent. He receives commission from the truck owner.

The commission is received by deducting the same from money to be passed on to truck owner after receipt of same from GTA, or if GTA directly pays to truck owner, the truck owner pays to him. Under the above facts, the issue raised was that the applicant should be liable on the amount retained by him and not on the gross amount.

The learned AAR held the applicant as intermediary as per provision of section 2(13) of IGST Act and ‘Agent’ as per the definition in section 2(5) of CGST Act.

In light of above the AAR reproduced question and gave answer as under:

‘Question: Whether the applicant will be classified under transportation of goods by road, which is exempt or commission agents or goods transport agencies and under what HSN code his services are classified and what will be the turnover?
Answer: The applicant will be classified as ‘Agent’ providing supporting service for transportation of goods under heading 9967(ii) as per the Notification No. 11/2017 Central Tax (Rate) and the amount received by him will form part of his turnover.’

(B) Basis for working of ratio for transfer of ITC in case of Demerger

M/s. IBM India Private Limited (KAR ADRG 47/2021 dated 30th July, 2021)

The applicant is a private limited company and has intended to separate its Managed Infrastructure services (‘MIS’) unit into a new company. Pursuant to such transfer, the applicant is to carry out the remaining business.

The applicant has sought an advance ruling in respect of the following questions:

‘i. Whether the value of assets which are outside the purview of GST is required to be included in the value of assets for the purpose of apportionment towards transfer of input tax credit in case of de-merger in terms of Section 18(3) of CGST Act, 2017 read with Rule 41(1) of CGST Rules, 2017?

ii. If the answer to Question (i) is yes, whether following assets are required to be considered for the purpose of determining the value of assets for apportionment towards transfer of input tax credit in case of de-merger in terms of Section 18(3) of CGST Act, 2017 read with Rule 41(1) of CGST Rules, 2017:-

a. Assets which are created only to comply with the requirements of the Accounting Standards;
b. Assets which are not being transferred as part of de-merger.

iii. If the answers to Question 1 and / or 2 are yes, whether the assets which are not attributable to any particular GSTIN be considered in the GSTIN of the head office of the Company for the purpose of computation of asset ratio?’

The AAR held that according to Section 18(3) of the CGST Act, 2017 whenever there is reconstitution of a registered person, by way of demerger, with a specific provision for transfer of liabilities, the said registered person is allowed to transfer the input tax credit which remains unutilized in his electronic credit ledger to the demerged businesses in the manner as may be prescribed. The manner is prescribed in Rule 41 of CGST Rules. The AAR observed that the proviso to the sub-rule (1) of rule 41 of the CGST Rules, 2017 provides that the input tax credit shall be apportioned to the demerged unit in the ratio of the ‘value of assets’ of the new unit as specified in the demerger scheme to the value of entire assets of the registered person. Referring to the CBIC Circular No. 133/03/2020-GST dated 23rd March, 2020, the AAR held that the term ‘entire assets’ has been mentioned in the circular, and hence all the assets of the parent company in the State are to be considered to find out the ratio. Regarding the question of whether the assets which are created to comply with the requirements of accounting standards also AAR held that they form part of the ‘entire assets’ and hence are to be included in the scope of ‘entire assets’. It is also held that since there are no specific exclusions contemplated in the provisions of the Act or rules made thereunder, these assets are also includible in the ‘entire assets’.

In light of above the learned AAR replied to questions reproduced above as under:

‘A1. The value of assets which are outside the purview of GST is required to be included in the value of assets for apportionment towards transfer of input tax credit in case of demerger in terms of Section 18(3) of CGST Act, 2017 read with Rule 41(1) of CGST Rules, 2017.

A2. The value of assets includes the assets which are created only to comply with the requirement of accounting standards and also the assets which are not being transferred as part of demerger.

A3. There is no question of assets which are not being attributed to any particular GSTIN. For the purpose of computation of asset ratio, the assets which are transferred to the new units has to be considered to the total assets which the company was maintaining in the particular state and accordingly ITC apportionment is to be calculated.’

BCAJ Admin

Service Tax

I. TRIBUNAL

15 M/s. Suraj Forwarders and Shipping Agencies vs. The Principal Commissioner of GST and Central Excise [2021-TIOL-844-CESTAT-Mad] Date of order: 10th December, 2021

When service tax paid twice is established, the refund cannot be denied on the ground of limitation

FACTS
The appellant inadvertently paid service tax under the wrong service tax registration number. At the time of scrutiny of the returns, it was found that the payment was made under the wrong service tax number. Thereafter, they discharged the service tax once again under the correct number. A refund claim was filed for the refund of the amount wrongly paid. A show-cause notice was issued proposing to reject the claim as the same was barred by limitation under section 11B of the Central Excise Act, 1944. After due process of law, the original authority rejected the refund claim. On appeal, the Commissioner (Appeals) upheld the same. The appellant is thus before the Tribunal.

HELD
The Tribunal noted that the service tax was paid twice by the appellant for the very same taxable value. The department directed them to pay the tax again as their in-house formalities do not allow adjustment of tax wrongly paid towards one Commissionerate to another. The appellant again paid service tax mentioning the correct service tax registration number. It is clear that the department has collected service tax twice. This is not permissible under the law. Relying on several decisions, the Tribunal held that the rejection of claim on the ground of limitation is not justifiable and therefore deserves to be set aside forthwith.

16 M/s Cades Digitech Pvt. Ltd. vs. Commissioner of Central Tax [2022-TIOL-52-CESTAT-Bang] Date of order: 4th January, 2022

Reimbursement of expenses in the nature of salary, rent, travelling expenses etc., from the head office to the branch office cannot be considered a service provided by the head office to the branch

FACTS
The appellants are engaged in providing “Consulting Engineers Services” to their customers through their branches located outside India namely USA, Korea, Japan, UK, Germany etc. Their branches are manned by their own employees, and they are reimbursing the expenses on account of salaries, rents, other and other expenses etc. They are also receiving consideration/remuneration for the Consultancy Services rendered abroad to their customers through their branches. Remuneration earned in this regard is treated as export of service, and no dispute is made on this count. Revenue has raised an issue stating that the appellants are paying money to their branches located outside India, as consideration towards the service rendered by the branches to them, such payments made are consideration towards the services provided by the branches to the appellants.

HELD
The Tribunal noted that the amounts incurred by the head office towards the salaries etc., of the employees working in their branches could by no stretch of imagination be equated to any service rendered to them by the respective branches. The legal fiction created in the proviso to section 66A for consideration of branch as a separate establishment is certainly not for the purposes of demanding service tax on the services alleged to have been rendered by the branch to the head office. In fact, the payments made by the appellants are none other than the recurring expenses like salary, travelling allowance, rent, telephone charge etc. It is not brought on record if any other payment for any other service alleged as provided was made. Thus, the demand on account of reimbursement of expenses to the employees working in the overseas branches does not constitute any remuneration in lieu of a service received by the appellants. The demand is therefore set aside.

17 Circor Flow Technologies India (P.) Ltd. vs. Principal Commissioner of GST & Central Excise [2021 133 taxmann.com 327 (CESTAT – Chen)] Date of order: 16th December, 2021

The assessee is entitled to refund in respect of CENVAT credit of service tax paid under the RCM in the GST period under section 142(3) of the CGST Act if the said CENVAT credit was otherwise eligible under the erstwhile law

FACTS
The appellant paid service tax under reverse charge mechanism on the import of software made during the pre-GST period belatedly in March 2019. In terms of CENVAT Credit Rules, 2004, as it stood during the relevant period, the appellants were eligible to avail credit of the service tax paid by them.

HELD
Hon’ble Tribunal noted that the Adjudicating Authority had rejected the refund holding that the service tax has been paid voluntarily and also that no credit is available in the GST regime. Hon’ble Tribunal held that as per section 174(2) of the CGST Act, as amended Act shall not affect any right, privilege, obligation, or liability acquired, accrued or incurred under the amended Act or repealed Acts. As the liability, if any, under the erstwhile law of Finance Act, 1994 to pay service tax would continue even after the introduction of GST, conversely, the right accrued under the said Act in the nature of credit available under CCR 2004 also is protected. It also observed that in this case, there is no allegation that the credit is not eligible to the appellant in the service tax regime and accordingly held that such credit has to be processed under section 142 (3) of GST Act, 2017 and refunded in cash to the assessee.

Note: The Hon’ble New Delhi Tribunal in a similar matter, in the case of Jagannath Polymers (P.) Ltd. vs. Commissioner, Central Goods and Services Tax, Jaipur 1 [2021] 133 taxmann.com 328 (New Delhi – CESTAT) [15-12-2021] also held that merely because the appellant has deposited the service tax payable under RCM in the GST period only after being pointed out by the audit, they shall not be denied refund thereof as the CENVAT credit was available under the service tax regime.

18 MIRC Electronics Limited vs. Commissioner of CSGT, Thane [2021 (55) GSTL (301) (Tri – Mum)] Date of order: 19th July, 2021

Penalty under the provisions of section 11AC of Central Excise Act, 1944 cannot be invoked merely on the basis that irregularities were observed by the audit wing where the appellant has maintained statutory records reflecting particulars of CENVAT credit

FACTS
The appellant was engaged in the business of manufacture of colour television sets, washing machines, etc. The appellant was availing CENVAT credit of excise duty paid on input and service tax paid on input service. During the course of audit by the department, it was observed that CENVAT credit was availed in respect of Rent-a-Cab Service, Insurance, Membership Fees, Foreign Travel expenses. The department denied the CENVAT credit on the ground that the above services are not confirming to the definition of input service under Rule 2(l) of CENVAT Credit Rules. The Adjudicating Authority raised a demand of Rs.9,80,675 with interest and imposed penalty under section 78. This was confirmed by Commissioner Appeals. Hence this appeal.

HELD
Since the appellant failed to produce proper documentary evidence and substantiate its claim with respect to CENVAT credit Rent-a-Cab Service and foreign travel expenses, the respondent was justified in denying the CENVAT credit pertaining to such services. Further, penalty under section 11AC of the Central Excise Act cannot be levied because there was no concealment on the part of appellant as the particulars of CENVAT credit have been recorded in statutory records and books of account.

19 Chryso India Private Limited vs. Commissioner of GST & Central Excise, Alwar [2021 (55) GSTL 159 (Tri- Del)] Date of order: 10th August, 2021

Service tax paid twice on ocean freight is liable to be refunded

FACTS
The appellant had imported raw material and discharged customs duty along with CVD on CIF basis. During the course of audit, it was pointed out that service tax is payable on reverse charge basis on ocean freight for the period prior to 30th June, 2017. In response to the audit objection, appellant deposited service tax along with interest. On being advised that appellant had already paid customs duty and CVD on the import price which includes freight element therefore, the appellant was not required to pay service tax again on freight (under reverse charge basis). Accordingly, appellant filed refund application of the amount of service tax paid on reverse charge basis. However, the refund application was rejected.

HELD
Tribunal held that since the transaction value for Customs Duty and CVD included ocean freight element, therefore, appellant had suffered the double taxation, by again paying the service tax on ocean freight on reverse charge basis. Thus, appellant was allowed refund of such service tax along with interest.

20 Astra Zeneca India Pvt Ltd. vs. Commissioner of GST & Central Excise, Chennai 2021 (55) GSTL 39 (Tri – Chen) Date of order: 23rd June, 2021

Refund of CENVAT credit cannot be rejected merely because such refund claim is clubbed with the CENVAT credit of previous quarter

FACTS
The appellant had filed a refund claim by clubbing the unutilized CENVAT credit of two quarters, namely July to September, 2016 and October to December, 2016. The primary reason for combining the credit for two quarters was that there was no Foreign Inward Remittance Certificate (FIRC) during the earlier quarter, i.e. July to September 2016. The Adjudicating Authority granted a partial refund and rejected the amount of Rs.12,00,695 pertaining to CENVAT credit of the quarter July to September, 2016 by stating that the definition of export turnover under Rule 5(1)(D) of CENVAT Credit Rules, 2004 was not satisfied. Similarly, Commissioner Appeals also rejected the refund claim, and hence the appellant, aggrieved by the Commissioner Appeals’ order filed the appeal before the Chennai Tribunal.

HELD
The Learned Bench relied upon the orders of M/s. B.A. Continuum India Pvt Ltd vs. Commissioner of Service Tax-II, Mumbai 2018 (6) TMI 1011-CESTAT-Mum, M/s. WNS Global Services Pvt. Ltd. vs. C.C.E., Pune III-2015 (11) TMI 905-CESTAT-Mum, and held that for the purpose of refund, the CENVAT credit of any particular quarter can include the amount of brought forward credit from the earlier quarter; the only bar is that refund application must be filed within one year. The refund cannot be rejected merely on the ground that CENVAT credit pertaining to the period prior to October, 2016 was taken while arriving at the total CENVAT credit taken during the quarter October to December, 2016. The Tribunal concluded that the rejection of the refund claim was unjustified and set aside the order of Commissioner Appeals.

BCAJ Admin

GOODS AND SERVICES TAX (GST)

I. HIGH COURT

27 Saiher Supply Chain Consulting (P.) Ltd vs. UOI [2022 134 taxmann.com 154 (Bombay)] Date of order: 10th January, 2022

The Order of Hon’ble Supreme Court issued under Misc. Application No. 665 of 2021 in Suo Motu Writ Petition (Civil) No. 3 of 2020 extending the period of limitation is also applicable to refund applications filed under section 54(1) of the CGST Act

FACTS

The Petitioner filed two refund applications which were rejected by the officer by issuing deficiency memos. When the third application was filed, the same was rejected as time-barred. Petitioner filed a writ petition praying for the restoration of the third refund application and a declaration that Rule 90(3) of the Central Goods and Services Tax Rules, 2017 is ultra vires the Constitution of India.

HELD

Relying upon the Extension of Limitation (Order dated 23rd September 2021), reported in 2021 SCC Online SC 947, passed by the Hon’ble Supreme Court in Misc. Application No. 665 of 2021 in Suo Motu Writ Petition (Civil) No. 3 of 2020 and considering that the third refund application is filed between the period 15th March, 2020 and 2nd October, 2021, the Hon’ble High Court held that the exclusion of the period of limitation falling between 15th March, 2020 and 2nd October, 2021 would also apply to the refund applications filed under section 54(1) of the CGST Act and consequently, the said refund application is within time. The Court however did not go into the question of the validity of the Circular dated 18th November, 2019 and the Rule 90(3) of the Central Goods and Services Tax Rules, 2017.

Note: The above period of 15th March, 2020 to 2nd October, 2021 has been further modified to 15th March, 2020 till 28th February, 2022 by the Order of Hon’ble Supreme Court dated 10th January, 2022.

28 Meritas Hotels (P.) Ltd. vs. State of Maharashtra [2021 133 taxmann.com 222 (Bombay)] Date of order: 3rd December 2021

The time limit for filing of the appeal under section 107 of the Act would commence from the receipt of a scanned copy of the impugned order by the Petitioner and not from the date of uploading of the appeal on the GST portal

FACTS

In this case, the petitioner did not file the GST return for February, 2019 on account of financial crunch. The petitioner was issued notice for non-filing of return followed by summary assessment order in Form GST ASMT-13 under section 62 of the MGST Act, 2017 fixing the liability of tax amount of Rs. 20,96,888 along with interest of Rs. 32,502 and penalty of Rs. 23,06,577 was made. The physical true copy of the assessment order was not served on the petitioner, nor was the same uploaded on the GSTN portal. However, the scanned copy of the impugned assessment order was sent by email to the General Manager of the petitioner company on the very same day. This email communication remained to be reported by the General Manager to the management of the petitioner company. The petitioner filed GSTR-3B for the said month on 14th June, 2019 based on the actual books of accounts. The petitioner came to know about the impugned assessment order only when their bank account came to be attached on 1st July, 2019. As the impugned assessment order was unavailable online, the petitioner had to file a physical appeal. The petitioner even tried to file the online appeal on the GSTN portal immediately after the order was uploaded on the GSTN portal. However, the status on the portal was showing that there is a delay in filing the appeal.

HELD

The High Court observed that the issue in the present case is whether, in the facts of the present case, the period of limitation to file an appeal under section 107(1) of the said Act would commence from the date when the impugned assessment order is uploaded on the GSTN portal or from the date of service upon the petitioner of the scanned copy of the impugned assessment order by email. The High Court further observed that it is not the case of the petitioner that the General Manager was not competent and/or not authorised to receive the communication of the impugned assessment order on behalf of the petitioner and accordingly held that failure on part of the General Manager to inform the petitioner regarding receipt of the impugned assessment order will not have the effect of extending the period of limitation prescribed under sub-section (1) of section 107 of the said Act. The Court did not accept the contention of the petitioner that the limitation prescribed by sub-section (1) of section 107 of the Act will commence from the date when the impugned assessment order is uploaded on the GSTN portal and that except for communication of the impugned assessment order on the GSTN portal, all other communications are to be disregarded for the purpose of sub-section (1) of section 107 of the said Act. Referring to Rule 108, the Court held that Rule 108 no doubt prescribes that the appeal has to be filed electronically, but it nowhere prescribes that the same is to be filed only after impugned assessment order is uploaded on GSTN portal online. Relying upon the decision of Hon’ble Supreme Court in the case of Assistant Commissioner (CT) LTU, Kakinada, and Ors. vs. Glaxo Smith Kline Consumer Health Care Limited, Hon’ble Court held that the policy behind the Act on the constitution of a special adjudicatory forum is meant to expeditiously decide the grievances of a person who may be aggrieved by the order of the adjudicatory authority. The Hon’ble High Court also did not apply the ratio of the decision of Hon’ble Gujarat High Court in the case of Gujarat Tate Petronet Limited vs. Union of India 2020-VIL-426-GUJ, wherein it was held that filing of the appeal and uploading of the order are intertwined activities. Hence though the physical copy of the adjudication order was handed over to the petitioner, the time period to file an appeal would start only when the order is uploaded on the GST portal as without the order being uploaded, the petitioner could not file the appeal and therefore, the contention raised on behalf of the respondents that the uploading of the order and filing of the appeal are two different processes is not tenable in law.

Note: With great respect, the author (MT) is of the view that the ratio of the Three Members’ decision of Hon’ble Gujarat High Court is more appropriate as the procedure for filing an appeal under Rule 108 electronically cannot be implemented unless the order is uploaded on the GST portal.

29 St. Joseph Tea Company Ltd. vs. State Tax Officer [2021 133 taxmann.com 3 (Kerala)] Date of order: 17th June, 2021

The recipients shall not be denied the claim of ITC on the ground of non-appearance of the credit in GSTR-2A, if the supplier is restrained from the filing of GST returns for circumstances beyond his control, provided the supplier has paid the tax to the Government

FACTS

The petitioner, a registered dealer under the Kerala Value Added Tax Act, had migrated to the Goods and Services Tax Act regime and applied for registration under the GST statutes. Having failed to obtain registration due to technical glitches in the GST portal, the petitioner filed a writ petition, and by an interim order, he was permitted to apply for registration afresh. Accordingly, he was granted registration afresh from 9th March, 2018. Even though the issue of registration was thus solved, the petitioner’s grievance about the inability to comply with the requirements in terms of the statutes for the period from 1st July, 2017 to 9th March, 2018 subsisted. As the petitioner was unable to upload the returns for the period from 1st July, 2017 to 9th March, 2018 and remit tax, the petitioner’s customers could not claim Input Tax Credit (ITC), and many of them stopped doing business with the petitioner. The department also started issuing notices in Form GST Asmt-10 to the petitioner’s customers, citing discrepancies in the return.

HELD

The Hon’ble Court observed that the department ought to provide the petitioner opportunity for statutory compliance for the period prior to 9th March, 2018. However, as stated by the respondent, it is technically impossible to make changes in the GST portal for providing an opportunity for an individual assessee to comply with the statutory requirements from a date prior to its registration. In such circumstances, the Hon’ble Court held that the only possible manner in which the issue can be resolved is for the petitioner to pay tax for the period covered by provisional registration from 1st July, 2017 to 9th March, 2018 along with applicable interest under Form GST DRC-03 against the show cause notice (SCN) or statement. If such payment is effected, the recipients of the petitioner under its provisional registration (ID) for the period from 1st July, 2017 to 9th July, 2018 shall not be denied ITC only on the ground that the transaction is not reflected in GSTR 2A.

30 Evertime Overseas Pvt Ltd. vs. Union of India [2021 (55) GSTL 257 (Bombay)] Date of order: 8th October, 2021

Refund of Goods and Service Tax paid cannot be withheld by the Revenue merely on the ground of pending Investigation

FACTS

Petitioner had filed a refund application under section 16 of the Integrated Goods and Service Tax Act, 2017 r. w. s. 54 of the Central Goods Service Tax Act, 2017, on account of making zero-rated supply. However, the application for refund was not processed on the ground that an investigation was pending and to secure the interest of revenue. Being aggrieved by such non-processing of the refund, the petitioner submitted an appeal before the Hon’ble Bombay High Court.

HELD

It was held that the petitioner’s application for refund shall be processed expeditiously as per law and directed the department to dispose of the refund application in an expeditious manner after passing a reasoned order based on the merits of the case.

31 Assistant State Tax Officer vs. VST and Sons (P) LTD. [2021 (55) GSTL 259 (Kerala)] Date of order: 22nd July, 2021

Transportation of used vehicles categorized as used personal effects are exempted from the requirement of E-Way Bill

FACTS

Respondent filed a writ petition challenging the detention of “Range Rover” motor vehicle while being transported as used personal vehicle from Coimbatore to Thiruvanthapuram. The motor vehicle was new and ran only for 43 kms. The department detained the vehicle on the ground that transportation was done without generation of e-way bill. Aggrieved by such detention the Respondent filed a writ petition before the Hon’ble High Court.

HELD

The High Court relied upon the judgement of Kun Motor Company Private Limited vs. Assistant Commissioner of State Tax 2019 (21) GSTL 3 (Kerala HC) and held that used vehicles are to be categorised as “used personal effects” irrespective of how negligible they have been used. Goods classifiable as “used personal and household effect” are exempt from the requirement of e-way bill in terms of Rule 138(14)(a) of CGST Rules. Thus, there was no requirement for the generation of e-way bill.

32 Daulat Samirlal Mehta vs. Union of India [2021 (55) GSTL 264 (Bombay)] Date of order: 15th February, 2021

An Arrest cannot be made merely because certain sections of the Central Goods and Service Tax provide for the same for specific violations or offences

FACTS

The petitioner, aged around 65 years, was a director of Twinstar Industries Limited and Originet Technologies Limited. During 2018 an investigation was initiated for the alleged fraudulent availment and utilization of Input Tax Credit (ITC) based on bogus invoices without actual receipt of goods or services. Summons were issued to the petitioner under section 70 of CGST Act on several occasions. In response to the summons, the petitioner appeared before the investigating officer and his statements were recorded on five occasions. After the fifth interrogation, the petitioner was arrested and sent to judicial custody. Petitioner was accused of committing an offence under section 132(1)(c) of CGST Act for availment of ITC around Rs.122.59 crores on strength of bogus invoices and offence under section 132(1)(b) and section 132(1)(c) of CGST Act for issuing bogus invoices and wrongfully passing ITC approximately Rs.191.66 crores without actual supply of goods or services. The petitioner, without admitting the allegations, filed three compounding applications under section 138 of CGST Act, one his personal account and the other two on behalf the two companies in which he is a director to avoid multiple proceedings as well as to avoid rigours of prosecution besides any further prejudice to his personal liberty. With the aforesaid grievance, the petitioner filed a writ petition before the Bombay High Court seeking bail.

HELD

It was held that the requirement under subsection (1) of section 69 of CGST Act is “reasons to believe” that not only a person has committed any offence as specified but also as to why such person needs to be arrested. The primary intention of the Central Goods Service Tax Act is to collect the revenue, and arrest is only incidental to achieve the main objective. An arrest cannot be made only because the offence is cognizable and non-bailable. The officers have to take into account whether arrest is necessary to prevent further commission of offences or tampering of evidences or influence of witness or producing before the courts. Further, once compounding under section 138 of the Central Goods Service tax Act is done, no further proceedings shall be initiated, and all the existing proceedings for the same offence shall stand abated. The Court concluded by granting bail to the petitioner subject to requisite bond, surety and conditions.

II. AUTHORITY FOR ADVANCE RULING

33 Suez India Pvt. Ltd. [2022-TIOL-15-AAR-GST] Date of order: 31st December, 2021

Even though there are two separate contracts, the contract for design and construction and operation and management for water loss management is a single indivisible contract

FACTS

Applicant entered into a performance-based contract for water loss management with Kolkata Municipal Corporation which includes construction of water distribution networks and operation and maintenance. The contract was awarded to him for a single lump sum amount, however, for the contract signing purposes, two separate contracts were prepared namely design and construction phase and operation and maintenance phase along with the Letter of Award. Applicant therefore, wished to know whether such an agreement be considered as divisible supplies or a single contract under the GST law and the taxability thereof.

HELD

Contract for water loss management made by the applicant with Kolkata Municipal Corporation which includes construction of water distribution networks and operation and maintenance shall be treated as an indivisible single contract and qualifies as works contract as defined under clause (119) of section 2 of the GST Act. Such composite supply of works contract gets covered under entry serial number 3(iii) of the Notification No. 20/2017-Central Tax (Rate) dated 22nd August, 2017 and therefore, would attract tax @ 12% with effect from 22nd August, 2017 – For the period from 1st July, 2017 to 21st August, 2017, however the supply would be taxable @ 18% vide entry serial number 3(ii) of the Notification No. 11/2017-Central Tax (Rate).

34 M/s Emcure Pharmaceuticals Ltd. [2022-TIOL-10-AAR-GST] Date of order: 4th January, 2022 [AAR-Maharashtra]

Recoveries made for providing canteen facility, bus facility and notice pay recovered from employees are not liable to GST

FACTS

The Applicant, a pharmaceutical company, makes recoveries at subsidized rates for providing canteen and bus transportation facilities to its employees and engages third- party service providers to provide the said facilities. These service providers raise invoices with applicable GST. The Applicant recovers a certain portion of the consideration paid to such third-party service providers from its employees. Also, there are instances where the employees leave without serving the mandated notice period. In such cases, the salary is deducted for the tenure not served as compensation for the breach of terms of Employment Agreement. The question before the Authority is whether such recoveries made are liable to GST.

HELD

The Authority noted that the canteen services are provided by the third-party service providers, and the company is not in the business of providing canteen facility, thus it is not their output service. Thus, the provision of a canteen facility is not a transaction made in the course or furtherance of business in terms of section 7 of the CGST Act, 2017 for a transaction to qualify as supply. Essentially it has to be made in the course or furtherance of business. Hence the canteen services cannot be considered as a ‘supply’ to attract GST payable on such recoveries. Also, recoveries made for the bus facility will not be liable for GST. With respect to the notice pay recovery, the Authority noted that the services by an employee to the employer in the course of or in relation to his employment are neither supply of goods nor supply of service. The employee opting to resign by paying an amount equivalent to month of salary in lieu of notice, has acted in accordance with the contract, and that being the case, no question of any forbearance or tolerance does arise. Thus notice pay recovered is also not liable to GST.

35 M/s. Chikkaveeranna Sweet Stall [2022-TIOL-08-AAR-GST] Date of order: 24th November, 2021 [AAR-Karnataka]

GST rate for composition tax payers engaged in the manufacture of sweet and namkeens and doing only the counter sales, is one percent

FACTS

Applicant is a composition taxpayer engaged in the manufacture of sweets and making counter sales without having any facility of restaurant or hotel. The question before the authority is the rate of GST applicable on the same.

HELD

The Authority held that since the applicant is into the manufacture of sweets, he can opt to pay GST at one per cent of the turnover subjected to the condition mentioned in the Notification No. 8/2017 (Central Tax) dated 27th June, 2017 and further amended notifications related to composition tax.

BCAJ Admin

RECENT DEVELOPMENTS IN GST

I. NOTIFICATIONS

(A) Changes in Rules – Notification No.38/2021 – Central Tax – dated 21st December, 2021
By
notification No. 35/2021-Central Tax dated 24th September, 2021
(Reported in BCAJ November, 2021), certain changes were made in rules to
come to effect from notified date. By the above notification, the said
rules are brought into effect from 1st January, 2022. The above changes,
which are coming into effect from 1st January, 2022, are basically in
respect of Aadhar Authentication for a registered person for carrying
out certain functions like filing of refund application, revocation
application etc.

(B) Changes in Act – Notification No.39/2021 – Central Tax – dated 21st December, 2021
By
above notification, effective date is notified for certain amendments
made by Finance Act, 13 of 2021 dated 28th March, 2021 under CGST Act.
As per the above notification, the given amendments are effective from
1st January, 2022 (discussed in detail in BCAJ, March 2021). The
indicative changes are mentioned below for ready reference:

Sr. No.	Section of the Finance Act, 13 of 2021	Section of the CGST Act, 2017	Particulars
1.	108	7	The amendment is to dilute the effect of the Mutuality Concept in the meaning of “supply” given in section 7, especially in relation to clubs, society etc.
2.	109	16	Matching ITC with outward details of supplier (GSTR 2B) is made applicable.
3.	113	74	Amendment in the above section is about the conclusion of proceedings in specified cases.
4.	114	75	Self-assessment for recovery to include details shown in GSTR-1 but not reflected in GSTR-3B.
5.	115	83	The extension of provisional attachment to the beneficiary is brought into effect.
6.	116	107	In case of an appeal against penalty order under section 129(3), pre-payment of 25% will be necessary.
7.	117	129	Penalty enhancement from 100% to 200% for E-way bill default becomes applicable.
8.	118	130	Penalty of 100% specified in the section becomes applicable.
9.	119	151	About collection of statistics.
10.	120	152	About bar on disclosure of information.
11.	121	168	Procedural changes
12.	122	Schedule-II, Para 7	The said Para about the treatment of unincorporated association is deleted. This is to be read with amendment in section 7.

Sr. No.

Section of the Finance Act, 13 of 2021

Section of the CGST Act, 2017

Particulars

108

The amendment is to dilute the effect of the Mutuality Concept
in the meaning of “supply” given in section 7, especially in relation to
clubs, society etc.

109

Matching ITC with outward details of supplier (GSTR 2B) is made
applicable.

113

Amendment in the above section is about the conclusion of
proceedings in specified cases.

114

Self-assessment for recovery to include details shown in GSTR-1
but not reflected in GSTR-3B.

115

The extension of provisional attachment to the beneficiary is
brought into effect.

116

107

In case of an appeal against penalty order under section 129(3),
pre-payment of 25% will be necessary.

117

129

Penalty enhancement from 100% to 200% for E-way bill default
becomes applicable.

118

130

Penalty of 100% specified in the section becomes applicable.

119

151

About collection of statistics.

10.

120

152

About bar on disclosure of information.

11.

121

168

Procedural changes

12.

122

Schedule-II, Para 7

The said Para about the treatment of unincorporated association
is deleted. This is to be read with amendment in section 7.

(C) Changes in Rules – Notification No.40/2021 – Central Tax – dated 29th December, 2021
By above notification, following changes are made in CGST Rules, 2017:

Sr. No.	Rule No.	Indicative Changes
1.	36(4)	Rule 36(4) about availment of ITC has been substituted from 1^st January, 2022. By the substitution, it is provided that, ITC availability will be as per reporting in GSTR-1 by the suppliers and reflected in GSTR-2B. The relaxation of 5% is removed.
2.	80	By inserting sub-rule (1A), the due date for filing annual return (GSTR-9) for 2020-2021 is extended till 28^th February, 2022. Similarly, by inserting sub-rule (3A), the due date for filing the self-certified reconciliation statement (GSTR-9C) for 2020-2021 is extended till 28^th February, 2022.
3.	95	In Rule 95(3)(c), a proviso is inserted to clarify that where the Unique Identity Number of the refund applicant is not mentioned on the invoice then, such applicant can submit a self-attested invoice copy with refund application in form GST-RFD-10.
4.	142	An amendment is made in sub-rule (3) of Rule 142 from 1^st January, 2022. As per the unamended position, the penalty proposed under section 129(1) could be paid within 14 days of detention or seizure of the goods and conveyance and informed to the officer and officer can conclude the proceedings in respect of the said notice. However, by amendment, the time period is now changed to seven days of the notice issued under section 129(3) but before the issuance of the order under said section. Therefore, now intimation of payment of penalty amount should be made and informed within 7 days of the notice otherwise; proceeding, will continue. In sub-rule (5), Prior to amendment, the provision was to specify tax, interest and penalty in DRC-07 payable by the person chargeable with tax. Now amendment is made to the effect that in Form GST-DRC-07, the amount of tax, interest and penalty, as the case may be, shall be payable by the person concerned.
5.	144A	This is a new rule inserted from 1^st January, 2022. It is regarding recovery of penalty by the sale of goods or conveyance detained or seized in transit. If the person liable to pay penalty under section 129(1) does not pay the same within 15 days from the date of receipt of order, then the proper officer can initiate proceeding for sale or disposal of the said goods or conveyance. The procedure
5. (continued)		to be adopted for sale or disposal like e-bidding etc. is also specified in the said rule. It is also clarified that in case appeal is filed and a stay is granted, then the above proceedings of sale or disposal will be stayed. This is a welcome insertion in as much as there is clarity about the procedure which will be followed by the authorities.
6.	154	Rule 154 is substituted from 1^st January, 2022 to support above Rule 144A. Under this Rule, the sequence of appropriation of the amount received under Rule 144A is provided.
7.	159	Rule 159 relates to procedural aspects of provisional attachment of property. Some procedural changes are made in the above rule. Amongst others, GST-DRC-22A is prescribed for filing objections against attachment. The time limit of 7 days for filing an objection is removed. It appears that the affected person can file an objection anytime within continuation of the attachment.
8.		There are also a few changes in some of the forms prescribed under the Rules.

Sr. No.

Rule No.

Indicative Changes

36(4)

Rule 36(4) about availment of ITC has been substituted from 1^st
January, 2022. By the substitution, it is provided that, ITC availability
will be as per reporting in GSTR-1 by the suppliers and reflected in GSTR-2B.
The relaxation of 5% is removed.

By inserting sub-rule (1A), the due date for filing annual
return (GSTR-9) for 2020-2021 is extended till 28^th February,
2022. Similarly, by inserting sub-rule (3A), the due date for filing the
self-certified reconciliation statement (GSTR-9C) for 2020-2021 is extended
till 28^th February, 2022.

In Rule 95(3)(c), a proviso is inserted to clarify that where the
Unique Identity Number of the refund applicant is not mentioned on the
invoice then, such applicant can submit a self-attested invoice copy with
refund application in form GST-RFD-10.

142

An amendment is made in sub-rule (3) of Rule 142 from 1^st
January, 2022. As per the unamended position, the penalty proposed under
section 129(1) could be paid within 14 days of detention or seizure of the
goods and conveyance and informed to the officer and officer can conclude the
proceedings in respect of the said notice. However, by amendment, the time
period is now changed to seven days of the notice issued under section 129(3)
but before the issuance of the order under said section. Therefore, now
intimation of payment of penalty amount should be made and informed within 7
days of the notice otherwise; proceeding, will continue.

In sub-rule (5), Prior to amendment, the provision was to
specify tax, interest and penalty in DRC-07 payable by the person chargeable
with tax. Now amendment is made to the effect that in Form GST-DRC-07, the
amount of tax, interest and penalty, as the case may be, shall be payable by
the person concerned.

144A

This is a new rule inserted from 1^st January, 2022.
It is regarding recovery of penalty by the sale of goods or conveyance
detained or seized in transit.

If the person liable to pay penalty under
section 129(1) does not pay the same within 15 days from the date of receipt
of order, then the proper officer can initiate proceeding for sale or
disposal of the said goods or conveyance. The procedure

(continued)

to be adopted for sale or disposal like
e-bidding etc. is also specified in the said rule. It is also clarified that
in case appeal is filed and a stay is granted, then the above proceedings of
sale or disposal will be stayed. This is a welcome insertion in as much as
there is clarity about the procedure which will be followed by the
authorities.

154

Rule 154 is substituted from 1^st January, 2022 to
support above Rule 144A. Under this Rule, the sequence of appropriation of
the amount received under Rule 144A is provided.

159

Rule 159 relates to procedural aspects of provisional attachment
of property. Some procedural changes are made in the above rule. Amongst
others, GST-DRC-22A is prescribed for filing objections against attachment.
The time limit of 7 days for filing an objection is removed. It appears that
the affected person can file an objection anytime within continuation of the
attachment.

There are also a few changes in some of the forms prescribed
under the Rules.

II. NOTIFICATIONS – RATES

Changes in Rate of Tax

(A)
Government has issued Notifications No.18/2021-Central Tax (Rate)
dated 28th December, 2021 and 18/2021-Integrated Tax (Rate) dated 28th
December, 2021 for effecting changes in rate schedules namely in
Notification No.01/2017-Central Tax (Rate) dated 28th June, 2017 and
Notification No.01/2017-Integrated Tax (Rate) dated 28th June, 2017. By
above amendments, changes are made in entries under 2.5%, 6%, 9% and 14%
slabs. For the sake of brevity entry wise amendments are not mentioned
here. The changes are effective from 1st January, 2022.

(B)
Government has issued Notifications No.19/2021-Central Tax (Rate) dated
28th December, 2021 and 19/2021-Integrated Tax (Rate) dated 28th
December, 2021 for effecting changes in rate schedules namely in
Notification No.02/2017-Central Tax (Rate) dated 28th June, 2017 and
Notification No.02/2017-Integrated Tax (Rate) dated 28th June, 2017
which are relating to exempting goods. By above amendments, changes are
made in exemption entries. For the sake of brevity entry wise amendments
are not mentioned here. The changes are effective from 1st January,
2022.

(C)
Government has issued Notifications No.20/2021-Central Tax (Rate) dated
28th December, 2021 and 20/2021-Integrated Tax (Rate) dated 28th
December, 2021 for effecting changes in rate schedules namely in
Notification No.21/2018-Central Tax (Rate) dated 26th July, 2018 and
Notification No.22/2018-Integrated Tax (Rate) dated 26th July, 2018
which are relating to handicraft items. By above amendments, changes are
made in said Notifications. For the sake of brevity entry wise
amendments are not mentioned here. The changes are effective from 1st
January, 2022.

(D) Government has issued Notifications
No.21/2021-Central Tax (Rate) dated 31st December, 2021 and
21/2021-Integrated Tax (Rate) dated 31st December, 2021 for superseding
Notification No.14/2021-Central Tax (Rate) dated 18th November, 2021 and
Notification No.15/2021-Integrated Tax (Rate) dated 18th November, 2021
and amend Notification No. 01/2017- Central Tax rate and
08/2017-Integrated tax (rate) respectively. By above amendments, changes
are made in said Notifications. For the sake of brevity entry wise
amendments are not mentioned here. The changes are effective from 1st
January, 2022.

(E) Government has issued Notifications
No.22/2021-Central Tax (Rate) dated 31st December, 2021 and
22/2021-Integrated Tax (Rate) dated 31st December, 2021 for superseding
Notification No.15/2021-Central Tax (Rate) dated 18th November, 2021 and
Notification No.14/2021- Integrated Tax (Rate) dated 18th November,
2021 and amending Notification No.11/2017-Central Tax rate and
01/2017-Integrated tax (rate). By above amendments, changes are made in
description in entries. For the sake of brevity item wises amendments
are not mentioned here. The changes are effective from 1st January,
2022.

III. CIRCULARS

(A) GST on services supplied by restaurants through e-commerce operators – Circular No.167/23/2021-GST dated 17th December, 2021
By
this Circular, various clarifications are given in respect of new
system of taxation of restaurants making supplies through e-commerce
operators.

(B) Mechanism for filing of refund claim by the
taxpayers registered in erstwhile Union Territory of Daman & Diu for
period prior to merger with U.T. of Dadra & Nagar Haveli – Circular
No.168/24/2021-GST dated 30th December, 2021
By this Circular, the clarifications are given about refund claims in the above Union Territory of Daman & Diu.

(C) Press Release
By
Press release dated 31st December, 2021 it is informed that vide
decision in 46th GST Council Meeting, the existing rates in Textile
sector will continue beyond 1st January, 2022 also. It means the
increase in rates for Textile sector is kept on hold.

(D) HSN Change from 1st January, 2022
The
Custom Department has informed vide D.O.F No.524/11/2021-STO(TU) dated
20th December, 2021, that there are changes in HSN codes from 1st
January, 2022 and stakeholders should take care of the same by making
reference to the changes.

IV. ADVANCE RULINGS

(A) Export of services vis-à-vis Intermediary Services

M/s. DKV Enterprises Pvt. Ltd. (AAR No. 02/AP/GST/2021 dated 11th January, 2021)

The
applicant is an authorized non-exclusive consultant for Grace Products
(Singapore) Pte Limited situated in Singapore to sell fluid cracking
catalysts and additives.

The applicant is expected to be a
consultant for the sale of products of Singapore Company to the HPCL
Vishaka Refinery and other such refineries. The applicant claimed that
he is rendering marketing consultant services to Singapore Company, and
they are billing directly to Singapore Company. It is also stated that
money is received in foreign currency. It was further clarified that the
applicant is not giving any services to Indian clients nor any payment
is received from them.

In this case, earlier advance ruling order
was passed dated 24th February, 2020. In the said order, the above
services were held as intermediary services and not export of services.
Applicant then filed appeal to the Appellate Authority for advance
ruling. Before the Appellate authority, applicant made request to remand
back the case to original authority in light of the judgment in case of
IBM India Pvt Ltd. vs. Commissioner of Central Excise and Service Tax reported in 2020 (34) G.S.T.L. 436. Consequent
to above request the matter was remanded back to original authority
i.e., AAR. Therefore, fresh hearing was done, and this advance ruling
order dated 11th January, 2021 is passed. In the order, the learned AAR
has held that the judgment cited by applicant i.e., in case of IBM India
Pvt. Ltd. is under service tax regime and not applicable in the present
situation. The learned AAR held that applicant is covered and fits into
the definition of intermediary as defined in the section 2(13) of the
IGST Act, 2017 and therefore, “Place of Supply” is required to be
decided as per section 13(8) of IGST Act, 2017. The learned AAR held
that, the transaction is not about export of services but it is liable
under IGST Act at 18% as per section 7(5)(c). The fresh ruling is passed
accordingly.

(B) Nature of service as “Going concern”

M/s SCV Sky Vision (AAR No. 04/AP/GST/2021 dated 12th January, 2021)

The
applicant is engaged in the cable operation business in Andhra Pradesh.
Applicant is Multi System Operator (MSO), whereby it purchases digital
signals from broadcasters, E-TV etc. The applicant transmits the said
signal to Local Cable Operators (LCO), who supplies the same to
individual home and customers premises. In relation to above business,
the applicant has assets and subscribers/customers linked LCO etc. The
applicant has entered into Business Transfer Agreement (BTA) with one
M/s ACN Cable Pvt. Ltd. In terms of BTA, ACN has agreed to purchase the
entire cable operation business of the applicant. All rights, title and
interest in and to the business, assets, subscribers/ customers, linked
LCOs will get transferred from the applicant to ACN as a going concern.
However, liabilities that have presently arisen or will arise for the
past business relationship/ earlier period and the employees are not
transferred. Based on the above facts, the applicant was contesting that
it has transferred business as a going concern and hence it is exempt
in light of entry at Sr. No.2 of the Notification No. 12/2017 – Central
Tax (Rate) dated 28th June, 2017 (‘Service Exemption Notification’).

The entry is also reproduced in the advanced ruling as under:

Sr. No.	Chapter, Section, Heading, Group or Service Code (Tariff)	Description of Services	Rate (per cent.)	Condition
1	Chapter 99	Services by way of transfer of a going concern, as a whole or an independent part thereof.	NIL	NIL

Sr. No.

Chapter,
Section, Heading, Group or Service Code (Tariff)

Description
of Services

Rate
(per cent.)

Condition

Chapter 99

Services by way of transfer of a going concern, as a whole or an
independent part thereof.

NIL

In support of the above claim, the applicant has given its
lengthy submission and has relied upon certain judgments, including the
definition of going concern as per dictionary and clarifications given
by CBIC under service tax.

The learned AAR examined the claim and
observed that there would be a transfer of assets but not liabilities.
The learned AAR observed as under about nature of transfer as going
concern:

‘Going concern is not included in the GAAP (Generally
Accepted Accounting Principles) but included in the GAAS (Generally
Accepted Auditing Standards). Accounting standards determine what a
company disclose on its financial statements if there are doubts about
it’s ability to continue as a going concern. Conditions that lead to
substantial doubt about going concern include the following like
negative trends in operating results, continuous losses from one period
to next, loan defaults, lawsuit against a company, and denial of credit
by suppliers. Moreover, transfer of a going concern means transfer of a
running business which is capable of being carried on by the purchaser
as an independent business. Such transfer of business as a whole will
comprise comprehensive transfer of immovable property, goods and
transfer of unexecuted orders, employees, goodwill etc.,

The
concept of transferring a company as a ‘going concern’ was examined by
the Delhi High Court in the landmark judgement of Inre Indo Rama Textile
Limited (2013) 4 Comp LJ 141 (Del). In this case the Delhi High Court
held that a company is said to be transferred as a ‘going concern’ when
the assets and liabilities being transferred constitute a business
activity capable of being run independently for a foreseeable future.
The Supreme Court in Allahabad Bank vs. ARC Holding AIR 2000 SC 3098
(Allahabad Bank case) held that if the company is sold off as a ‘going
concern’, then along with the assets of the company, if there are any
liabilities relevant to the business or undertaking, the liabilities too
are transferred.’

In light of the above judicial precedents and
legal position, the learned AAR held that the applicant’s transaction
could not fit into the exemption entry cited above. The learned AAR held
the transaction is taxable.

BCAJ Admin

Service Tax

I. TRIBUNAL

12 Shanti Construction Co. vs. CCE&ST [2021 (54) GSTL 164 (Tri-Ahm)] Date of order: 18th June, 2021

Reversal of CENVAT credit availed when output service was taxable is not required to be reversed on grant of retrospective exemption subsequently

FACTS
The appellants provided works contract services to various Government departments. They availed credit on input service from various sub-contractors on which the sub-contractors had discharged service tax. The appellant availed and utilised the CENVAT credit for discharging the service tax liability for the period 1st April, 2015 to 29th February, 2016. The Central Government later inserted section 102 to the Finance Act, 1994 for giving retrospective exemption to works contract services provided to the Government, local authority or Governmental authority and allowing refund of service tax paid for such services. The appellant filed a refund claim for service tax paid which was partially rejected, to the extent payment was made through the utilisation of CENVAT credit, by the Commissioner (Appeals).

HELD
The appellant had discharged the service tax as per the legal provision prevailing at that time and hence was rightfully entitled to CENVAT credit. Section 102 was unambiguous with respect to the amount to be refunded retrospectively and had no distinction whether it was paid in cash or through the utilisation of CENVAT credit. Thus, the appellant’s claim falls within the purview of section 102 and hence is held eligible for the refund of the entire service tax
paid.

13 Neyveli Lignite Corporation Ltd. vs. CCE&ST [2021 (53) GSTL 401 (Tri-Chen)] Date of order: 26th July, 2021

Service tax is not applicable on liquidated damages recovered by appellant for not completing the task in the scheduled time as per the terms of the contract

FACTS
The appellant, formerly known as Neyveli Lignite Corporation India Limited, was engaged in the excavation from the captive mines of lignite that is principally consumed in the generation of electricity. The appellant executed a contract with Bharat Heavy Electricals Limited (BHEL). As per clause 4.7.1 of the said contract, BHEL was required to complete successful performance guarantee within 35 months and 39 months for Unit 1 and Unit 2, respectively. Further, there was a clause 4.9.1 in the contract which stated that liquidated damages would be levied on failure to adhere to the above time limit. As BHEL failed to do so, the appellant recovered liquidated damages from it. Consequently, the Department issued five show cause notices covering the periods from April, 2012 to June, 2017 for recovering service tax on liquidated damages. The appellant submitted a detailed reply stating that service tax was not payable on liquidated damages. However, these contentions were rejected and orders passed holding that liquidated damages were liable for service tax as ‘agreeing to an obligation to tolerate an act’ in terms of section 66E(e).

HELD
Following the decisions of M/s South Eastern Coalfields Ltd. 2020 (12) TMI 912 and Poorva Kshetra Vidyut Vitran Co. Ltd. 2021 (46) GSTL 409, it was held that the view of the Commissioner to charge service tax on liquidated damages recovered was unsustainable.

14 Chadriot International Pvt. Ltd. vs. CCT, Bengaluru East [2021 (54) GSTL 29 (Tri-Bang)] Date of order: 17th June, 2021

Delay in debiting credit is only a procedural delay that does not disentitle the appellant from claiming refund

FACTS
The appellant is engaged in the manufacture and export of granite tiles and is availing CENVAT credit of service tax paid on input services used in the manufacture and export of finished goods. It filed three applications for refund of CENVAT credit under Rule 5 of CCR, 2004 read with Notification No. 27/2012-CE (N.T.) dated 18th June, 2012. Thereafter, the appellant received a show cause notice proposing to reject the refund claim on the ground that the appellant has not debited the amount equivalent to refund claims from the CENVAT register as required under para 2(h) of Notification No. 27/2012 CE (N.T.) dated 18th June, 2012.

The appellant replied to the notice stating that the balance of CENVAT credit was carried forward in TRAN-1 under GST in December, 2017 and the amount equivalent to refund claims was debited from the electronic credit ledger at the time of filing GSTR3B for the period December, 2017. The Original Authority sanctioned the refund after following the due process. However, the Department filed an appeal before the Commissioner (Appeals) against the refund-sanctioning order. The Commissioner (Appeals) set aside the order-in-original sanctioning refund on the ground that credit reversal in GSTR3B pertains to GST credit and not CENVAT credit and disallowed the refund. Aggrieved, the appellant filed this appeal.

HELD
The Tribunal held that credit reversed without being utilised is as good as credit not taken. The delay in debiting credit is merely a procedural lapse which cannot debar the appellant from claiming the refund. Thus, the order rejecting the refund was not sustainable.

BCAJ Admin

GOODS AND SERVICES TAX (GST)

I. HIGH COURT

23 Jagat Janani Services vs. GST Council [2021 (54) GSTL 283 (Odi)] Date of order: 21st September, 2021

Refund of excess Service Tax paid shall be granted to the Operational Creditor when the amount receivable is reduced pursuant to the Resolution Plan

FACTS
The petitioner was entitled to receive Rs. 18.14 crores against various invoices issued on Essar Steel India Limited (service recipient) for the period January to December, 2017. Due to the Corporate Insolvency Resolution Process (CIRP) of Essar Steel India Limited as finalised by the Supreme Court’s order dated 15th November, 2019, the petitioner’s claim, inter alia, was settled at 20.5% of Rs. 18.14 crores which worked out to Rs. 3.71 crores. The petitioner had already paid service tax of Rs. 1.41 crores and GST of Rs. 1.93 crores for the said period of January to December, 2017. Since the petitioner is entitled to get only Rs. 3.71 crores, pro rata reduction in tax liability working out to approximately Rs. 45 lakhs was sought. It was also clarified that Essar Steel India Limited had reversed the credit taken on the Service Tax amount of Rs. 1.41 crores. The petitioner accordingly calculated excess at Rs. 2.16 crores and claimed refund thereof.

HELD
The High Court allowed the petition with a direction that the excess service tax paid by the petitioner is liable to be refunded in accordance with extant rules, by acknowledging that the petitioner’s claim was reduced to 20.5% of the admitted claim.

II. AUTHORITY FOR ADVANCE RULING

24 M/s Lucknow Producers Co-operative Milk Union Ltd. [2021-TIOL-284-AAR-GST] Date of order: 16th April, 2021

Reimbursements of statutory liability not received as pure agent – GST liable @ 18%

FACTS
The applicant is in the business of milk processing and manufacturing milk products and avails the services of manpower supply agencies under an agreement. The terms provide for consideration against services and discharge of statutory liabilities such as EPF, ESI, workmen’s compensation Act, etc. A ruling was sought for GST applicability on reimbursements for statutory liabilities. As per the applicant, the agreement provides for two separate elements of payment and that the statutory liabilities as per the Act rest with the factories or the work place. However, it is shifted to service providers to minimise their work burden and hence they subsequently reimburse them. Further, Rule 33 of the GST Rules provides that the cost incurred by the supplier as pure agent is excluded from the value of supply. Also, AAR Karnataka [reported in 2020 (32) GSTL 49 (AAR-GST-Kar)] had ruled that Group Insurance and Workmen’s’ Compensation schemes benefit workers and are not taxable under GST. Further, bills raised for reimbursement fulfil the condition of being a pure agent and hence should not be subjected to GST.

HELD
After examining section 2(13) of the CGST Act, 2017 for definition of consideration and section 15 of the said Act for determination of value of taxable supply, it was held that the entire payment received by the manpower, including statutory payment supplies from the application, would attract GST. It was found that labour contractors are not pure agents as they do not outsource services from third parties. Also, a contractual agreement with the contractor does not fulfil the obligation of being a pure agent. Therefore, GST is liable to be paid on reimbursement at 18% as they form value of supply as per section 15 of the CGST Act, 2017.

25 M/s Rotary Club of Bombay Queen’s City [2021-TIOL-273-AAR-GST] Date of order: 22nd November, 2021

Members and AOP / Club separate entities post amendment of section 7(1) – Contribution by members is consideration for supply

FACTS
The applicants Rotary Club and Rotary Districts are associations of persons joined together to carry out social activities. The contribution collected is spent on meetings and administration expenditure. Hence a ruling was sought to determine whether their activity of collecting contributions and spending it on meetings and administration is considered business as envisaged u/s 2(17) of the CGST Act, 2017 and whether contributions from their members results in supply under the CGST Act, 2017. The applicants pleaded that they maintain separate bank accounts, one for administration expenses and the other for donations or charity. Donations received are strictly used for charitable purposes and not for administration. Further, they also pleaded that they function on the concept of mutuality and hence the said doctrine applies as per their belief. They relied on and referred to CIT vs. Bankimpur Club Ltd. 2002-TIOL-834-SC-IT and the recent Larger Bench judgment of the Supreme Court in State of West Bengal vs. Calcutta Club Ltd. 2019-TIOL-449-SC-ST-LB under service tax law. The applicant also relied on the order of the AAR, Maharashtra in the case of Rotary Club of Mumbai Nariman Point and that in Rotary Club of Mumbai Queen’s Necklace wherein it was observed that these clubs did not provide any specific facility or benefit to their members against membership subscription and hence it is not ‘business’. Further, the applicant submitted that insertion of new clause (aa) in sub-section (1) of section 7 of the CGST Act, retrospectively, does not alter the case of the Rotary Club on account of ‘Agency Principle’ and reasoning of the AAAR in the said cases of the two Rotary Clubs.

HELD
After examining the definitions of supply in section 7 of the CGST Act, 2017 and consideration as per section 2(31) of the said Act, the AAR observed that contribution received is used for obtaining goods and services of third parties and provide benefit of such goods and services to the members. Further, the definition of person in the GST law includes both individuals as well as association of persons or body of individuals whether incorporated or not. Hence, individual members are beneficiaries of contribution made by them to be considered consideration and the members and the Club are two distinct persons. Hence, activities and transactions between them amount to ‘supply’ in terms of the GST law. Also, it was found that reliance on AAAR in the case of Rotary Clubs is not proper as it was done prior to the amendment to section 7 of the Act. The other point cited was that the cases do not provide any guidance or the legal situation particularly after the amendment. The fees / subscription by whatever name called is consideration received by the applicant for such supply and is covered within the scope of ‘business’.

26 M/s Portescap India Pvt. Ltd. [2021-TIOL-293-AAR-GST] Date of order: 10th December, 2021 [AAR Maharashtra]

SEZ GST not included yet in section 26 of SEZ Act

FACTS
The applicant, an SEZ, sought a ruling to know whether there is exemption on GST payable by it under Reverse Charge Mechanism (RCM) on obtaining immovable property (on rent) service from the SEEPZ SEZ authority (local authority) in terms of Notification No. 13/2017-CT dated 28th June, 2017 read with Notification No. 03/2018-CT (Rate) dated 28th January, 2018. Its business is manufacture of customised motors in India and their export. According to the applicant, Entry 5A of Notification No. 13/2017-CT (Rate) dated 28th June, 2017 notifies renting service supplied by Central and State Governments, Union Territory or local authority to any registered person. Hence, the need to seek AAR. Section 7 of the SEZ Act, 2005 exempts goods and services obtained from Domestic Tariff Area (DTA) or foreign supplies specified in the first schedule. Also, section 51 of the said Act has an overriding effect on provisions of other Acts, including taxation laws. Section 26 of the said SEZ Act deals with exemption of tax on services provided to SEZ or its developer to carry out authorised operations. In terms of section 16 of the IGST Act, 2017, supply to SEZ is an inter-state supply.

The default list of services approved for authorised operation includes renting of immovable property service in its ambit and hence the service supplied to it would be considered zero-rated. Also, Notification No. 18/2017-ST (Rate) exempts services imported by unit / developer into an SEZ-authorised operation as exempt from IGST. According to them, services obtained from India also being in the nature of inter-state supply, the Notification covers the same and hence it would be exempt. In support they relied on the judgment of the Telangana and Andhra Pradesh High Court in GMR Aerospace Engineering Ltd. & another vs. U.O.I. & Ors. 2018-TIOL-3127-HC-TELANGANA-ST which held that when the services are used for authorised operation of an SEZ unit, the same should be exempted from the levy of service tax.

HELD
As contended by the AAR and also after considering various rebuttals of the contentions of the jurisdiction officer, the AAR held as follows:

• Since the applicant is registered under the CGST Act, 2017 and satisfies all conditions of the amended Notification No. 10/2017-ITR (Rate) dated 28th June, 2017, the applicant is liable to pay tax under rent in terms of section 5(3) of the IGST Act, 2017.

• Question No. 41 of the FAQ dated 15th December, 2018 issued by the CBIC states that SEZ has to pay GST as a recipient of service under RCM.

• The applicant’s contention that service obtained from Indian territory was the same as imported service was not accepted citing definition of import of services in section 2(11) of the IGST Act and the definition of ‘India’ as per section 2(56) of the CGST Act, 2017. Hence, the applicant was regarded as one situated in India as the SEZ is in India.

• As for zero-rated supplies, it was observed that section 16(3) of the IGST Act applies to registered persons making a zero-rated supply. However, the applicant is a recipient thereof and hence is not covered by section 16(3). A harmonious reading of section 5(3) of the IGST Act, 2017 along with relevant Notifications and section 16 of the IGST Act stipulates that the applicant is liable to pay tax under RCM.

• Section 26 of the SEZ Act dealing with exemptions is not yet aligned with the CGST and / or IGST Acts and as such the list contained thereunder does not include GST.

• The cases cited by the applicant pertain to service and hence they do not apply in the subject case.

BCAJ Admin

RECENT DEVELOPMENTS IN GST

I. NOTIFICATIONS

a) Changes in Rate of Tax

*Sr. No.*	*Notification No.*	Reference of Entry in which change is made	Indicative changes (changes are made effective from 1^st January, 2022)
1.	14/2021-Central Tax (Rate) and 14/2021-Integrated Tax (Rate) both dated 18^th November, 2021. Changes in rate of tax on goods. These Notifications are applicable from 1^st January, 2022	Entries at Sr. Nos. 203, 207, 211, 216, 217, 218, 218B, 218C, 219A, 219AA, 219B, 220, 221, 222, 223, 224, 224A and 225 under Schedule I, and Entries from Sr. Nos. 132A, 132B, 132C, 132D and 171 under Schedule II, and Entries from Sr. Nos. 159 to 163 under Schedule III are omitted. The said Entries are not given here for sake of brevity	The goods covered by the above Entries in Schedule I, like woven fabrics of silk or of silk waste (Entry 203), are removed from 2.5% slab and incorporated in 6% slab. New Entries are added as mentioned subsequently. In Schedule II changes are to segregate goods contained therein into separate Entries for more clarity. The changes in Schedule III are consequential
		Schedule-II (6%)
2.	14/2021-Central Tax (Rate) and 14/2021-Integrated Tax (Rate), both dated 18^th November, 2021, changes to add Entries in Schedule II, effective from 1^st January, 2022	a) Entry 132AA is inserted	Woven fabrics of silk or of silk waste are brought under this new Entry
b) Entry 132AB is inserted	Woven fabrics of carded wool or of carded fine animal hair
c) Entry 132AC is inserted	Woven fabrics of combed wool or of combed fine animal hair
d) Entry 132AD is inserted	Woven fabrics of coarse animal hair or of horse hair
e) Entry 132AE is inserted	Woven fabrics of cotton, containing 85% or more by weight of cotton, weighing not more than 200g/m2
f) Entry 132AF is inserted	Woven fabrics of cotton, containing 85% or more by weight of cotton, weighing more than 200g/m2
g) Entry 132AG is inserted	Woven fabrics of cotton, containing less than 85% by weight of cotton, mixed mainly or solely with man-made fibres, weighing not more than 200g/m2
h) Entry 132AH is inserted	Woven fabrics of cotton, containing less than 85% by weight of cotton, mixed mainly or solely with man-made fibres, weighing more than 200g/m2
2. (continued)		i) Entry 132AI is inserted	Other woven fabrics of cotton.
j) Entry 132AJ is inserted	Woven fabrics of flax.
k) Entry 132AK is inserted	Woven fabrics of jute or of other textile-based fibres of heading 5303
l) Entry 132AL is inserted	Woven fabrics of other vegetable textile fibres, woven fabrics of paper yarn
m) Entry 132BA is inserted	Sewing thread of man-made filaments, whether or not put up for retail sale
n) Entry 132BB is inserted	Synthetic filament yarn (other than sewing thread), not put up for retail sale, including synthetic monofilament of less than 67 decitex
o) Entry 132BC is inserted	Artificial filament yarn (other than sewing thread), not put up for retail sale, including artificial monofilament of less than 67 decitex
p) Entry 132BD is inserted	Synthetic monofilament of 67 decitex or more and of which no cross-sectional dimension exceeds 1 mm; strip and the like (for example, artificial straw) of synthetic textile materials of an apparent width not exceeding 5 mm
q) Entry 132BE is inserted	Artificial monofilament of 67 decitex or more and of which no cross-sectional dimension exceeds 1 mm; strip and the like (for example, artificial straw) of artificial textile materials of an apparent width not exceeding 5 mm
r) Entry 132BF is inserted	Man-made filament yarn (other than sewing thread) put up for retail sale
s) Entry 132BG is inserted	Woven fabrics of synthetic filament yarn, including woven fabrics obtained from materials of heading 5404
t) Entry 132BH is inserted	Woven fabrics of artificial filament yarn, including woven fabrics obtained from materials of heading 5405
u) Entry 132CA is inserted	Synthetic filament tow
v) Entry 132CB is inserted	Artificial filament tow
w) Entry 132CC is inserted	Synthetic staple fibres, not carded, combed or otherwise processed for spinning
x) Entry 132CD is inserted	Artificial staple fibres, not carded, combed or otherwise processed for spinning
y) Entry 132CE is inserted	Waste (including noils, yarn waste and garnetted stock) of man-made fibres
z) Entry 132CF is inserted	Synthetic staple fibres, carded, combed or otherwise processed for spinning
aa) Entry 132CG is inserted	Artificial staple fibres, carded, combed or otherwise processed for spinning
2. (continued)		bb) Entry 132CH is inserted	Sewing thread of man-made staple fibres, whether or not put up for retail sale
cc) Entry 132CI is inserted	Yarn (other than sewing thread) of synthetic staple fibres, not put up for retail sale
dd) Entry 132CJ is inserted	Yarn (other than sewing thread) of artificial staple fibres, not put up for retail sale
ee) Entry 132CK is inserted	Yarn (other than sewing thread) of man-made staple fibres, put up for retail sale
ff) Entry 132CL is inserted	Woven fabrics of synthetic staple fibres, containing 85% or more by weight of synthetic staple fibres
gg) Entry 132CM is inserted	Woven fabrics of synthetic staple fibres, containing less than 85% by weight of such fibres, mixed mainly or solely with cotton, of a weight not exceeding 170g/m2
hh) Entry 132CN is inserted	Woven fabrics of synthetic staple fibres, containing less than 85% by weight of such fibres, mixed mainly or solely with cotton, of a weight exceeding 170g/m2
ii) Entry 132CO is inserted	Other woven fabrics of synthetic staple fibres
jj) Entry 132CP is inserted	Woven fabrics of artificial staple fibres
kk) Entry 139 is substituted	By substitution, Entry reads as under: ‘Twine, cordage, ropes and cables, whether or not plaited or braided and whether or not impregnated, coated or sheathed with rubber or plastics’
ll) Entry 139A is inserted	Knotted netting of twine, cordage or rope; made up of fishing nets and other made-up nets, of textile materials
mm) Entry 146A is inserted	Woven pile fabrics and chenille fabrics, other than fabrics of heading 5802 or 5806
nn) Entry 151A is inserted	Narrow woven fabrics, other than goods of heading 5807; narrow fabrics consisting of warp without weft assembled by means of an adhesive (bolducs)
oo) Entry 154 is substituted	By substitution, Entry reads as under: ‘Braids in the piece; ornamental trimmings in the piece, without embroidery, other than knitted or crocheted; tassels, pompons and similar articles’
pp) Entry 155 is substituted	By substitution, Entry reads as under: ‘Woven fabrics of metal thread and woven fabrics of metallised yarn of heading 5605, of a kind used in apparel, as furnishing fabrics or for similar purposes, not elsewhere specified or included’
qq) Entry 156 is substituted	By substitution, Entry reads as under: ‘Embroidery in the piece, in strips or in motifs’
rr) Entry 168 is substituted	In above Entry: for the words ‘this Chapter’, the word and the figure ‘Chapter 59’ is substituted
2. (continued)		ss) Entry 168A is inserted	Pile fabrics, including ‘long pile’ fabrics and terry fabrics, knitted or crocheted is brought under this new Entry
tt) Entry 168B is inserted	Knitted or crocheted fabrics of a width not exceeding 30 cm, containing by weight 5% or more of elastomeric yarn or rubber thread, other than those of heading 6001
uu) Entry 168C is inserted	Knitted or crocheted fabrics of a width not exceeding 30 cm, other than those of heading 6001 or 6002
vv) Entry 168D is inserted	Knitted or crocheted fabrics of a width exceeding 30 cm, containing by weight 5% or more of elastomeric yarn or rubber thread, other than those of heading 6001
ww) Entry 168E is inserted	Warp knit fabrics (including those made on galloon knitting machines), other than those of headings 6001 to 6004
xx) Entry 168F is inserted	Other knitted or crocheted fabrics
yy) Entry 169 is substituted	By substitution, Entry reads as under: ‘Articles of apparel and clothing accessories knitted or crocheted’
zz) Entry 170 is substituted	By substitution, Entry reads as under: ‘Articles of apparel and clothing accessories, not knitted or crocheted’
aaa) Entry 171A1 is inserted	Blankets and travelling rugs brought under this new Entry
bbb) Entry 171A2 is inserted	Bed linen, table linen, toilet linen and kitchen linen
ccc) Entry 171A3 is inserted	Curtains (including drapes) and interior blinds; curtains or bed valances
ddd) Entry 171A4 is inserted	Other furnishing articles, excluding those of heading 9404
eee) Entry 171A5 is inserted	Sacks and bags, of a kind used for the packing of goods
fff) Entry 171A6 is inserted	Tarpaulins, awnings and sun blinds; tents; sails for boats, sailboards or land craft; camping goods
ggg) Entry 171A7 is inserted	Other made-up articles, including dress patterns
hhh) Entry 171A8 is inserted	Sets, consisting of woven fabric and yarn, whether or not with accessories, for making up into rugs, tapestries, embroidered table cloths or serviettes, or similar textile articles, put up in packings for retail sale
iii) Entry 171A9 is inserted	Worn clothing and other worn articles
jjj) Entry 171A10 is inserted	Used or new rags, scrap, twine, cordage, rope and cables and worn out articles of twine, cordage, rope or cables, of textile materials
2. (continued)		kkk) Entry 171A11 is inserted	Footwear of sale value not exceeding Rs.1,000 per pair
3.	15/2021-Central Tax (Rate) and 15/2021-Integrated Tax (Rate), both dated 18^th November, 2021. This Notification is applicable from 1^st January, 2022	a) Changes in (Sl. No. 3 in TABLE) in Notification No. 11/2017-Central Tax (Rate) and 08/2017-Integrated Tax (Rate), both dated 28^th June, 2017	In the description of Services at item Nos. (iii), (vi), (vii), (ix) & (x), the words ‘Union territory, a local authority, a Governmental Authority or a Government Entity’ are substituted with ‘Union territory or a local authority’. The scope of coverage reduced
b) Change in Sl. No. 26 in Notification No. 11/2017-Central Tax (Rate) and 8/2017-Integrated Tax (Rate), both dated 28^th June, 2017	In item (i)(b) in column (3), after the words numbers, figures and brackets, ‘Customs Tariff Act, 1975 (51 of 1975)’ the words ‘except services by way of dyeing or printing of the said textile and textile products’ is inserted
4.	16/2021-Central Tax (Rate) and 16/2021-Integrated Tax (Rate), both dated 18^th November, 2021. This notification is applicable from 1^st January, 2022	Changes in Notification No. 12/2017-Central Tax (Rate) and 09/2017-Integrated Tax (Rate), both dated 28^th June, 2017 a) Changes in Sl. Nos. 3 & 3A of TABLE b) In item (2) in Sl. No. 15 in TABLE c) In Sl. No. 17	In the description of Services, in Entries at Sr. Nos. 3 & 3A of TABLE the words ‘or a Governmental authority or a Government Entity’ are omitted
Following Clause is inserted after item (c) of Sl. No. 15 in TABLE: ‘Provided that nothing contained in items (b) and (c) above shall apply to services supplied through an electronic commerce operator, and notified under sub-section (5) of section 9 of the Central Goods and Services Tax Act, 2017 (12 of 2017)’
After Clause (e) in Entry at Sl. No. 17, following clause is inserted: ‘Provided that nothing contained in item (e) above shall apply to services supplied through an electronic commerce operator, and notified under sub-section (5) of section 9 of the Central Goods and Services Tax Act, 2017 (12 of 2017)’
5.	17/2021-Central Tax (Rate) and 17/2021-Integrated Tax (Rate), both dated 18^th November, 2021. This Notification is applicable from 1^st January, 2022	Changes in Notification No. 17/2017-Central Tax (Rate) and 14/2017-Integrated Tax (Rate), both dated 28^th June, 2017a) Clause (i) is substituted	This Notification is about supplies through e-commerce In Clause (i) after the words ‘and motor cycle’ the words ‘motor cycle, omni bus or any other motor vehicle’ is substituted
b) Clause (iv) is inserted	‘Supply of restaurant service other than the services supplied by restaurant, eating joints, etc., located at specified premises’ is inserted
c) Explanation – item (b) is substituted	In item (b) in Explanation, following substitution is made:
d) Item (c) in Explanation is inserted	‘Specified premises means premises providing hotel accommodation service having declared tariff of any unit of accommodation above Rs. 7,500 per unit per day or equivalent’

Sr. No.

Notification No.

Reference of Entry in
which change is made

Indicative changes
(changes are made effective from
1^st January, 2022)

14/2021-Central Tax (Rate) and 14/2021-Integrated Tax (Rate)
both dated 18^th November, 2021. Changes in rate of tax on goods.

These Notifications are applicable from
1^st January, 2022

Entries at Sr. Nos. 203, 207, 211, 216, 217, 218, 218B, 218C,
219A, 219AA, 219B, 220, 221, 222, 223, 224, 224A and 225 under Schedule I,
and Entries from Sr. Nos. 132A, 132B, 132C, 132D and 171 under Schedule II,
and Entries from Sr. Nos. 159 to 163 under Schedule III are omitted. The said
Entries are not given here for sake of brevity

The goods covered by the above Entries in Schedule I, like woven
fabrics of silk or of silk waste (Entry 203), are removed from 2.5% slab and
incorporated in 6% slab. New Entries are added as mentioned subsequently.

In Schedule II changes are to segregate goods contained therein
into separate Entries for more clarity. The changes in Schedule III are
consequential

Schedule-II (6%)

14/2021-Central Tax (Rate) and 14/2021-Integrated Tax (Rate),
both dated 18^th November, 2021, changes to add Entries in Schedule
II, effective from
1^st January, 2022

a) Entry 132AA is inserted

Woven fabrics of silk or of silk waste are brought under this
new Entry

b) Entry 132AB is inserted

Woven fabrics of carded wool or of carded fine animal hair

c) Entry 132AC is inserted

Woven fabrics of combed wool or of combed fine animal hair

d) Entry 132AD is inserted

Woven fabrics of coarse animal hair or of horse hair

e) Entry 132AE is inserted

Woven fabrics of cotton, containing 85% or more by weight of
cotton, weighing not more than 200g/m2

f) Entry 132AF is inserted

Woven fabrics of cotton, containing 85% or more by weight of
cotton, weighing more than 200g/m2

g) Entry 132AG is inserted

Woven fabrics of cotton, containing less than 85% by weight of
cotton, mixed mainly or solely with man-made fibres, weighing not more than
200g/m2

h) Entry 132AH is inserted

Woven fabrics of cotton, containing less than 85% by weight of
cotton, mixed mainly or solely with man-made fibres, weighing more than
200g/m2

2.
(continued)

i) Entry 132AI is inserted

Other woven fabrics of cotton.

j) Entry 132AJ is inserted

Woven fabrics of flax.

k) Entry 132AK is inserted

Woven fabrics of jute or of other textile-based fibres of
heading 5303

l) Entry 132AL is inserted

Woven fabrics of other vegetable textile fibres, woven fabrics
of paper yarn

m) Entry 132BA is inserted

Sewing thread of man-made filaments, whether or not put up for
retail sale

n) Entry 132BB is inserted

Synthetic filament yarn (other than sewing thread), not put up
for retail sale, including synthetic monofilament of less than 67 decitex

o) Entry 132BC is inserted

Artificial filament yarn (other than sewing thread), not put up
for retail sale, including artificial monofilament of less than 67 decitex

p) Entry 132BD is inserted

Synthetic monofilament of 67 decitex or more and of which no
cross-sectional dimension exceeds 1 mm; strip and the like (for example,
artificial straw) of synthetic textile materials of an apparent width not
exceeding 5 mm

q) Entry 132BE is inserted

Artificial monofilament of 67 decitex or more and of which no
cross-sectional dimension exceeds 1 mm; strip and the like (for example,
artificial straw) of artificial textile materials of an apparent width not
exceeding 5 mm

r) Entry 132BF is inserted

Man-made filament yarn (other than sewing thread) put up for
retail sale

s) Entry 132BG is inserted

Woven fabrics of synthetic filament yarn, including woven
fabrics obtained from materials of heading 5404

t) Entry 132BH is inserted

Woven fabrics of artificial filament yarn, including woven
fabrics obtained from materials of heading 5405

u) Entry 132CA is inserted

Synthetic filament tow

v) Entry 132CB is inserted

Artificial filament tow

w) Entry 132CC is inserted

Synthetic staple fibres, not carded, combed or otherwise
processed for spinning

x) Entry 132CD is inserted

Artificial staple fibres, not carded, combed or otherwise
processed for spinning

y) Entry 132CE is inserted

Waste (including noils, yarn waste and garnetted stock) of
man-made fibres

z) Entry 132CF is inserted

Synthetic staple fibres, carded, combed or otherwise processed
for spinning

aa) Entry 132CG is inserted

Artificial staple fibres, carded, combed or otherwise processed
for spinning

2.
(continued)

bb) Entry 132CH is inserted

Sewing thread of man-made staple fibres, whether or not put up
for retail sale

cc) Entry 132CI is inserted

Yarn (other than sewing thread) of synthetic staple fibres, not
put up for retail sale

dd) Entry 132CJ is inserted

Yarn (other than sewing thread) of artificial staple fibres, not
put up for retail sale

ee) Entry 132CK is inserted

Yarn (other than sewing thread) of man-made staple fibres, put
up for retail sale

ff) Entry 132CL is inserted

Woven fabrics of synthetic staple fibres, containing 85% or more
by weight of synthetic staple fibres

gg) Entry 132CM is inserted

Woven fabrics of synthetic staple fibres, containing less than
85% by weight of such fibres, mixed mainly or solely with cotton, of a weight
not exceeding 170g/m2

hh) Entry 132CN is inserted

Woven fabrics of synthetic staple fibres, containing less than
85% by weight of such fibres, mixed mainly or solely with cotton, of a weight
exceeding 170g/m2

ii) Entry 132CO is inserted

Other woven fabrics of synthetic staple fibres

jj) Entry 132CP is inserted

Woven fabrics of artificial staple fibres

kk) Entry 139 is substituted

By substitution, Entry reads as under:
‘Twine, cordage, ropes and cables, whether or not plaited or braided and
whether or not impregnated, coated or sheathed with rubber or plastics’

ll) Entry 139A is inserted

Knotted netting of twine, cordage or rope; made up of fishing
nets and other made-up nets, of textile materials

mm) Entry 146A is inserted

Woven pile fabrics and chenille fabrics, other than fabrics of
heading 5802 or 5806

nn) Entry 151A is inserted

Narrow woven fabrics, other than goods of heading 5807; narrow
fabrics consisting of warp without weft assembled by means of an adhesive
(bolducs)

oo) Entry 154 is substituted

By substitution, Entry reads as under:

‘Braids in the piece; ornamental trimmings
in the piece, without embroidery, other than knitted or crocheted; tassels,
pompons and similar articles’

pp) Entry 155 is substituted

By substitution, Entry reads as under: ‘Woven fabrics of metal
thread and woven fabrics of metallised yarn of heading 5605, of a kind used
in apparel, as furnishing fabrics or for similar purposes, not elsewhere
specified or included’

qq) Entry 156 is substituted

By substitution, Entry reads as under: ‘Embroidery in the piece,
in strips or in motifs’

rr) Entry 168 is substituted

In above Entry: for the words ‘this Chapter’, the word and the
figure ‘Chapter 59’ is substituted

2.
(continued)

ss) Entry 168A is inserted

Pile fabrics, including ‘long pile’ fabrics and terry fabrics,
knitted or crocheted is brought under this new Entry

tt) Entry 168B is inserted

Knitted or crocheted fabrics of a width not exceeding 30 cm,
containing by weight 5% or more of elastomeric yarn or rubber thread, other
than those of heading 6001

uu) Entry 168C is inserted

Knitted or crocheted fabrics of a width not exceeding 30 cm,
other than those of heading 6001 or 6002

vv) Entry 168D is inserted

Knitted or crocheted fabrics of a width exceeding 30 cm,
containing by weight 5% or more of elastomeric yarn or rubber thread, other
than those of heading 6001

ww) Entry 168E is inserted

Warp knit fabrics (including those made on galloon knitting
machines), other than those of headings 6001 to 6004

xx) Entry 168F is inserted

Other knitted or crocheted fabrics

yy) Entry 169 is substituted

By substitution, Entry reads as under: ‘Articles of apparel and
clothing accessories knitted or crocheted’

zz) Entry 170 is substituted

By substitution, Entry reads as under: ‘Articles of apparel and
clothing accessories, not knitted or crocheted’

aaa) Entry 171A1 is inserted

Blankets and travelling rugs brought under this new Entry

bbb) Entry 171A2 is inserted

Bed linen, table linen, toilet linen and kitchen linen

ccc) Entry 171A3 is inserted

Curtains (including drapes) and interior blinds; curtains or bed
valances

ddd) Entry 171A4 is inserted

Other furnishing articles, excluding those of heading 9404

eee) Entry 171A5 is inserted

Sacks and bags, of a kind used for the packing of goods

fff) Entry 171A6 is inserted

Tarpaulins, awnings and sun blinds; tents; sails for boats, sailboards
or land craft; camping goods

ggg) Entry 171A7 is inserted

Other made-up articles, including dress patterns

hhh) Entry 171A8 is inserted

Sets, consisting of woven fabric and yarn, whether or not with
accessories, for making up into rugs, tapestries, embroidered table cloths or
serviettes, or similar textile articles, put up in packings for retail sale

iii) Entry 171A9 is inserted

Worn clothing and other worn articles

jjj) Entry 171A10 is inserted

Used or new rags, scrap, twine, cordage, rope and cables and
worn out articles of twine, cordage, rope or cables, of textile materials

2.
(continued)

kkk) Entry 171A11 is inserted

Footwear of sale value not exceeding Rs.1,000 per pair

15/2021-Central Tax (Rate) and 15/2021-Integrated Tax (Rate),
both dated 18^th November, 2021. This Notification is applicable
from
1^st January, 2022

a) Changes in (Sl. No. 3 in TABLE) in Notification No.
11/2017-Central Tax (Rate) and 08/2017-Integrated Tax (Rate), both dated 28^th
June, 2017

In the description of Services at item Nos. (iii), (vi), (vii),
(ix) & (x), the words ‘Union territory, a local authority, a Governmental
Authority or a Government Entity’ are substituted with ‘Union territory or a
local authority’. The scope of coverage reduced

b) Change in Sl. No. 26 in Notification No. 11/2017-Central Tax
(Rate) and 8/2017-Integrated Tax (Rate), both dated 28^th June,
2017

In item (i)(b) in column (3), after the words numbers, figures
and brackets, ‘Customs Tariff Act, 1975 (51 of 1975)’ the words ‘except
services by way of dyeing or printing of the said textile and textile
products’ is inserted

16/2021-Central Tax (Rate) and 16/2021-Integrated Tax (Rate),
both dated 18^th November, 2021. This notification is applicable
from
1^st January, 2022

Changes in Notification No. 12/2017-Central Tax (Rate) and
09/2017-Integrated Tax (Rate), both dated 28^th June, 2017

a) Changes in Sl. Nos. 3 & 3A of TABLE

b) In item (2) in Sl. No. 15 in TABLE

c) In Sl. No. 17

In the description of Services, in Entries at Sr. Nos. 3 &
3A of TABLE the words ‘or a Governmental authority or a Government Entity’
are omitted

Following Clause is inserted after item (c) of Sl. No. 15 in
TABLE:

‘Provided that nothing contained in items (b) and (c) above
shall apply to services supplied through an electronic commerce operator, and
notified under sub-section (5) of section 9 of the Central Goods and Services
Tax Act, 2017 (12 of 2017)’

After Clause (e) in Entry at Sl. No. 17, following clause is
inserted:

‘Provided that nothing contained in item (e) above shall apply
to services supplied through an electronic commerce operator, and notified
under sub-section (5) of section 9 of the Central Goods and Services Tax Act,
2017 (12 of 2017)’

17/2021-Central Tax (Rate) and 17/2021-Integrated Tax (Rate),
both dated 18^th November, 2021. This Notification is applicable
from
1^st January, 2022

Changes in Notification No. 17/2017-Central Tax (Rate) and
14/2017-Integrated Tax (Rate), both dated 28^th June, 2017a) Clause
(i) is substituted

This Notification is about supplies through e-commerce

In Clause (i) after the words ‘and motor cycle’ the words ‘motor
cycle, omni bus or any other motor vehicle’ is substituted

b) Clause (iv) is inserted

‘Supply of restaurant service other than the services supplied
by restaurant, eating joints, etc., located at specified premises’ is
inserted

c) Explanation – item (b) is substituted

In item (b) in Explanation, following substitution is made:

d) Item (c) in Explanation is inserted

‘Specified premises means premises providing hotel accommodation
service having declared tariff of any unit of accommodation above Rs. 7,500
per unit per day or equivalent’

b) Changes in Rules – Notification No. 37/2021-Central Tax dated 1st December, 2021

By the above Notification, changes have been made in the CGST Rules. Rule 137 is for prescribing the tenure of the National Anti-Profiteering Authority. The tenure was four years which is now made five years by the above amendment.

Certain changes are also made in Form GST DRC-03.

II. ADVANCE RULINGS

A) Classification – Namkeen / sweetmeats vis-à-vis jackfruit chips, banana chips and sharkara variety and others

M/s Sri Abdul Aziz, Glow Worm Chips AR Order No. KER/113/2021 dated 26th May, 2021

The applicant is engaged in business as a supplier of goods such as jackfruit chips, banana chips and sharkara variety without brand name. The applicant also intends to engage in the manufacture and supply of salted as well as masala chips made from tapioca and potato, roasted / roasted and salted / salted preparations made out of groundnuts, cashewnut and other seeds.

The applicant requested advance ruling on the following questions:
‘1. Whether jackfruit chips and banana chips (salted and masala varieties) made out of raw as well as ripe banana and sold without brand name are classifiable as namkeens and are covered by HSN code 2106.90.99 and taxable under Entry 101A of the Schedule of Central Tax (Rate) Notification No. 1 of 2017?
2. Whether sharkara variety sold without brand name is classifiable as sweetmeat and is covered by HSN code 2106.90.99 and taxable under Entry 101A of the Schedule of Central Tax (Rate) Notification No. 1 of 2017?
3. Whether roasted and salted / salted / roasted preparations such as of groundnuts, cashewnut and other seeds are namkeens and when sold without a brand name can they be classified under HSN 2106.90.99 and taxed under Entry 101A of Schedule I of Central Tax (Rate) Notification No. 1 of 2017?
4. Whether salted and masala chips of potato and tapioca are classifiable as namkeens and when sold without a brand name can they be classified under HSN 2106.90.99 and taxed under Entry 101A of Schedule I of Central Tax (Rate) Notification No. 1 of 2017?’

The applicant described the methods of preparation. It was submitted that jackfruit chips are made by frying the fruit in edible oil. Banana chips are made by slicing raw / ripe bananas into thin round pieces and frying in edible oil. Salt and turmeric are also applied. By adding masala fried banana masala chips are prepared. Sharkara variety is made by frying thick pieces of banana slices in edible oil. Thereafter, they are mixed thoroughly in a dense syrup of jaggery and then mixed in a powder of dried ginger and cardamom. Thus, jackfruit chips, banana chips and sharkara variety are edible preparations and the first two are savouries and sharkara variety is a sweetmeat. Accordingly, the applicant was levying GST at the rate of 5% by classifying the commodities under Entry 101A of Schedule I of Central Tax (Rate) Notification No. 1 of 2017.

In respect of further products to be dealt with, such as salted and masala chips made from tapioca and potato, it was submitted that these are sliced into round pieces and fried in edible oil. Salt is applied at the time of frying. After frying, these are sold as such or after mixing with masala. Salted chips and masala chips of tapioca and potato are commonly understood as namkeens. In respect of other products like roasted and salted / salted / roasted preparations made of groundnuts, cashewnuts and other seeds, it was submitted that they are commonly understood as namkeens.

The technical details and complete analysis of the above edibles is made in the AR. The claim of the applicant was that the products are classifiable under heading 2106 attracting a rate of 5% under Entry 101A of Schedule 1 of Notification No. 1/2017-Central Tax (Rate) dated 28th June, 2017.

The contention of the Revenue Officer was that the items were essentially prepared of vegetables, fruits, nuts or other parts of plants which fall under Chapter 20 of the Customs Tariff and even if a process is done, they remain in the above category.

The AAR considered the arguments in detail and observed that Chapter 21 of the Customs Tariff covers ‘Miscellaneous edible preparations’. The Heading 2106 of Chapter 21 covers food preparations not elsewhere specified or included, in the sense that these are residuary Entries in respect of edible preparations and hence the edible preparations shall be classified under this Entry only if the same are not classifiable under any of the other specific Entries for edible preparations.

He also referred to the Explanation appended to Notification No. 01/2017-Central Tax (Rate) dated 28th June, 2017 which directs to consider interpretation rules of the Custom Tariff Act for interpretation of entries in GST.

He referred to the rules for interpretation in the Custom Tariff Act and after analysing the same, he observed as under:
‘7.6. Accordingly, applying the principles of interpretation in Rule 2 of the General Rules for Interpretation of the First Schedule to the Customs Tariff Act, 1975 the jackfruit chips, banana chips, sharkara variety, tapioca chips and potato chips (whether salted / masala or otherwise) are classifiable under Tariff Heading 2008 19 40 of the Customs Tariff Act, 1975. Regarding classification of roasted / salted / roasted and salted cashewnuts, groundnuts and other nuts, there are specific headings under Chapter 20 that cover the products. Accordingly, roasted / salted / roasted and salted cashewnuts are classifiable under Tariff Heading 2008 19 10 and other roasted / salted / roasted and salted nuts and seeds are classifiable under 2008 19 20 of the Customs Tariff Act, 1975.’

The AAR referred to Entry 40 of Schedule II of Notification No. 1/2017-Central Tax (Rate) dated 28th June, 2017 and found that on a plain reading of the said Entry all the products that fall under Chapter Heading 2008 of the Customs Tariff Act,1975 attract GST at the rate of 12% (6% CGST + 6% SGST).

Accordingly, he determined the rate for different products as under:

*Sr. No.*	*Products*	*Entry*	*Rate*
1.	Jackfruit chips	Entry at Sl. No. 40 of Schedule II of Notification No. 01/2017 Central Tax (Rate) dated 28^th June, 2017	12%
2.	Banana chips	– do –	12%
3.	Sharkara variety	– do –	12%
4.	Roasted and salted preparation of groundnut / cashewnut	– do –	12%
5.	Salted and masala potato and tapioca	– do –	12%

Sr. No.

Products

Entry

Rate

Jackfruit chips

Entry at Sl. No. 40 of Schedule II of Notification No. 01/2017
Central Tax (Rate) dated 28^th June, 2017

12%

Banana chips

– do –

12%

Sharkara variety

– do –

12%

Roasted and salted preparation of groundnut / cashewnut

– do –

12%

Salted and masala potato and tapioca

– do –

12%

B) Rate of Tax on Construction Service / Eligibility to ITC

M/s Building Roads Infrastructure & Construction P. Ltd. AAR order No. 07/AP/GST/2021 dated 18th January, 2021

The applicant is an unregistered dealer expecting a contract for construction, erection, commissioning, widening of roads and completion of bridges for road transportation for use of the general public. He has to act as a sub-contractor to the main contractor who has been awarded a contract by the NHAI to construct, erect, commission, widen roads and completion of bridges in the State of Andhra Pradesh.

For clarity of liability under GST, the following questions were raised before the AAR:
‘1. What is the classification of the “works contract” services pertaining to construction, erection, commissioning and completion of “Bridges and Roads” provided by the applicant as a sub-contractor to the contractors who have been awarded the construction contract pertaining to construction / widening of roads by the Government Entities such as National Highway Authority of India?
2. Clarification for rate of tax chargeable on the outward supplies, i.e., on the RA bills raised on the main contractor.
3. Whether eligible to claim input tax credit on inward supply of the following goods: JCB, Road Roller, Grader, Hydra Crane, Transit Mixer, Generator, Excavator and Sensor Paver?’

The applicant was canvassing that this contract will fall under sub-Entry (iv) in Sr. No. 3 of Notification No. 11/2017 which reads as under:

*Sr. No.*	*Chapter, Section or Heading*	*Description of Service*	Rate (per cent)	*Condition*
1.	Heading 9954 (Construction Services)	iv) Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017, supplied by way of construction, erection, commissioning, installation, completion, installation, completion, fitting out, repair, maintenance, renovation, or alteration of – (a) a road, bridge, tunnel, or terminal for road transportation for use by general public…	12%	—

Sr. No.

Chapter, Section or Heading

Description of Service

Rate
(per cent)

Condition

Heading 9954 (Construction Services)

iv) Composite supply of works contract as defined in clause
(119) of section 2 of the Central Goods and Services Tax Act, 2017, supplied
by way of construction, erection, commissioning, installation, completion,
installation, completion, fitting out, repair, maintenance, renovation, or
alteration of – (a) a road, bridge, tunnel, or terminal for road
transportation for use by general public…

12%

—

It was further submitted that the other competing Entries at Serial No. 3(ix) and 3(x) are not applicable to the applicant as they are applicable to services provided by a sub-contractor to the main contractor who is in turn providing services specified in Serial No. 3(iii), 3(vi) and 3(vii) to the Government. Since the activity of construction of roads and bridges for transportation for use by general public of the Government (NHAI) is not specified in Serial No. 3(iii), 3(vi) and 3(vii), the activity of the applicant should correctly be classifiable under Entry at Serial No. 3(iv). It was also submitted that since the Entry at Serial No. 3(iv) does not specify that it should be made applicable only to a main contractor, it can be applicable to the main contractor as well to the sub-contractor appointed by the main contractor and accordingly the applicant is duly covered by the above Entry 3(iv).

In respect of ITC on inward supply of goods like JCB, Road Roller, etc., it was submitted that they are received and will be used in execution of works. They are received and used in the course of business and furtherance of business and therefore ITC is eligible.

The AAR referred to the above facts and Entry 3(iv). He further referred to the GST Council proceedings at its 25th meeting on 18th January, 2018 in which the recommendations at Item No. 12 were as under:
‘to reduce GST rate (from 18% to 12%) on the Works Contract Services (WCS) provided by sub-contractor to the main contractor providing WCS to Central Government, State Government, Union Territory, a Local Authority, a Governmental Authority or a Government Entity, which attract GST of 12%. Likewise, in WCS attracting 5% GST, their sub-contractor would also be liable to pay @ 5%.’

The AAR also observed that the National Highways Authority of India was set up by an Act of the Parliament, NHAI Act, 1988, under the administrative control of the Ministry of Road Transport and Highways to develop, maintain and manage the National Highways entrusted to it by the Government of India.

Accordingly, he held that the instant case was qualified to fit in the above category. He also agreed that its supply of service will fall under the Item 3(iv) of the amended provisions of the Notification No. 11/2017-Central Tax (Rate) and the rate of tax applicable will be 12% (CGST 6% + SGST 6%).

In respect of eligibility of ITC on JCB and other equipment, he referred to the Scheme of ITC in section 16(1) and held that the applicant is eligible to ITC as per section 16(1) subject to fulfilment of the conditions mentioned in Section 16(2), such as being in possession of tax invoice, having actually received goods or services, tax being paid by the supplier, return being filed u/s 39 and so on.

Referring to section 17(5)(c) of the CGST Act, 2017, the AAR held that it blocks ITC if input is work contract service. That not being the case here, the application of section 17(5)(c) was ruled out. Further, he referred to section 17(5)(d) which blocks ITC if there is own construction. Since that is also not the case in the instant case, he held that the applicant is eligible to ITC on the above goods.

Accordingly, the learned AAR opined in the affirmative on the given questions.

BCAJ Admin

Recent Developments in GST

A. NOTIFICATIONS

1. Notification No.11/2023-Central Tax dated 24th May, 2023

The above notification seeks to extend the due date, for furnishing return in Form GSTR-1 for the month April 2023, to 31st May, 2023 for registered persons whose principal place of business is in the State of Manipur.

2. Notification No.12/2023-Central Tax dated 24th May, 2023

The above notification seeks to extend the due date, for furnishing return in Form GSTR-3B for the month April 2023, to 31st May, 2023 for registered persons whose principal place of business is in the State of Manipur.

3. Notification No.13/2023-Central Tax dated 24th May, 2023

The above notification seeks to extend the due date, for furnishing return in Form GSTR-7 for the month April 2023, to 31st May, 2023 for registered persons whose principal place of business is in the State of Manipur.

B. INSTRUCTIONS

i) Instruction No.2/2023-24 (GST) dated 26th May, 2023
By above instruction, guidelines about Standard Operating Procedure for Scrutiny of Returns, for F.Y. 2019-2020 onwards, are made available on the ACES-GST application.

C. ADVANCE RULINGS

24 Gandour India Food Processing Pvt Ltd
(A. R. Com/03/2022 dated 14th September, 2022)
TSAAR No.53/2022 (Telangana)

Classification via-a-vis Service Code

M/s Gandour India Food Processing Pvt Ltd in Cherlapalli, Rangareddy, Hyderabad is a top player in the category of Chocolate Manufacturers established in the year 1987. It is known to provide top services in the categories of Chocolate Manufacturing, Confectionery Manufacturing, Food Product Retailing, Sugar Coated Chocolate Manufacturing, etc. It also provides job work services wherein from the materials supplied by principals it manufactures chocolates for them and delivers back to them. Thus, it is a “Job Work provider” doing job work of manufacturers of chocolates (food product falling under Chapter 19 of customs tariff Act) with inputs provided by the “job work receiver”. Its services come under SAC Code 9988 with applicable tax rate of 5 per cent.

The issue raised was in light of requirement of mentioning SAC code on invoices vis-à-vis rate of tax.

By notification 78/2020, applicant is required to mention a six-digit SAC on their service invoices w.e.f. 1st April, 2021. Accordingly, the SAC code applicable on invoices is 998816. But the applicant could not find separate tax rate for this six-digit code in the service code classification. Therefore, this AR application.

To arrive at a conclusion about the given issue the ld. AAR analysed basic position. The ld. AAR decided as to whether the applicant falls under supply of services or not?

The ld. AAR made reference to Para 3 of the Schedule II of the CGST Act, which specifies certain activities to be treated as supply of goods or supply of services. Para 3 provides that “Any treatment or process which is applied to another person’s goods is a supply of services”.

Accordingly, the ld. AAR held that the supply of the applicant is that of ‘supply of Service’.

The ld. AAR than made reference to Service Code 9988 and reproduced Explanation note there to as under:

“9988 Manufacturing services on physical inputs (goods) owned by others

The services included under Heading 9988 are performed on physical inputs owned by units other than the units providing the service. As such, they are characterized as outsourced portions of a manufacturing process or a complete outsourced manufacturing process. Since this Heading covers manufacturing services, the output is not owned by the unit providing this service. Therefore, the value of the services in this Heading is based on the service fee paid, not the value of the goods manufactured.”

The ld. AAR held that this heading covers those services characterised as outsourced portions of a manufacturing process. Since in the case at hand, the job work done by the applicant is a portion of manufacturing process
of the customer of the applicant, the ld. AAR held that the activity of the applicant is covered under SAC 9988.

The ld. AAR also referred to definition of “Job-work” in Section 2(68) which is as below:

“Section 2(68) of CGST Act defines “Job work means any treatment or process undertaken by a person on goods belonging to another registered person and the expression” job worker’ shall be construed accordingly.”

The ld. AAR accordingly held that the activity of undertaking manufacturing services by a registered person on the physical inputs owned by another registered person is a Job work. In the case at hand, the applicant is a registered person and when he undertakes work on the goods belonging to another registered person, then, the nature of work of the applicant is job work, observed the ld. AAR.

Thereafter, the ld. AAR referred to Sl.No.26 in Notification no.11/2017-CT(R) dated 28th June, 2017 along with various amendments there in from time to time in which rate of tax for heading 9988 is provided.

The ld. AAR also referred to Notification no.78/2020-CT dated 15th October, 2020 and further amendment there in from the 1st April, 2021 by which the requirement of mentioning code is made six digits, if aggregate turnover is more than Rs 5 crores.

The ld. AAR also referred to Annexure to Scheme of Classification of Services and SAC code at Sr. No. 498 there in, where the heading of said service is as under:

“Annexure: Scheme of Classification of Services
Sr. no.	Chapter, Section, Heading or Group	Service Code (Tariff)	Service Description
(1)	(2)	(3)	(4)
498	Heading 9988		Manufacturing services on physical Inputs (goods) owned by others
499	Group 99881		Food, beverage and tobacco manufacturing services.
500		998811	Meat processing services
501		998812	Fish processing services
502		998813	Fruit and vegetables processing services
503		998814	Vegetable and animal oil and fat manufacturing services.
504		998815	Dairy product manufacturing services
505		998816	Other food product manufacturing services”

Based on combined reading of the above notifications, explanation and SAC codes, the ld. AAR held that the SAC code of the Service Offered by applicant is “998816” i.e., “Other food product manufacturing services” and the rate of tax as seen from the above entry is 2.5 per cent CGST and 2.5 per cent SGST.The ld. AAR accordingly passed order as under:

“Questions	Ruling
1. GST Tax rate on Service Accounting Code 998816.	2.5% CGST and 2.5% SGST “

25 Accurex Biomedical Pvt Ltd
Order No. MAH/AAAR/AM-RM/12/2022-23
Dated 30th September, 2022) (Mah)

Classification of productsThe facts are that M/s Accurex Biomedical Pvt Ltd, is, inter-alia, engaged in the business of supply of various diagnostic reagents.

Out of the various range of products, the appellant sought ruling in respect of the classification of the following two products:

(A) Turbilatex CRP Infinite

(B) HbA1c Infinite

Infinite Turbilatex CRP (hereinafter referred to as “CRP Test Kit”) is supplied by the appellant under the brand name “Infinite”. This product is meant for in-vitro diagnostic use only.

CRP Test Kit is used for the quantitative determination of C-Reactive Protein (CRP) in human serum for medical diagnosis of inflammation and infections.

It contains following components:

Components	Description
R1	Buffer Reagent
R2	Latex Reagent
R3	Calibrator Lyoph Serum Vial

Further the principle on which the product is based is stated in appeal order are as under:“(i) CRP Test Kit is based on agglutination principle between latex particles coated with specific anti-human CRP to determine CRP in the sample. To a naked eye, it is impossible to detect the process of agglutination. That is why, to facilitate easy detection of agglutination, “carriers” were chosen on which the specific antibodies could be coated.

(ii) R2 contains latex particles coated with specific anti human CRP which reacts with CRP in the sample resulting in agglutination. Agglutination causes change in absorbance, measured at 540 nm (530 – 550 nm) & is proportional to the concentration of CRP in the sample.

(iii) The affinity purified polyclonal antibodies are coated on the latex particles, these latex beads act as carrier for the spectrophotometric detection of antigen CRP in human serum/plasma via reaction with agglutination sera coated onto the latex reagent.

(iv) The essential component of the CRP Test Kit is R2 since it contains the antiserum. In fact, around 85% of the total cost of the CRP Test Kit is attributable to component R2.”

The further details about preparation of work solution are also given.

Similarly details are given in respect of Infinite HbA1c – This product is used for the quantitative determination of hemoglobin A1c (HbA1c) in human blood and monitoring of glycemic control in diabetic patients.

It has following components:

Components	Description
R1	Latex reagent
R2	Buffered antibody reagent
R3	Hemolysis Reagent
R4	Optional-Calibrator made from human blood

The principles on which the product is based as well as preparation for working solution are also given.The principles on which the product is based as well as preparation for working solution are also given.

Based on above facts the appellant had filed an application for Advance Ruling before Maharashtra AAR seeking an advance ruling on the question about classification of CRP Test Kit & Hb1Ac Test Kit. Questions are reproduced as under:

“(a) Under HSN Code 30.02 at Entry No.125 of List 1 of Sr. No 180 under Schedule-I of the Notification No.1/2017-Central Tax (Rate), dated 28.6.2017 as “Agglutinating Sera”; or

(b) Under HSN Code 38.22 at Sr. No 80 under Schedule-II of the Notification No.1/2017-Central Tax (Rate), dated 28.6.2017 as “diagnostic kits and reagents”.”

The ld. AAR gave ruling No.GST-ARA-98/2019-20/B-72 dated.11th October, 2021 and held that CRP kit and Hb1Ac kit do not fall under HSN code 3002, and the same are covered by HSN Code 3822.

Therefore, this appeal was filed before ld. Appellate Authority for Advance Ruling (AAAR) and various contentions were raised in support of appeal.

The ld. AAAR heard both sides and observed that AAR has held CRP kit and Hb1Ac kit as not falling under HSN code 3002 and held as covered by HSN Code 3822, on the ground that Entry No.125 of List 1 of Sr. No. 180 of Schedule I of Notification No. 1/2017-Central Tax (Rate), dated 28th June, 2017, mentions the word “Agglutinating Sera”, and it is not followed by the word ‘diagnostic kits’, whereas, there are other entries in the same List 1 wherein there is a specific mention of diagnostic kit. The AAR has further observed that “Agglutinating Sera” listed under Sr. No. 125 of List 1 of Schedule I covers agglutinating sera as an individual product, and not as a diagnostic kit which works on the principle of “Agglutinating Sera”.

The ld. AAAR made a detailed reference to material submitted before it by both parties and also referred to judgment of Hon. Supreme Court in case of Span Diagnostics Ltd. vs. CCE, Surat-2007(211) ELT 521 (SC).

The Ld. AAAR applied ratio of the aforesaid judgment of the Hon’ble Supreme Court and observed that CRP Test Kit, whose principal component is the latex particles coated with the anti-human CRP antibody obtained from the mice antisera, will aptly be construed as antisera. Accordingly, the ld. AAAR held that it will be classified under the Chapter Heading 30.02, and not under the Chapter Heading 38.22 owing to its description wherein it is categorically mentioned that a diagnostic or laboratory reagents which are not falling under the Chapter Heading 30.02 will be covered under the Chapter Heading 38.22. Accordingly, it is held that, the product under question is aptly classifiable under the Chapter Heading 30.02 and therefore, the said impugned product, i.e., CRP Test Kit, will not be classifiable under the Chapter Heading 38.22.

Regarding the issue as to whether the impugned product, i.e., CRP Test Kit, can be construed as “agglutinating sera” mentioned at Sl. No. 125 of the List I appended to the Schedule I to the Notification No. 01/2017-C.T. (Rate) dated 28th June, 2017 or not, the ld. AAAR observed that the said impugned product works on the principle of agglutination where the latex beads coated with the antisera reacts with the CRP of the human blood sample resulting into agglutination, which ultimately leads to diagnosis of inflammation or infection in the human body with the help of spectrophotometer. In view of this, it is held by the ld. AAAR held that the impugned product, i.e., CRP Test kit, which has been held as antisera, and which works on the principle of agglutination for the medical diagnosis of infection and inflammation in the human body, is construed as agglutinating sera.

Accordingly the ld. AAAR held that the impugned product will fall under entry “agglutinating sera” at Sl. No. 125 of the list I appended to the Schedule I to the Notification No 01/2017-C.T. (Rate) dated 28th June, 2017 and the said product, CRP Test Kit, will attract GST at the rate of 5 per cent (CGST @ 2.5 per cent + SGST @ 2.5 per cent) in terms of the entry at Sl. No. 180 of Schedule I to the Notification No. 01/2017-C.T. (Rate) dated 28th June, 2017.

The ld. AAAR classified the other product viz: Hb1Ac Test Kit, also in same category of CRP Test Kit and held the same liable to GST @ 5 per cent.

Thus, the appeal filed by the appellant is allowed.

26 Gurjinder Singh Sandhu
(Prop. M/s New Jai Hind Transport Service)
(Ruling No.10/2022-23 in Appl.no.06/2022-23 dated 26th September, 2022) (Uttarakhand)

Valuation – Fuel Cost

The applicant is in the process of discussion for providing transport of goods service by road to a recipient which is not a related person and for which the consignment note will be issued by the applicant. As per the draft agreement, the applicant will have to transport the goods from the factory of the recipient of service to the destination specified by the recipient by deploying vehicle with driver/staff to run/operate, for exclusive transport of their goods. The applicant will charge recipient for transport and GST thereon on forward charge basis. However, the applicant will charge for transportation. The fuel required to transport the goods shall not be within the scope of work of the applicant and it will be borne by the recipient. Since the fuel (diesel) is not in the scope of the applicant as per draft agreement, while charging GST at the applicable rate, the applicant will not include cost of the fuel consumed/ used for transport of the goods.

In view of the above facts, the applicant sought an advance ruling as to “Whether the value of free diesel filled by service recipient under the accepted terms of contractual agreement in the fleet(s) placed by GTA service provider will be subject to the charge of GST by adding this free value diesel in the value of GTA service, under the Central Goods and Services Tax Act, 2017, Uttarakhand Goods and Service Tax Act, 2017?”

During the hearing, the applicant contended that GST is tax on consumption and not on business. Hence, in present case, what is being consumed by the service recipient will be the activity carried by the Applicant i.e., GTA service & consequently freight charges. The FOC fuel, being a liability of the service recipient on its own, cannot be said to be a value addition brought forth by the Applicant. Hence, such free fuel cannot be made leviable to GST.

It was further contended that in the facts of present case, the FOC fuel does not constitute a “supply” as there is neither transfer of property nor there is any consideration involved in respect of fuel. Since the fuel will be directly filled in the fuel tank of the goods carriage only for the purpose of transporting goods belonging to service recipient, the fuel cannot be construed to be supplied to the applicant.

Ruling of AAR Karnataka in M/s. Hical Technologies Pvt Ltd, 2019 (10) TMI 571 – 2019-VIL-305-AAR cited in which it is held that the value of the goods provided by recipient would not form the part of the value of the supply and must be excluded while valuing the supply. The rulings of AAAR of Karnataka in M/s Nash Industries (I) Pvt Ltd -2019 (3) TMI 435 – 2019-VIL-08 and Maharashtra AAR in M/s Lear Automotive India Pvt Ltd- 2018 (12) TMI 766 – 2018-VIL-318-AAR were also cited in which similar view is taken.

The ld. AAR made reference to Section 15 of the CGST Act, 2017 and reproduced the same in full.

The ld. AAR observed that the section provides that the value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.

The ld. AAR analysed section 15 and further observed that there is a specific mandate that the value of supply shall include (a) any taxes, duties, cesses, fees and charges levied under any law for the time being in force other than this Act, the State Goods and Services Tax Act, the Union Territory Goods and Services Tax Act and the Goods and Services Tax (Compensation to States) Act, if charged separately by the supplier; and (b) any amount that the supplier is liable to pay in relation to such supply but which has been incurred by the recipient of the supply and not included in the price actually paid or payable for the goods or services or both.

Accordingly, the ld. AAR held that Section 15 of the CGST Act, 2017 unambiguously mandates that the value of supply shall include, among others things, any other amount that the supplier is liable to pay in relation to such supply but which has been incurred by the recipient of the supply and not included in the price actually paid or payable for the goods or services or both.

Referring to section 7 of the CGST Act, 2017 and relevant provisions, the ld. AAR held that all forms of supply of goods or agreed to be made for a consideration, is a part of supply. Reference also made to term “consideration” defined in Section 2(31) of the CGST Act, 2017. The ld. AAR held that the said definition mandates that consideration includes any payment whether in money or otherwise, made or to be made or monetary value of any act or forbearance for the inducement of the supply of goods. The usage of the terms “or otherwise” and “or forbearance for the inducement of the supply of goods or services or both, whether by the recipient”, in the statute leaves no doubt about the spirit and essence of the Act, observed the ld. AAR.

The ld. AAR observed that in normal business transaction applicant is required to include the cost of fuel, but by putting terms and conditions in agreement which apparently suites themselves, the applicant is trying to circumvent the statute, which appears to be not the intent of the Parliament.

The ld. AAR observed that without the fuel, the vehicle does not run and without running i.e. moving from one place to another, the act of transportation of goods by road cannot take place. The ld. AAR opined that to prove claim of providing the services of transporting the goods, actual transportation has to take place and without fuel this cannot happen and if there is no transportation of goods due to absence of fuel or any other reason the same cannot be termed as “GTA service”. In such a case, the same can be termed as rental or leasing service.

The ld. AAR held that by merely issuing consignment notes, the service cannot be termed and classified as “GTA service”, as the ingredient of transport of goods comes into play, when and only when the vehicle in running condition along with operator have been provided by the service provider. The running condition implies that all the upkeep, maintenance, operation including that of fuel is the liability of the service provider and the “Price/freight charges” as referred to by the applicant are insufficient for supply of “GTA Services”, observed the ld. AAR. The contention of the applicant that Contract price cannot be rejected as it will tantamount to undermining “freedom of contract” and “sanctity of contract” between the parties held as not sacrosanct being against the essence and spirit of the GST Act enacted by the Parliament.

The ld. AAR rejected to rely on other decision and that of M/s Bhayana Builders Pvt Ltd. The ld. AAR referred to Hon’ble Supreme Court judgment in the case of M/s ABL Infrastructure Pvt Ltd, vs. CCE in civil appeal No. 41950/2018 dated 03rd December, 2018 wherein the appeal filed by M/s ABL Infrastructure Pvt Ltd, against the CESTAT Order dated 28th September, 2017 favoring the Service Tax Department for inclusion of value of free goods and material into the “gross amount charged”, is dismissed.

The other arguments like, revenue neutral, difficulty in finding price of fuel etc., rejected by Ld. AAR.

The ld. AAR held that “The value of free diesel filled by the service recipient in the vehicle(s) provided by the applicant will subject to the charge of GST by adding the free value of diesel to arrive at the transaction value of GTA service.”

27. Innovative Nutrichem Pvt. Ltd. (Adv. Ruling No. KAR ADRG 37/2022 dt.27.10.2022) (Karnataka) RCM vis-à-vis Exempted Outward Supply.

The applicant is in the business of manufacture and supply of animal feeds, which are exempted goods under GST. The applicant utilizes the GTA / Security Services that are covered under Reverse Charge Mechanism (RCM).

The applicant has sought advance ruling in respect of the following question:

“Whether they are liable to pay GST under RCM for the services procured from the respective service providers being the manufacturer and supplier of exempted goods falling under HSN 23099020.”

The applicant’s products are classifiable under HSN 23099020, and they are exempted from GST vide entry No. 102 of the Notification No.02/2017-Central Tax (Rate) dated 28th June, 2017; Applicant uses the services of Goods Transport Agencies (GTA) to transport their products/ goods and pay the freight/transportation charges to the transport operators. GTA services fall under Reverse Charge Mechanism (RCM) vide entry No.01 of the Notification No. 13/2017- Central Tax (Rate) dated 28th June, 2017. Similarly they also use the security services, which also fall under RCM vide entry No. 14 of the Notification No. 13/2017-Central Tax (Rate) dated 28th June, 2017, as amended vide notification No.29/2018-Central Tax (Rate) dated 31st December, 2018.

Applicant’s contention was that they supply animal feeds (exempted goods) and hence the Reverse Charge Mechanism Notification No. 13/2017 dated 28th June, 2017 is not applicable to them.

The ld. AAR made reference to section 9 which is for levy and collection. The said section is reproduced in AR as under:

“(1) Subject to the provisions of sub-section (2), there shall be levied a tax called the central goods and services tax on all intra-State supplies of goods or services or both, except on the supply of alcoholic liquor for human consumption, on the value determined under section 15 and at such rates, not exceeding twenty per cent., as may be notified by the Government on the recommendations of the Council and collected in such manner as may be prescribed and shall be paid by the taxable person.

(3) The Government may, on the recommendations of the Council, by notification, specify categories of supply of goods or services or both, the tax on which shall be paid on reverse charge basis by the recipient of such goods or services or both and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.”

The ld. AAR also reproduced notification issued under section 9(3) about RCM.

The ld. AAR on analysing the above provisions held as under:

“11. The applicant, admittedly is a registered person under GST Act and located in the taxable territory. They are the recipients of the services of the Goods Transport Agency and Security services, which are squarely covered under the category of supplies attracting GST liabilities on reverse charge basis, in terms of the Notification supra. Further Section 9(3) of the CGST Act 2017 stipulates that all the provisions of the CGST Act 2017 shall apply to the recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both, where the tax shall be paid on reverse charge basis by the recipient. Thus the recipient of service is liable to pay GST in respect of the services notified under Section 9(3) of the Act, ibid read with Notification 13/2017-Central Tax (Rate). It is pertinent to mention that GST is levied on the supply of service and liability is fastened independently for each of the supplies. Levy of tax or otherwise on a particular supply does not have a bearing on the taxability of other supplies received or provided by a taxpayer. Thus the exemption provided to the outward supplies of the applicant does not have a bearing on the GST liabilities under reverse charge basis on the supplies received by the applicant.”

The ld. AAR confirmed liability to RCM in spite of appellant’s outward supply is exempt.

BCAJ Admin

Service Tax

TRIBUNAL

6. Commissioner of Central Excise & Service Tax, Goa vs. Goa Golf Club Pvt Ltd
Date of order: 9th February, 2023

Share of Profit received by co-venturer under a joint venture agreement was not liable to service tax.

FACTS

Respondent M/s Goa Golf Club Pvt Ltd (GGCPL) had entered into a joint venture agreement with M/s Britto Amusement Pvt Ltd (BAPL) to run and operate a casino at the premise of M/s BAPL, on a mutually agreed profit-sharing ratio. SCN was issued demanding service tax on the distribution of share of profit. The respondent submitted the response and the adjudicating authority dropped the demand of service tax. Aggrieved by the same, an appeal was filed by the department contesting the dropping of service tax demand.

HELD

Tribunal after relying upon Circular No. 109/03/2009 dated 23rd February, 2023 held that there was no relationship of the service provider and service receiver with the parties to joint venture agreement. Also, no consideration was received by GGCPL for rendering any service. Consequently, the appeal was decided in the favor of respondent.

7. M/s Lakshmi Electrical Driver Ltd. vs. CCE & ST (Appeals)
2023-TIOL-462-CESTAT-MAD

Whether RCM is applicable under section 66A when the foreign service provider has a 100 per cent subsidiary in India.

FACTS

Appellant, a manufacturer, availed services of technical inspection and certification for which payment was made in foreign currency to a company in Canada who had also issued inspection certificate. However, the said service was performed by a 100 per cent subsidiary of the Canadian company in India. During departmental audit, the revenue raised the issue of non-payment of service tax under Reverse Charge Mechanism (RCM) for payment made to the foreign party who had also issued the certificate of inspection. It was the Revenue’s contention that in terms of sub-section (2) of section 66A, when a person is carrying only business through a permanent establishment in a country other than India, such permanent establishments shall be treated as separate persons for the purpose of this section. On the other hand, as per the appellant, relying on Explanation 1 it was argued that a person carrying on a business through a branch or agency in any country shall be treated as having a business establishment in that country, and since the Canadian company had 100 per cent subsidiary in India which had performed the service, RCM was not applicable to them. The appellant in support of their contention, submitted factory inspection reports which were signed by the representatives from the Indian subsidiary company to evidence that services were performed in India by the subsidiary company.

HELD

It was observed that at the relevant time (period of 2009-2010) there was no condition attached for RCM that the Foreign Service provider should not have an office in India. The reports indicate that the inspection service was performed in India though the certificate was issued by the Canadian company. Hence, invoking section 66A of the Finance Act and fastening tax liability on appellant on RCM basis is not legally sustainable. Accordingly, the appeal was allowed.

8. M/s Max Life Insurance Company Ltd. vs. CCE-ST
2023-TIOL-426-CESTAT-DEL
Date of order: 12th April, 2023

Service Tax on interest for reviving a lapsed insurance policy not liable to be paid.

FACTS

The issue in the appeal relates to leviability of service tax on the amount of interest charged by the appellant insurance company on the reinstatement of a lapsed policy. The Service Tax was confirmed for the reasons of lapsed interest charged for revival of the lapsed policy. According to the Revenue, interest was not chargeable when the policy got terminated on account of the failure to make premium payment. Interest was not charged at a uniform rate and according to the revenue, it must be recovered periodically and whereas it was neither charged at a uniform rate nor periodically. It was alleged that it was not interest, and was in the nature of administration charge or a processing fee and hence liable for service tax.

In the said context, the basic concepts of a life policy were examined and more specifically the relevant aspect was that the policy contract allows a policy holder to revive a lapsed policy within a specified period of non-payment of the last premium and subject to payment of overdue premium, along with charges as per terms and conditions specified in the policy. In the instant case, the policy specified the payment of overdue premium along with interest. Thus, a policy does not terminate on non-payment of premium due.

HELD

The order of the Commissioner was held unsustainable as the contract provided for interest only and not for any processing fee or administration charge.

9. M/s. SEW Infrastructure Ltd vs. CCE
2023-TIOL-470-CESTAT-DEL
Date of order: 2nd May, 2023

Composite contracts involving both good and services are necessarily works contracts and were not liable for service tax prior to the introduction of specific entry on 1st June, 2007.

FACTS

Appellant, an infrastructure construction company executed turnkey contracts such as irrigation, power projects, etc. An electric supply company awarded a contract for setting up a power plant to Bharat Heavy Electricals Ltd (BHEL) who in turn sub-contracted a portion of the work to the appellant. The job required the appellant to perform land development involving earth work, excavation, back filling, site levelling, grading and disposal. The Revenue alleged that it was an activity that would be categorised as “site formation and clearance excavation and earthmoving and demolition” as contained in section 65(97a) of the Finance Act, 1994 and hence taxable under section 65(105)(zzza) of the Act. Further, the payment made through CENVAT credit was also rejected on the grounds that invoices on which the credit was availed were not issued to the Bhilai premises of the appellant. However, the credit availed was already reversed by the appellant. The period involved in the case was up to September, 2006.

HELD

a) The work order is a composite contract consisting of goods and services. The contract specified that earth work was to be done by using borrowed good earth and which had to be arranged by the contractor at its own cost. Relying upon Larsen & Toubro’s case 2015-TIOL-187-SC-ST, it was observed that in that case a distinction was drawn between service contracts simplicitor and composite works contracts which would involve both services and goods. It was held in that case that it was a composite contract involving both goods and services as the work order so specified and hence, the service performed was a works contract and not one of “site formation” service. However, only after 1st June, 2007, this service was subjected to service tax. Hence prior to this date, no service tax was payable.

b) As regards availment of CENVAT credit, it was held that since the order finds that no service tax was liable to be paid prior to 1st June, 2007, the appellant cannot avail CENVAT credit. However, interest was not chargeable as the credit was already reversed by the appellant. Thus, penalty and interest were also set aside.

BCAJ Admin

Goods and Services Tax

I. SUPREME COURT

26. VVF India Ltd. vs. State of Maharashtra
2023 (72) GSTL 444 (S.C.)
Date of order: 3rd December, 2021

Amount paid under protest before passing of assessment order can be adjusted against amount of mandatory pre-deposit for filing an appeal as per section 26(6A) of MVAT Act, 2002.

FACTS

The petitioner was issued a SCN notice demanding payment of tax along with interest. It submitted a reply contesting the said demand. During the course of personal hearing, an amount was deposited comprising of tax and interest under protest. Later, an assessment order was passed by respondent imposing tax along with penalty after adjusting the amount paid under protest. The petitioner filed an appeal against the order of assessment which was rejected by the appellate authority on the ground that payment made under protest could not be considered towards mandatory pre-deposit as per section 26(6A) of MVAT Act, 2002. Further, the Hon’ble High Court also dismissed the petition contending that petitioner was duty bound to deposit 10 per cent of total tax liability after adjusting the amount already paid under protest, prior to the said order. Being aggrieved, petitioner preferred this petition before the Hon’ble Supreme Court.

HELD

The Hon’ble Supreme Court held that section 26(6A) of MVAT Act, 2002 does not specifically exclude amount deposited under protest for calculation of mandatory pre deposit. Also, taxing statute should be strictly construed as it stands, by adopting the plain and grammatical meaning of the words used which was deviated by the Hon’ble High Court. The appeal was allowed to be restored, subject to depositing 10 per cent of tax disputed amount by the petitioner. The petition was allowed in favor of the petitioner.

II. HIGH COURT

27. Brij Mohan Mangla vs. Union of India
2023 (72) G.S.T.L. 511 (Del.)
Date of order: 23rd February, 2023

Refund cannot be withheld by the department merely because it has decided to file an appeal against order granting refund passed by the appellate authority.

FACTS

The petitioner had filed a refund claim of accumulated ITC. Thereafter, SCN was issued stating why the claimed refund should not be rejected due to non-existence of premises on physical verification and cancellation of GSTIN registration. The petitioner’s explanation was not accepted since he was no longer a registered person. Subsequently, an order rejecting refund claim was passed by respondent. Further, an appeal was filed by the petitioner against order rejecting refund and the same was decided in favor of petitioner by Appellate Authority since it was registered at the time of application of refund. However, the respondent did not process the petitioner’s claim for refund on the grounds that it was decided that an appeal was to be filed against the order passed by the Appellate Authority. Aggrieved by the same, the petitioner preferred this petition before Hon’ble High Court.

HELD

It was held that the Respondent cannot refuse to follow the order granting a refund passed by the Appellate Authority even if department intended to file an appeal. It would debilitate the rule of law if respondents were permitted to withhold implementation of orders passed by the authority. The Respondent was directed to process the petitioner’s claim for refund along with interest and petition was allowed.

28 Y.B. Constructions Pvt Ltd vs Union Of India
2023 (72) G.S.T.L. 332 (Ori.)
Date of order: 22nd February, 2023

Rectification of error while filing GSTR -1 after the time limit was allowed since tax was already deposited with the Government and recipient was entitled to ITC.

FACTS

The petitioner had wrongly shown supplies under B2C instead of B2B while filing outward supply return in GSTR-1 for a period of two years. As a result, recipient was not able to avail ITC. This error was noticed subsequently after the time limit for rectification of returns filed had passed. Thereafter, the petitioner requested the respondent to permit correction in GSTR-1 forms but the same was denied by the respondent stating that deadline for rectification of forms was over and hence permission for the same could not be granted to the petitioner. Being aggrieved by such denial, this petition was filed before Hon’ble High Court.

HELD

Hon’ble High Court relied upon the decision made in the M/s Sun Dye Chem. vs. Assistant Commissioner (ST) [2021 (44) G.S.T.L. 358 (Mad.)] case wherein the petitioner was permitted to file the corrected form. Further, it was held that allowing the petitioner to rectify the mistake would not result in any loss to the respondent, as there was no escapement of tax. The petitioner was thus allowed to resubmit the corrected GSTR-1 manually to respondent and enable their uploading on the GST portal. Consequently, a petition was disposed of in favor of the petitioner.

29 Siddharth Associates vs. State Tax Officer, Ghatak 103 (Gandhidham)
2023 (72) GSTL 299 (Guj.)
Date of order: 11th January, 2023

Registration cancelled by passing a non-speaking order is violative of principle of natural justice, it ought to be restored.

FACTS

The petitioner was a registered person engaged in the business of civil construction work. Registration of the petitioner was suspended by issuing SCN. Subsequently, an order cancelling his registration was passed. Thereafter, an appeal was filed 75 days after expiry of time of three months and hence it got rejected on the grounds of time bar. Hence, no opportunity was granted for personal hearing. Being aggrieved by the order cancelling the registration and not mentioning the reason for such an order, the petitioner preferred a writ petition before this Hon’ble High Court.

HELD

The hon’ble High Court squarely relied upon the decision in Aggarwal Dyeing & Printing Works (Supra) vs. State of Gujarat [2022 (66) GSTL 348 (Guj.)] wherein it was held that it is a settled law that assigning reasons in speaking order are heart and soul of the order and non-communication of the same itself amounts to denial of reasonable opportunity of being heard which results in miscarriage of justice. Accordingly, order cancelling the registration was set aside with a direction to issue fresh notice and pass a speaking order after providing opportunity of personal hearing.

30 Marjit Basumatary vs. The Union of India and Others (Gauhati High Court)
Date of order:7th June, 2023 in WP(C)/2620/2023

“Reasons to believe” examined in lease mining.

FACTS

Petitioner, a works contractor of construction of roads and bridges is also engaged in undertaking mining of sand, stone etc. under license from the forest department of the State of Assam Government against payment of royalty. Consequent upon investigation by DGGI under section 67 of CGST Act triggered based on alleged intelligence for GST payable under reverse charge mechanism on the royalty, audit was conducted under section 65 of the CGST Act and issued a Show Cause Notice proposing demand of GST on various grounds including mismatch of credit, delayed filing of returns, etc. The petitioner challenged legality and validity of the Show Cause Notice as well as the letter issued by DGGI’s office at Gauhati.

The petitioner produced books of account and records before the authorities and submitted that the issue of GST on royalty and/or mining lease was the subject matter of decision by a larger bench of Supreme Court of India and in support, they cited inter alia, the order dated 19th September, 2018 of Gujarat High Court in the case of Gujmin Industry Association vs. UOI R / Special Civil Appl. No.8167/2017 and others and order dated 04th October, 2021 passed by the Supreme Court of India in the case of Lakhwinder Singh vs. UOI W.P.(C) 1076/2021. However, according to the petitioner they did not receive the relied upon documents which they had demanded from the department and hence they were prevented from making exhaustive reply to the Show Cause Notice. Per revenue, the relied upon documents are listed in the Show Cause Notice annexure and the department is not liable to disclose the material giving them “reasons to believe”.

HELD

The department is directed to produce record relating to the Show Cause Notice for the perusal of the Court and copies would not be provided to the petitioner and as an interim measure, the department was directed to defer the proceeding.

31. Instakart Services (P.) Ltd. vs. Sales Tax Officer
[2023] 151 taxmann.com 192 (Delhi)
Date of order: 31st May, 2023

If there is an inadvertent or typographical error that has crept in any returns, the taxpayer cannot be mulcted with the tax liability in excess of what is due and payable.

FACTS

The petitioner had inadvertently typed its CGST liability in GSTR-3B of September 2017 as Rs.32,33,36,855 instead of Rs.3,23,36,855. It discharged its liability by using the available balance of Input Tax Credit (ITC) in the electronic credit register; an ITC of Rs.29,10,00,000 was used for discharging the said liability, which the petitioner claims as an apparent error. The petitioner immediately reversed the said ITC that was used for discharging the overstated liability and reported the same in its returns filed for the month of October, 2017. Thereafter, the petitioner filed its GSTR-1 for the month of September, 2017 and correctly stated the tax liability at Rs. 3,23,36,855 instead of Rs.32,33,36,855 as reported earlier. Notwithstanding the fact that the petitioner had rectified the apparent mistake, the department issued a letter informing the petitioner as to the mismatch in the FORM GSTR-2A and FORM GSTR-3B for the relevant financial year. The petitioner clarified the same, however, it appears that the said clarification was not considered and SCN was issued to the petitioner.

HELD

The Hon’ble Court held that if there is an inadvertent or typographical error that has crept in any returns, the taxpayer cannot be mulcted with the tax liability in excess of what is due and payable. It is apparent that the explanation provided by the petitioner has not been considered. The Court, therefore, directed the concerned authority to pass an appropriate order pursuant to the show cause notice considering the petitioner’s responses to the show cause notice.

32 Samyak Metals (P.) Ltd vs. UOI[2023]
151 taxmann.com 225 (Punjab & Haryana)
Date of order: 24th May, 2023

When the assessee makes the payment through DRC-03 during the investigation and the department neither issued acknowledgment in DRC-04 nor the show cause notice under sections 73 or 74 of the CGST Act, even after the significant lapse of time, the High Court directed the department to refund the said amount with interest.

FACTS

The business premises of the petitioner were searched. During the course of the search, the department examined the purchase ledger of one party, and the petitioner was forced to deposit tax against the Input Tax Credit claimed by it on the purchases made from the said party along with interest and penalty vide DRC-03. The grievance of the petitioner was that even after depositing the said amount, no GST DRC-04 has been issued by the department and amounts have been recovered from them without passing any adjudicating order or following any procedure under sections 73/74 of the Act.

HELD

The Hon’ble Court observed that the petitioner has deposited the tax in terms of provisions of section 74(5) of the CGST Act. As per Rule 142(2) of the CGST Rules, when a payment is made in FORM GST DRC-03, the proper officer has to issue acknowledgment, accepting the payment made by the said person in FORM GST DRC-04. The Court observed that although payment was made long back, no DRC-04 or notice under section 74(1) was issued to the petitioner. The Court also observed that the department has faulted with the Government’s instruction No.01/2022-23 dated 25th May, 2022 in which it is clarified that there is no bar on the taxpayers for voluntarily making the payments based on ascertainment of their liability on non-payment/short payment of taxes before or at any stage of such proceedings. Since in the present case, the officer did not follow the provisions of Rule 142(2) of the CGST Act nor did he issue any notice under section 74 (1) of the CGST Act, the Court directed the department to return the amount in question to the petitioner along with simple interest at the rate of 6 per cent per annum from the date of deposit till the payment is made

33 Naarjuna Agro Chemicals (P.) Ltd vs. State of UP
[2023] 151 taxmann.com 112 (Allahabad)
Date of order: 20th April, 2023

The scrutiny proceedings of return as well as proceeding under section 74 are two separate and distinct exigencies and issuance of notice under section 61(3), therefore, cannot be construed as a condition precedent to initiation of action under section 74 of the Act.

FACTS

The issue raised before the Court was whether the department is enjoined to issue a notice under section 61(3) of the CGST Act once returns have been submitted by the assessee before initiating action under section 74 of the Act.

HELD

The Hon’ble Court held that section 61 regulates the scrutiny of returns. In the process of scrutiny of such returns, the proper officer has been vested the jurisdiction to examine the return. In case any discrepancies are noticed therein, the proper officer can intimate such discrepancy to the assessee with the object of conferring an opportunity upon the assessee to rectify such discrepancy. The exigency, which is dealt with under section 61 is, therefore, quite distinct and is confined to the scrutiny of returns. In case where no discrepancies in the returns are found but at the later stage of the proceedings the department concludes that tax is not paid properly, it is permissible for the department to take recourse to section 73 or 74 directly. The argument that unless deficiency in return is pointed out to the assessee and an opportunity is given to rectify such deficiency, that the department can proceed under section 74 is not borne out from the statutory scheme and the argument in that regard therefore, must fail.

34 Electro Steel Corporation vs. State of Jharkhand
[2023] 150 taxmann.com 407 (Jharkhand)
Date of order: 31st March, 2023

Whether the assessee’s registration is cancelled on the grounds of excess ITC availment in GSTR-3B as compared to GSTR2A/2B as the petitioner’s vendor did not file GSTR-1/GSTR-3B, the department was directed to verify the facts and revoke the cancellation if no fault lies with the assessee.

FACTS

The petitioner was issued a show cause notice alleging wrongful availment of ITC in respect of inward supplies against invoices raised by one party who had not filed GSTR-1 nor submitted GSTR-3B. The petitioner’s registration was also cancelled on the grounds that the petitioner was availing excess ITC in GSTR-3B than ITC accrued in GSTR2A/2B in violation of section 16 of the JGST Act for the period 01st June, 2020 to 31st October, 2020. The petitioner challenged the said cancellation contending that cancellation on the said grounds cannot be done as the said grounds was introduced by the amendment to Rule 21 which came into force from 22nd December, 2020 i.e. prospectively. The party who did not file GST returns was also made the respondent in this petition.

HELD

After going through the affidavit of the said party, the Hon’ble Court observed that although the said party completed the work, the petitioner did not make the full payment to it and there was a billing dispute between them. The Court stated that the gist of the stand of the respective parties noted herein above creates an impression that taxes were paid by the petitioner purchaser to the said party against the invoices raised in respect of which the petitioner is making a claim for rightful availment of ITC for the said tax period but whether the entire payments were made against those invoices, is something which needs verification at the end of the respondent authorities. The Court therefore held that such a verification be done by the authorities and in case the fault lay with the said party in not depositing taxes, it would be open for authorities to take the decision for revocation of cancellation of registration of the petitioner subject to such conditions it deems fit.

BCAJ Admin

Service Tax

TRIBUNAL

3 Punjab National Bank vs.
Commissioner, CGST Division H, Jaipur
2023 (71) G.S.T.L 290/4 (Tri.-Del.)
Date of order: 12th January, 2023

CENVAT credit cannot be denied merely on the grounds that input services were availed by offices located in different premises which formed an integral part to execute business operations even if ISD registration was not taken.

FACTS

The Appellant was engaged in providing “banking and financial services” and had availed entire CENVAT credit of the service tax paid under reverse charge mechanism. The said input services were provided at a Zonal Training Centre, Zonal Audit office and Zonal Office. These offices were set up by the Appellant at different premises for operational efficiency and better control. The appellant had obtained a centralised service tax registration. A show cause notice was issued for recovery of the CENVAT credit availed by the appellant along with interest and penalty was confirmed by Adjudicating Authority. The appeal filed was dismissed on the grounds that no output service was provided on their own by Zonal Training Center and Zonal Audit Centre while the Zonal Office provided administrative services to six different offices and no ISD registration was obtained for distribution of credit. Aggrieved by the impugned order, the Appellant filed an appeal before the Tribunal.

HELD

The Tribunal held that the offices are not a separate entity but an integral part of the business. The service tax has already been paid by the Appellant for its offices under Centralised registration obtained. It was further held that the failure to obtain ISD registration is a mere procedural lapse and credit cannot be denied for the same. Thus, demand raised in Show Cause Notice was not sustainable.

4 Credence Property Developers Pvt. Ltd v/s. Commissioner of CGST & C. Ex., Mumbai
2023 (71) G.S.T.L. 294/3 (Tri. – Mumbai)
Date of order: 5th January, 2023

Refund of service tax paid on account of cancellation of flat purchase ought to be granted where appellant had himself borne the same.

FACTS

The appellant was engaged in providing the service of construction of residential projects. A buyer had booked two flats in the project and paid advance along with service tax to appellant. Subsequently, the buyer cancelled the booking of both the flats and entire advance along with service tax paid was returned by the appellant. Accordingly, refund was claimed for the service tax paid which was rejected by adjudicating authority as well as first appellate authority. Hence the appeal.

HELD

The Tribunal held that as per Article 265 of Constitution, the Government was not authorised to retain the amount of service tax which was not payable under the law. Moreover, since no services were rendered, the question of liability to pay service tax does not arise. The appeal was thus allowed.

5 Balmer Lawrie & Company td. vs. CST
2023-TIOL-346-CESTAT-DEL
Date of order: 1st May, 2023

Profit share / mark-up of overseas agent being an associated component of air freight or ocean freight, not liable for service tax in case of logistics services of multimodal transport operator.

FACTS

The Appellant provides comprehensive logistics services which inter alia include import consolidation by air, handling of cargo, air and sea freight forwarding, multimodal transportation including door to door services, transportation and other incidental services. The current appeal relates to confirmed demand of Rs.5.25 crores of which the major demand in relation to ocean freight was dropped by the Commissioner. However, the department also filed appeal against some part of the dropped demand. During the course of logistics services, the appellant had entered into agreement with overseas service providers for handling cargo of their clients on their behalf at foreign ports. As per terms between them, the profit received by such Foreign Service providers is shared 50:50 basis in every transaction. The Appellant’s invoice on their customers has four parts, viz. freight, other charges – origin, other charges – destination and service tax. They paid service tax on the destination charges in case of imports but not on other components of freight and charges at origination. The confirmed demand mainly relates to profit share as it is considered a part of cargo handling service. According to the revenue, the Foreign Service providers are located outside India providing taxable services to the appellants and hence they are liable to pay service tax under reverse charge mechanism on the value of such services. Further, the revenue contended that appellant paid consideration for the actual freight, other charges, origin charges and the profit share to overseas service providers and which was much higher than the actual freight. Therefore, the excess amount collected is liable to be taxed. As against this, appellant contended that as a part of ocean or air freight, the overseas service provider receives invoices towards airline fuel surcharge, airline security fee and their revenue share. Since these are associated components of freight, air or ocean, they are not subject to service tax whereas on the other components of charges such as break bulk fee, charges collect fee etc. they had always paid due service tax including for transportation of goods by road. Reliance was placed inter alia on the cases of Greenwich Meridian Logistics, India Pvt Ltd vs CST, Mumbai 2016 (43) STR 215 (Tri-Mum), Satkar Logistics vs CST, Delhi 2021-TIOL-543-CESTAT-DEL and Tiger Logistics India Ltd vs CST, Delhi [2022 (2) TMI 455 (Cestat-New Delhi).

HELD

The primary issue involved in the matter being one of taxability of service tax on ocean freight and the liability of tax on profit / mark-up which is no more res-integra as it has been decided in a catena of decisions including the latest being the judgment in the case of M/s Tiger Logistics (supra), wherein it has been held that this activity is business in itself on account of the appellant and cannot be called a service at all. The space bought by appellant from shipping line is sold to customers against a House Bill of Lading. The Shipping line issues a Master Bill of Lading in favor of the appellant. The first leg is a contract between shipping line and the appellant and second leg is between appellant and its customers. Hence, profit earned from such business cannot be termed as consideration for services. Respectfully following inter alia Satkar Logistics (supra), it was held that appellant is not liable for service tax. The above having been held in Tiger Logistics (supra) and while also citing paras from Greenwich Meridian’s case (supra), the demand with interest and penalties are set aside and department’s appeal has been dismissed in toto.

BCAJ Admin

Goods and Services Tax

I. HIGH COURT

21 Sikha Debnath v/s. Assistant Commissioner of State Tax, Cooch Behar
2023(71) GSTL 362/4 (Cal.)
Date of order: 10th February, 2023

An appeal was allowed where delay was for negligible period by extending time as per section 107 of CGST Act.

FACTS

The petitioner had filed an appeal with a delay of 21 days of the available time as per section 107 of the CGST Act. He submitted before the Court that the appeal should be allowed as the period of delay was negligible. The respondent rejected the appeal stating that the same was time-barred. Being aggrieved, the petitioner preferred this petition.

HELD

Hon’ble High Court relied upon its own decisions passed in the matter of Suraj Mangar Versus Assistant Commissioner of West Bengal State Tax, Cooch Behar Charge, Jalpaiguri, West Bengal [WPA No. 2809 of 2022] as well as Debson Pumps vs. Assistant Commissioner of State Tax, Bowbazar Charge, Dharmatola & Anr. [MAT No. 1496 of 2022] where delay of negligible period was condoned. Accordingly, writ petition was disposed off.

22 Mehta Enterprise vs. State of Gujarat

2023 (71) GSTL 399/3 (Guj.)
Date of order: 21st December, 2022

When the petitioner was willing to pay a deposit for the release of perishable goods confiscated no auction for such goods would be made.

FACTS

The petitioner was a dealer of tobacco. The respondent had intercepted a truck carrying tobacco and recorded the statement of driver after interrogation and detained both the goods as well as the vehicle. Later on, an order of confiscation was passed in Form GSTR MOV-11. The petitioner had initially approached the Court but subsequently withdrew the petition to take a different legal recourse. Subsequently, the notice of auction of confiscated goods was issued. Being aggrieved by such a notice, the petitioner challenged the auction before Hon’ble High Court.

HELD

Hon’ble High Court held that the petition, previously withdrawn, should be entertained as there was a new cause of receipt of notice of auction. It was held that when the petitioner was willing to make the bare minimum deposit for the release of perishable goods, the authority should decide interim release of goods within one week and no auction should take place till then. Petition was thus allowed.

23 UOI vs. Cosmo Films Ltd. [2023]
149 taxmann.com 473 (SC)
Date of order: 28th April, 2023

The mandatory fulfilment of a “pre-import condition” incorporated in the Foreign Trade Policy of 2015-2020 (‘FTP’) and Handbook of Procedures 2015-2020 (‘HBP’) by Notification No.33/2015-20 and Notification No.79/2015-Customs, both dated 13th October, 2017 cannot be regarded as unreasonable and cannot be faulted with on the grounds of being arbitrary or discriminatory. The Notification No.1/2019-Cus dated 10th January, 2019 withdrawing the “pre-import condition” cannot be construed as applicable from 13th October, 2017.

FACTS

The issue before the Court was whether the mandatory fulfilment of a “pre-import condition” incorporated in the Foreign Trade Policy of 2015-2020 (‘FTP’) and Handbook of Procedures 2015-2020 (‘HBP’) by Notification No.33/2015-20 and Notification No.79/2015-Customs, both dated 13th October, 2017 is valid. The Hon’ble High Court concluded that the impugned condition (xii) in the Notification No.79, as well as the amendment in paragraph 4.14 of the FTP, vide Notification No.33 to the extent the same imposes a “pre-import condition” in case of imports under Advance Authorisation (AAs) for physical export for exemption from the whole of the integrated tax and GST compensation cess leviable under sub-section (7) and sub-section (9) respectively, of section 3 of the Customs Tariff Act, do not meet with the test of reasonableness and are also not in consonance with the scheme of Advance Authorisation. Aggrieved by the same, the department filed the present appeal.

HELD

The Hon’ble Court noted that exporters were made aware of the changes brought about due to the introduction of GST, through a trade notice, (Trade Notice 11/2017, dated 30th June, 2017 and the said notice clearly forewarned that AAs, and their utilisation would not continue in the same manner as the AA scheme was operating hitherto. It further noted that the HBP was amended and para 4.27(d) was inserted which stated that duty-free authorisation for inputs subject to “pre-import condition” could not be issued. The Hon’ble Court held that both these aspects are ignored by the High Court.The Hon’ble Court also noted that by paragraph 4.13 of the FTP, the DGFT can impose “pre-import conditions” on any goods other than those specified and held that the High Court has not discussed this aspect, and proceeded on the assumption that only specified goods were subject to the “pre-import condition”. It further held that the indication of a few items by virtue of paragraph 4.13 (ii) per se never meant that other articles could not be subjected to “pre-import conditions”. The existence of this discretion itself would mean that there was flexibility in regard to the nature of policies to be adopted, having regard to the state of export trade, and concessions to be extended in the trade and tax regime. The Court thus held that the object behind imposing the “pre-import condition” is discernible from paragraph 4.03 of FTP and Annexure-4J of the HBP; and that only a few articles were enumerated when the FTP was published, is no ground for the exporters to complain that other articles could not be included for the purpose of “pre-import condition”.

The Hon’ble Court discussed the concept of “physical export” in paragraph 4.05(c) and paragraph 9.20 of the FTP and held that except read with section 2(e) of the Foreign Trade (Development and Regulation) Act, 1992 (FTDRA) and held that except for “physical exports” including exports to SEZ defined in clause (c)(i), all other categories stated in clause (c) (ii), (iii) and (iv) for which AAs can be issued are ineligible for being considered as “physical exports” and are automatically ineligible for the exemption.

The Hon’ble Court held that the introduction of the “pre-import condition” may have resulted in hardship to the exporters, because even whilst they fulfilled the physical export criteria, they could not continue with their former business practices of importing inputs, after applying for AAs, to fulfil their overseas contractual obligations. The new dispensation required them to pay the two duties, and then claim refund, after satisfying that the inputs had been utilized fully (wastage excluded) for producing the final export goods. The re-shaping of their businesses caused inconvenience to them. Yet, that cannot be a ground to hold that the insertion of the “pre-import condition”, was arbitrary.

The Hon’ble Court also rejected the assessee’s contention of alleged discrimination. It held that there cannot be a blanket right to claim exemption and that such a relief is dependent on the assessment of the State and tax administrators, as well as the State of the economy and above all, the mechanism for its administration. The Court held that there is no constitutional compulsion that whilst framing a new law, or policies under the new legislation – particularly when an entirely different set of fiscal norms are created, overhauling the taxation structure, concessions hitherto granted or given should necessarily be continued in the same fashion as they were in the past. In this background, the Hon’ble Court held that the exporter respondents’ argument that there is no rationale for differential treatment of BCD and IGST under AA scheme is without merit. BCD is a customs levy at the point of import. At such stage, there is no question of credit. On the other hand, IGST is levied at multiple points (including at the stage of import) and input credit gets into the stream, till the point of the end user. As a result, there is justification for a separate treatment of the two levies. The impugned notifications, therefore, cannot be faulted for arbitrariness or under classification.

The Hon’ble Court also held that the FTPRA contains no power to frame retrospective regulations. Construing the later notification of 10th January, 2019 that withdrew the “pre-import condition” as being effective from 13th October, 2017 would be giving effect to it from a date prior to the date of its existence which is not permissible.

24 Pinstar Automotive India (P.) Ltd vs.
Additional Commissioner
[2023] 149 taxmann.com 13 (Madras)
Date of order: 20thMarch, 2023

Where the suppliers have filed GSTR-1 but failed to deposit tax to the Government due to non-filing of GSTR-3B, the department may reverse credit in the hands of the purchaser as a protective move and it must be restored when the recovery is effected from such suppliers. The Hon’ble Court held that substantive liability falls on the supplier and the protective liability upon the purchaser directs that a mechanism must be in place to address such situation.

FACTS

The three suppliers who had supplied goods to the petitioner and to whom the petitioners had paid the full consideration including the tax portion included therein, had uploaded their invoices in GSTR-1, but no tax had been remitted by them since GSTR 3B had not been filed by them. The petitioner, as a consequence, suffered a reversal of ITC, IGST, CGST, and SGST.

HELD

The Hon’ble Court held that there can be no dispute on the position that the provisions of section 16 are to be observed strictly. It observed that the provisions of the Central Goods and Services Tax Act, 2017 have, assimilating the wisdom of experience from the erstwhile tax regimes, gone one step further to ensure that the interests of the revenue are protected by providing for a mandate that the tax liability is defrayed/met either at the hands of the supplier or the purchaser. However, it further held that where the tax liability has been met by way of reversal of ITC and similarly recovery is effected from the supplier as well, this would amount to a double benefit to the revenue. Hence, the Hon’ble Court held that while the department may reverse credit in the hands of the purchaser, this has to be a protective move, to be reversed and credit restored if the liability is made good by the supplier. Thus, the substantive liability falls on the supplier and the protective liability upon the purchaser. A mechanism must be put in place to address this situation.

25 AC Impex vs. UOI [2023]
150 taxmann.com 175 (Delhi)
Date of order: 13th March, 2023

The petitioner is entitled to interest on refund from the date when the initial application for refund was filed as the orders passed by the High Court only pushed the respondents/revenue in the right direction and it cannot be said that any “lis” was pending between the parties and it cannot be said that during such period there was a “lis” pending between the parties so as to attract the proviso to section 56 of the CGST Act.

FACTS

The petitioner filed a refund application on 6th January, 2017. The deficiency memo issued by the department dated 13th Febuary, 2018 was cured on 16th February, 2018. A show cause notice was issued to the petitioner on 07th May, 2018 which was replied to by the petitioner on 10th May, 2018. The order rejecting the refund was passed on 11th May, 2018. The petitioners challenged the orders before the Hon’ble Court. Various rounds of litigation happened from 11th May, 2018 until the explanation given by the petitioner was finally accepted by the department on 24th May, 2019 when the refund order came to be passed on account of the order issued by the High Court on 28th March, 2019, and the amount of refund was finally paid to the petitioner subsequent thereto. The issue before the Court was what would be the date from which statutory interest on refund under section 56 of the CGST Act would get triggered. The petitioner claimed that interest should be paid from the date when the initial application for refund was filed. On the other hand, the respondent/revenue asserted that in terms of the proviso appended to section 56 of the CGST Act, interest will get triggered 60 days after the date when this Court passed an order directing consideration of the application.

HELD

Referring to the proviso to section 56 of the CGST Act, the Hon’ble Court held that the proviso envisages a situation where, while processing an application for a refund, the respondents/revenue are required to deal with a lis and the refund is a consequence of that lis. Where there is no lis with regard to either the quantum or the value, then the proviso will have no application. The Hon’ble Court observed that it passed the order dated 28th March, 2019 in the background of the order dated 11th January, 2019 whereby the Court had permitted the petitioner to file an application manually and yet the said applications were rejected by the department vide order dated 22nd March, 2019. In this factual background, the Court held that the orders of the Court only pushed the respondents/revenue in the right direction, in consonance with the main provision of section 56 of the CGST Act and there was no element of lis pending between the parties which required adjudication and allowed the petition.

BCAJ Admin

Recent Developments in GST

A. NOTIFICATIONS

I. Notification No.10/2023-Central Tax dated 10th May, 2023

The above notification seeks to implement e-invoicing for the taxpayers having aggregate turnover exceeding Rs. 5 crore from 1st August, 2023.

II. Notification No.5/2023-Central Tax (Rate) dated 9th May, 2023

The above notification seeks to amend notification No. 11/2017- Central Tax (Rate) dated 28th June, 2017 so as to extend the last date for exercising of option by GTA to pay GST under forward charge.

III. ADVISORY

A) An advisory dated 1th April, 2023 is issued to inform that the E-invoices will be allowed to be uploaded/reported within 7 days from the issuance of system invoice for taxpayers having Aggregate turnover Rs.100 crores and above. This was to apply from 1st May, 2023.

By subsequent advisory dated 6th May, 2023, the above decision is deferred for 3 months.

IV. CBIC INFORMATIONS

(i) The CBIC, vide its post, dated 11th May, 2023, has informed that the Automated Return Scrutiny Module for GST return in ACES–GST backend application for Centre Tax Officers is rolled out and preparations are made for its implementation for scrutiny of returns for 2018-2019.

B. ADVANCE RULINGS

20 Sri Bhavani Developers (AAR No. A. R. Com/29/2021 dated: 14th July, 2022) (TSAAR Order no.38/2022) (Telangana)

Labour supply services – Tax will not be attracted for the labor engaged on daily basis or employees, etc.

The facts are that the applicant M/s Sri Bhavani Developers are into construction of residential buildings and have opted for a new tax scheme as per Notification No.3/2019 dated 29th October, 2019. It was submitted that, in a particular case, they have entered into a Joint Development Agreement (JDA) with one Mr. Sadanda Chary for construction of residential units at Moulali.

It was further explained that the Joint Development agreement between land owner and builder was entered on 7th December, 2017 and subsequently supplementary development agreement was entered on 17th December, 2018 on area sharing basis. The further facts were that work had started but they didn’t have any bookings as on 31st March, 2023-2019. Based on the above, a ruling was sought on following questions:

“1. Whether notification 4/2019 can be followed and GST be paid on RCM basis for the share of landlord as the project is falling under “other than On-going Projects” as it can be considered as new project?

2. Is RCM applicable to daily wages, Labour Charges and Contract Labour?

3. Whether there is any limit on the percentage of material to be used in project for Eg: cement 15%, sand 10% etc.?

4. Whether Salaries, Incentives, Brokerage, Remuneration and interest on Working Capital are liable for RCM?

5. In a project of combination of affordable Flats (Carpet Area is less than 60Sq Mts), and other flats (Carpet Area is more than 60Sq Mts), can different rate of tax be adopted for different units, i.e., GST 1% in case of affordable Units and 5% in case of other units based on the Carpet area?

6. That, the customer is entering into two types of agreements at the time of selling the semi-finished residential flat.

a) “SALE AGREEMENT” and

b) Completion of semi-finished works called “WORK ORDER”,

In such case what is the rate of tax for:

a) For SALE DEED @ 5%

b) For WORK ORDER @ 18% or 12% or 5%.

Whether they are eligible for ITC in case of 18% /12%?

What is the tax rate in case of affordable housing project in the above situation?”

The Ld. AAR took note of the fact that the work commenced in June,2018 and the GST structure on real estate services was greatly altered w.e.f. 1st April, 2019 through notification no. 3/2019 and Notification no.4/2019 both dated 29th March, 2019.

The Ld. AAR held that the Notification No. 03/2019 makes a distinction between ‘Ongoing project’ in clause (xx) of Para 4 and ‘Other than ongoing project’ in clause (xxviii) of Para 4. Accordingly, the Ld. AAR observed that ‘Other than ongoing project’ means a project which commences on or after 01st April, 2019. In view of above, the Ld. AAR held that the project undertaken by the applicant does not fall under this definition.

However, the notification offers that the promoter can shift to the new scheme or continue under the earlier scheme, by filing declaration till 20th May, 2019.

Since the applicant has not opted for the old scheme, they fall under new scheme and accordingly the Ld. AAR held that the applicant has to pay tax @ 1 per cent for affordable residential apartment and @ 5 per cent for other residential apartments, without availing ITC.

In respect of liability on developer for the project commenced before 1st April, 2019, taking note of provisions in above Notification nos. 3/2019 and 4/2019 dated 29th March, 2019, the Ld. AAR held that the tax in relation to the portion of constructed area shared with the land owner promoter, applicant developer has to pay GST as his liability in the capacity of developer promoter and not under Reverse charge mechanism (RCM). The land owner-promoter can claim such tax as ITC.

In respect of other questions also the Ld. AAR observed as under:

“i) Cement for the project must be purchased from registered supplier only even if total value of supplies received from unregistered suppliers is less than 80% and the promoter is required to pay GST @28% under reverse charge if the purchase is from unregistered supplier.

ii) Excluding cement, minimum 80% of the procurement of inputs and input services used in supplying the real estate project service shall be received from registered supplier only. For the shortfall from this requirement GST @18% is payable on value to the shortfall. This adjustment is to be done financial year wise and not project wise.

iii) In case of capital goods procured from unregistered person, the promoter is liable to pay GST under reverse charge.

iv) For residential apartments, GST is not payable on TDR, FSI or payment of upfront amount for long term lease of land if such supply takes place after 01.04.2019 and if residential apartment is sold before completion. However, for residential apartments remaining unsold after completion, proportionate GST is payable on TDR, FSI or long term lease of land by developer-promoter under reverse charge.

v) In respect of service by employees the Ld. AAR held that no RCM is payable as services by employees is covered by Schedule III, not amounting to supply of goods or services. However, manpower supply or labor supply by manpower supply agency was held liable in the hands of such supplier on forward charge basis @ 18 per cent.

vi) Regarding the two separate contracts, the Ld. AAR held that, even if there are two different un-severable agreements, they constitute a single contract and hence will attract tax @ 1 per cent for affordable housing and @ 5 per cent for other housing without ITC. However, it is also observed that if any other agreement, which is beyond the scope of initial agreement and is a severable agreement vis-à-vis the initial agreement then the construction made under such contract will attract tax @ 18 per cent with ITC.

21 Rites Ltd

(AAR No. HR/ARL/19/2022-23

dated 18th October, 2022 (Haryana)

The applicant, RITES Ltd is a Government of India Enterprise established in 1974, under the aegis of Indian Railways. RITES Ltd is incorporated in India as a Public Limited Company under the Companies Act, 1956 and is governed by a Board of Directors which includes persons of eminence from various sectors of engineering and management. It is a multi-disciplinary consultancy organisation in the fields of transport, infrastructure and related technologies. It provides a comprehensive array of services under a single roof and believes in transfer of technology to client organisations.

The Applicant has receipts from various other charges or amounts forfeited in the course of its routine business.

Following are the main headings of such receipts.

A. Notice pay recovery,

B. Bond Forfeiture of the Contractual Employees,

C. Canteen Charges,

D. Recovery on account of Loss/Replacement of ID Cards,

E. Liquidated Damages due to delay in completion,

F. Taxability on the forfeiture of Earnest Money and Security Deposit/Bank Guarantee by the applicant,

G. Taxability of amount written off as Creditors balance in the books of account of the applicant.

Based on receipts under above headings following questions were raised before the learned AAR.

“1. Whether the amount collected by the Applicant company as Notice Pay Recovery from the outgoing employee would be taxable under GST law and if yes, rate of GST thereupon?

2. Whether the amount of Surety Bond forfeited/encashed by the Applicant company from the outgoing contractual employee would be taxable under GST law and if yes, rate of GST thereupon?

3. Whether GST would be payable on nominal & subsidized recoveries made by the Applicant from its employees towards provision of canteen facility by 3rd party service provider to Applicant’s employees and if yes, rate of GST thereupon?

4. Whether the amount collected by the Applicant company from its employees in lieu of providing a new identity card (ID Card) would be chargeable to GST and if yes, rate of GST thereupon?

5. Whether the amount collected by the Applicant as liquidated damages for non-performance/ short-performance/delay in performance is taxable under GST and if yes, rate of GST thereon?

6. Whether the amount forfeited by the Applicant company pertaining to Earnest Money, Security Deposit & Bank Guarantee due to the reasons mentioned supra would be chargeable to GST and if yes, rate of GST thereon?

7. Whether the amount of Creditors balance unclaimed/untraceable and written off by the Applicant by way of crediting P&L Account is taxable and if yes, rate of GST thereon?”

Applicant has submitted his version for non-taxability of above receipts. The available precedents were also referred.

After analysis of submission of applicant, the Ld. AAR observed as under in respect of issues raised.

1. The Ld. AAR held that first two issues are covered by circular dated 03rd August, 2022 issued by the CBIC. The Ld. AAR observed that the amount received as notice pay recovery by the applicant from the employees who leave the applicant company without serving mandatory notice period mentioned in the employment contract is not a consideration for any supply of services. The Ld. AAR also held that the action of surety bond forfeiture by the applicant, which is furnished by the contractual employee at the time of joining of the employment, who leave the company without serving minimum contract period as per the employment contract, is also not a consideration per se. The Ld. AAR held that these amounts are covered under Schedule III(1) and not clause 5(e) of Schedule II appended with the CGST Act, 2017 and hence, outside the scope of supply. It is held that said amount recovered by the applicant is in lieu of un-served notice period/non-serving the contract period by the employees. The Ld. AAR held that it is the employee who is the service provider and service supplied by him in the course of its employment is excluded from the definition of Supply under the GST Act and there is no service by applicant. Accordingly issue decided in favor of applicant.

2. In respect of provision of the canteen facility at its premises by the applicant company to its employees the Ld. AAR observed that the applicant incurs expenses including of GST on same. The applicant company charges a nominal amount from its employees for this facility. The Ld. AAR held that the transaction/deduction of nominal amount from the salary of the employees at fixed rate is outside the preview of the taxability under the GST Act. It is observed that the principal supply of the applicant is of consultancy in the field of transport, infrastructure and related technology and not of any catering services. Tax already stands charged by the third party service provider from the applicant for the supply of food to the employees of the company. The applicant is charging a nominal amount from its employees to recover part of its cost and accordingly not liable to GST. The AR of other States also relied upon.

The Ld. AAR further justified its holding by observing that, the facility of canteen is being provided by the companies to its employees under the Factory Act, 1948 wherein it is mandatory for the applicant to make provisions of the canteen facility to its employees. The further findings also noted like there is no independent contract between the applicant and the employees for setting up the canteen facility at the company’s premises but it is being undertaken on account of the legal obligation cast upon the applicant. Therefore the Ld. AAR concluded that the said transaction of recovering the part payment of the meals from the staff by the applicant is outside the purview of scope of supply.

3. In respect of charges for re-issuance of ID card to the employees the Ld. AAR observed that the applicant uses the in-house printing facility for the services i.e. re-issuance of identity cards to the employees and charges fees of Rs. 100 per card form its respective employee for issuance of the new Identity card. There is no third party contractor for the printing of Id-cards. The Id-card is reissued in case of loss of the same or the card is in non- serviceable condition. Therefore, the Ld. AAR held that this transaction does not fall under the taxable event under the GST as it is covered under the schedule III(1) appended to the CGST Act, 2017.

4. In respect of Taxability on the transaction of liquidated damages charged due to delay in completion of work and forfeiture of Ernest / Bank Guarantee / Security Deposit, the Ld. AAR observed that the factual as well as legal details of the transactions are examined along with the details of the copy of Tender flouted/issued by the applicant company for the works. The authority further observed that the matter stands clarified in the circular dated 03rd August, 2022 of the Board and Ld. AAR held that the issue is decided accordingly.

5. In respect of Taxability of amount written off in the books of account of the applicant as creditors balance, the Ld. AAR observed that amount of the contractor which was deposited as security before the execution of the contract is not reclaimed by the contractor, and similarly certain other credit balances which remain unclaimed for a certain period of time, are written off by way of credit entry in profit and loss account.

The Ld. AAR held that there are no services received or provided by the applicant company in the above-mentioned situations and transactions is basically an income and not a supply, hence outside the purview of scope of supply under the GST Act.

With above discussion the Ld. AAR gave ruling on each issue as under:-

“Questions	Answers
Whether the amount collected by the Applicant company as Notice Pay Recovery from the outgoing employee would be taxable under GST law and if yes, rate of GST thereupon?	No
Whether the amount of Surety Bond forfeited/encashed by the Applicant company from the outgoing contractual employee would be taxable under GST law and if yes, rate of GST thereupon?	No
Whether GST would be payable on nominal & subsidized recoveries made by the Applicant from its employees towards provision of canteen facility by 3rd party service provider to Applicant’s employees and if yes, rate of GST thereupon?	No
Whether the amount collected by the Applicant company from its employees in lieu of providing a new identity card (ID Card) would be chargeable to GST and if yes, rate of GST thereupon?	No
Whether the amount collected by the Applicant as liquidated damages for non performance/short-performance/delay in performance is taxable under GST and if yes, rate of GST thereon?	No
Whether the amount forfeited by the Applicant company pertaining to Earnest Money, Security Deposit & Bank Guarantee due to the reasons mentioned supra would be chargeable to GST and if yes, rate of GST thereon?	No
Whether the amount of Creditors balance unclaimed/untraceable and written off by the Applicant by way of crediting P&L Account is taxable and if yes, rate of GST thereon?	No

22. Shree Ambica Geotex Pvt Ltd

AAR No.GUR/GAAR/R/2022/46 (In App.No. Advance Ruling/SGST & CGST/2022/AR/34) dated 18th October, 2022 (Guj)

Classification – Geomembrances

The applicant, M/s Shree Ambica Geotex Pvt Ltd, submitted that it is engaged in the business of manufacture and sale of textile products and articles like Geomembranes. The applicant has submitted that it also produces intermediate products like Tapes/Strips, but almost entire quantity of these intermediate products is used within the factory in relation to manufacture of the final product, viz. Geomembranes. The applicant is licensed by the Bureau of Indian Standards (BIS) for manufacture of the above-referred goods in accordance with IS 15351:2015 and IS 7903: 2017. The Indian Standards i.e. IS 15351:2015 is for ‘Agro-textiles – Laminated HDPE woven Geomembranes for water proof lining’.

The applicant further submitted that the application is filed for classification of the final products namely, Geomembranes under the GST Tariff and claimed that Geomembranes merit classification under Heading 5911 Sub Heading 59111000, as textile products and articles for technical uses.

The Ld. AAR referred to nature of Geomembranes. It was observed that the BIS has published IS 15351:2015 for the products, namely, Laminated HDPE woven Geomembrane for waterproof lining. These goods are also known and referred to in the trade by various other nomenclatures like Agro-textiles, Geo-grid Fabrics, and the like. The products are basically in the nature of fabrics, and they are used for water proofing in ponds, and for agricultural applications.

The manufacturing process also discussed.

The Ld. AAR referred to use of the product. It is mainly used in Biofloc technology which is mainly used in farming and Aquaculture ponds. Using Biofloc technology can bring big benefits to aquaculture farmers.

The submission of applicant that Heading 5911 of the Tariff is the most appropriate classification for the products viz. Geomembrane, because the product is textile products for technical uses was found acceptable. The product is in the nature of textile fabrics coated or laminated with plastic processed and used for technical purposes.

The Ld. AAR referred to observation in Porritts & Spencer (Asia) Ltd vs. State of Haryana reported in 1983 (13) ELT 1607 (S.C.) – 1978- VIL-03-SC as reproduced below:

“5. It was pointed out by this Court in Washi Ahmed’s case (supra) that the same principal of construction in relation to words used in a taxing statute has also been adopted in English, Canadian and American Courts. Pollock B. pointed out in Gretfell v. I.R.C. (1976) 1 Ex. D. 242 at 248 that “if a statute contains language which is capable of being construed in a popular sense, such a statute is not to be construed according to the strict or technical meaning of the language contained in it, but is to be construed in its popular sense, meaning, of course, by the words popular sense’ that which people conversant with the subject-matter with which the statute is dealing would attribute it.”

Ld. AAR further relied upon Ruling pronounced by the AAR, Daman, Diu & DNH in case of M/s. EMMBI Industries Ltd reported in 2019 (29) GSTL 105 (AAR- GST) – 2019-VIL-295-AAR and reproduced following observations –

“Geomembranes for water proof lining – Classification of – “Laminated High Density Poly Ethylene HDPE Woven Geomembrane for water proof Lining Type-II, IS:15351:2015” – Product known in market as agro textiles –Main product around which whole process of manufacturing revolves is HDPE Woven Fabrics – Perusal of Chapter Note 1 to Chapter 39 of Customs Tariff Act, 1975 making it clear that textile materials of Section XI excluded from scope and terms of plastics and cannot be covered under scope of Heading3926 of HSN – HDPE Tapes/Strips of less than 5 mm specifically covered under HSN Heading 5404 as Synthetic Textile Material and specially woven fabrics from said HDPE Tapes/Strips covered under HSN Heading 5407 20 – HDPE Woven Fabrics referred as Woven Fabrics made from Synthetic Textile Material subjected to LDPE Coating and Lamination referred as Sandwich Lamination – Two or more pieces of said Sandwiched Laminated Geomembrane fabrics joined/seamed together by a suitable heat air blower scaling process keeping into requirement of customer based on which said fabrics cut and joint and cut sealed as per standard sealing process to be used as pond liner – Such Laminated Coated Fabrics used for technical purpose and is specifically covered under scope of HSN Heading 5911 10 00 – Product fit for using as pond liner laminated textiles products and correctly classifiable under HSN Code 5911. [paras 7.3, 8, 8.1, 8.2, 8.3, 9].”

Concurring with above ruling the Ld. AAR held that Geomembrane merits classification at HSN 5911, tariff item 59111000.

23 Shalby Ltd (AAR No. GUJ/GAAR/APPEAL/2022/22

(In App. No. Advance Ruling/SGST & CGST/2021/AR/14) dated6th October, 2022 (Guj)

Maintainability of AR vis-à-vis ‘any proceedings’

The original applicant (now appellant) has raised the following question for advance ruling in the application for Advance Ruling dated 02nd December, 2020 filed by it.

“Whether the medicines, consumables and implants used in the course of providing health care services to in-patients for diagnosis or treatment for patients opting with or without packages along with allied services i.e. (room rent/food/doctor fees etc.) provided by hospital would be considered as “Composite Supply” and accordingly eligible for exemption under the category “Health Care Services”?”

The Ld. AAR, vide Advance Ruling No. GUJ/GAAR/R/11/2021 dated 20th January, 2021 – 2021- VIL-202-AAR, ruled as follows:

“The medicines, consumables and implants used in the course of providing health care services to in-patients for diagnosis or treatment for patient opting with or without packages along with allied services i.e. (room rent/food/doctor fees etc.) provided by hospital is a “Composite Supply”. Supply of inpatient health care services by the applicant hospital as defined in Para 2(zg) of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017, as amended, is exempted from CGST as per Sl. No. 74 of the above notification.”

After pronouncing above ruling, the Ld. AAR received a letter F. No. CST/ENFORCEMENT/SHALBY/ADVANCE RULING/20-21/O.NO.5376 dated 06.03.2021 from the Additional Commissioner of State Tax (Enforcement), Gujarat State, Ahmedabad, informing that search proceedings u/s.67(2) were initiated against the application on 5th June, 2019 and continued till 6th June, 2019. Based on discrepancies noted in search DRC 01A was issued dated 11th February, 2020. The applicant has sought AR on 2nd December, 2020 and AR is pronouncement on 20th January, 2021.

Based on the above information, invoking section 104 of CGST Act, lLd. AAR granted personal hearing to the applicant. Before the Ld. AAR the applicant sought to argue that there is no fraud or suppression. The search action is not a proceeding for section 98(2). The applicant insisted on meaning of ‘proceedings’ and relied upon various judgments like judgement of Delhi High Court in case of CIT-1 vs. Authority of Advance Ruling [2020] 119 Taxmann.com80 (Delhi HC) and the case of Sage Publication Ltd vs Deputy Commissioner of Income Tax (International Taxation) reported at [2016] 387 ITR 437 (Delhi), which was later affirmed by the Supreme Court in [2017] 246 Taxman 57 (SC).

It was argued that the term ‘Proceedings’ only includes any proceedings that may result in a decision i.e. show cause notice or order and cannot include mere inquiry or investigation initiated by investigation agencies as Show Cause Notice is the point of commencement of any proceeding as per Master Circular No. 1053/02/2017-CX dated 10th March, 2017 issued by CBIC. It was therefore summarised that in absence of Show Cause Notice till date, no proceeding can be said to be pending before any authority and there is no suppression of material facts.

However, rejecting the contention of applicant, the Ld. AAR declared the AAR as void ab-initio.

The applicant filed appeal against above order declaring its AR as void ab-initio.

The arguments before Ld. AAR were also reiterated before the Ld. AAAR. It was specifically submitted that the term ‘proceeding’ does not cover any and all steps/actions that the department may take under the act. Applying principle of noscitur a sociis, it was submitted that the term ‘pending’ has to derive color from the term ‘decided’ and ‘proceedings’ only includes any proceedings that may result in a decision i.e. in nature of show cause notice or order and cannot include mere inquiry/investigation initiated by investigating agencies such as enforcement wing, which are merely empowered to investigate. The appellant further submitted that filing of application for advance ruling was well within the knowledge of department but no show cause notice was issued till date.

The Ld. AAAR made reference to above submission and the judgments cited by the appellant. The Ld. AAAR recorded chronological order of events as under:

“(i) Proceedings to access business premises of appellant was initiated on 04.06.2019 by Gujarat State Tax and Commercial Tax Department which was later on converted into search proceeding on 05.06.2019 under section 67(2) of GGST Act and the same continued till 06.06.2019.

(ii) On account of various discrepancies, appellant was issued with three GST DRC-01A Part A on 11.02.2020.

(iii) Appellant submitted application for advance ruling on 02.12.2020 for which AAR pronounced ruling dated 20.01.2021 answering the question raised by appellant.

(iv) On 22.01.2021, appellant submitted the ruling dated 20.01.2021 to Assistant Commissioner of State Tax, Enforcement & Co-ordination, Gujarat State, Ahmedabad.

(v) On 08.03.2021, the AAR received a letter informing about the proceedings initiated against the appellant before the appellant had filed application before AAR.

(v) On 09.06.2021, intimation about personal hearing to decide whether ruling dated 20.01.2021 is required to be declared void ab-initio under section 104 of CGST Act or not was issued.

(vi) The Ld. AAR declared its previous ruling dated 20.01.2021 as void ab-initio in terms of Section 104 of CGST Act, 2017 vide ruling dated 19.7.2021.”

Thereafter the Ld. AAAR made reference to provision of Section 98(2) of CGST Act and reproduced the said section as under:

“98(2) The Authority may, after examining the application and the records called for and after hearing the applicant or his authorised representative and the concerned officer or his authorised representative, by order, either admit or reject the application:

Provided that the Authority shall not admit the application where the question raised in the application is already pending or decided in any proceedings in the case of an applicant under any of the provisions of this Act:

Provided further that no application shall be rejected under this sub-section unless an opportunity of hearing has been given to the applicant:

Provided also that where the application is rejected, the reasons for such rejection shall be specified in the order.”

The Ld. AAR observed that the term proceeding is a very comprehensive term and generally speaking means a prescribed course of action for enforcing legal right. Hence, it necessarily comprises the requisite steps by which judicial action is invoked. If further observation that the process of investigation in tax administration is such a step towards the action of issuing a show cause notice which culminates in a decision. Investigation is activated when there is evidence to show that there is tax evasion. The objective of investigation is to carry out in-depth analysis of taxpayer’s transactions, activities and records to ensure that tax due to government exchequer is not lost in evasion. Accordingly the Ld. AAR came to the conclusion that, initiation of investigation can be said to be the start of proceedings to safeguard government revenue. Issue of Form GST DRC-01A Part A, which was the intimation of liability, under the provisions of Section 74(5), to pay GST is part of proceedings initiated against the appellant.

The Ld. AAAR also rejected other contentions about fraud / suppression on ground that it was duty cast on appellant to disclose the proceedings. After elaborate discussion, the Ld. AAAR observed that there can be no doubt that the appellant had indeed not declared/ mis-declared the fact of initiation of proceedings clearly evidenced by GST DRC-01A Part A issued in this case. Therefore, this is also covered under the scope of the term ‘suppression’ as defined. It was held that it was encumbent upon the appellant while making application for Advance Ruling, to have declared the true and complete facts, given the provisions of the GST law, in particular Sections 98(2) and 104 of the CGST Act, 2017. Accordingly, the invocation of Section 104 of CGST Act by the AAR declaring the advance ruling dated 20th January, 2021 void ab – initio was held to be legal.

BCAJ Admin

Recent Developments in GST

A. NOTIFICATIONS

i) Notification No.2/2023-Central Tax dated 31st March, 2023

By the above notification, the date for filing GSTR 4 for F.Ys.2017-18 to 2021-22 is extended upto 30th June, 2023 without any late fees, if there is no additional liability. If there is additional tax payable, then the late fees will be maximum Rs.250 under the CGST Act.

ii) Notification No.3/2023-Central Tax dated 31st March, 2023

By the above notification, a facility is provided to the Registered Person whose registration has been cancelled on or before 31st December, 2022 for non-filing of returns. If such a person files returns upto effective date of cancellation with applicable interest and late fees before 30th June, 2023 then he can apply for the revocation of cancellation. The person in whose case an appeal is rejected can also take benefit of this notification.

iii) Notification No.4/2023-Central Tax dated 31st March, 2023

By above notification, the rule 8(4A) of CGST Act is substituted. The said rule is regarding authentication of Aadhar number. This is now a revised procedure.

iv) Notification No.5/2023-Central Tax dated 31st March, 2023

By the above notification, a clerical mistake in notification no. 27/2022 dated 26th December, 2022 is corrected.

v) Notification No.6/2023-Central Tax dated 31st March, 2023

By the above notification, a facility is given to the registered person who failed to file valid returns within the period of 30 days from the service of best judgment assessment order under section 62(1) of the CGST Act issued before 28th February, 2023. If the return is filed before 30th June, 2023 with applicable interest and late fees, then said order can get cancelled.

vi) Notification No.7/2023-Central Tax dated 31st March, 2023

By the above notification, a facility is given to the defaulter of filing annual returns in Form 9 by the due date for the years 2017-18 to 2021-22. If such return is filed upto 30th June, 2023, then the late fees will be maximum Rs.10,000 under the CGST Act instead of higher late fees as per normal provisions.

vii) Notification No.8/2023-Central Tax dated 31st March, 2023

By the above notification, a waiver of late fees is provided in case of final returns in Form GSTR-10. If such a return is not filed earlier, and is filed upto 30th June, 2023, then the late fees will be Rs.500 instead of higher late fees as per normal provisions.

ix) Notification No.9/2023-Central Tax dated 31st March, 2023

By the above notification, issued under section168A of the CGST Act, the time limits for passing orders under section 73 are extended as under:

Financial year	Extended date
2017-18	31^st December, 2023
2018-19	31^st March, 2024
2019-20	30^th June, 2024

x) Notification No.1/2023-Compensation Cess dated 31st March, 2023

By this notification, the provisions of section 163 of Compensation Act are brought into force from 1st April, 2023.

xi) Notification No.2/2023-Compensation Cess dated 31st March, 2023

By this notification, the rates given in the schedule are modified.

B. CIRCULARS

a) Clarification about GST rate and classification of ‘Rab’ -Circular no.191/03/2023-GST, dated 27th March, 2023

The CBIC has issued the above circular giving clarification about GST rate on ‘Rab’. It is also clarified that the issue for past period is regularised on ‘as is’ basis.

C. ADVANCE RULINGS

4 Rabia Khanum (AR No. KAR ADRG 31/2022

Dated 8th September, 2022) (Kar)

Sale of Developed land plot – liability under GST

The applicant is an individual and not registered under GST. The Applicant intended to convert its land into residential sites.

The applicant sought advance ruling in respect of the following questions:

“i. Whether GST is applicable for the consideration received on sale of sites? If yes, at what rate and on what value?

ii. Whether GST is applicable for the advance received towards sale of site? If yes, at what rate and on what value?

iii. Whether GST is applicable on sale of plots after completion of works related to basic necessities?

iv. If GST is chargeable on any of these transactions, can the applicant collect the GST from the prospective buyers?

v. If GST is chargeable on any of these transactions whether the applicant is eligible for claiming Input Tax Credit that they pay on the expenses they incur on development?”

The ld. AAR has analyzed facts that the applicant owns three acres of land at Sy No.61/8 (old Sy No.61/1), Bagganadu Village, J G Halli Hobli, Hiriyur Taluk, Chitradurga District and on getting permission from the concerned Government Authorities it will be converted for residential usage, wherein they will be forming small plots of land (residential sites) and sell these to individuals.

The land will be developed as per regulations of the District Town and Country Planning Act. It was also noted that the Karnataka Real Estate Regulation Act and other zonal regulations would be applicable while obtaining sanction of the plan. The development of land includes formation of roads, formation of rain water drains, laying of electricity cables, water pipes, sewerage lines, drilling of borewells for supply of water, construction of water tank for storage and supply of water, setting up of a power sub-station and obtaining connection from Electricity board for supply of electricity etc., which are basically required for human inhabitation. It was also noted that without providing these basic necessities, the concerned authorities will not grant permission to sell the plots to individuals for construction of houses.

It was explained that the applicant will not be entering into an agreement with any prospective buyer, where consideration is separately identified between cost of the plot and cost of development.

The applicants further stated that they will enter into an agreement of sale with the prospective customers for sale of individual sites and receive advances for the same. On receipt of the full consideration, the sale deed will be executed.

It was informed to ld. AAR that the prospective buyers are aware of the fact that they will be purchasing a plot worthy of constructing a house to live, since the authorities will be maintaining and managing the amenities required for living.

Based on above facts the ld. AAR analysed the legal position.

The ld. AAR made reference to entries in Schedule III of CGST Act and reproduced relevant part as under:

“SCHEDULE III.
[See section 7]

ACTIVITIES OR TRANSACTIONS WHICH SHALL BE TREATED

NEITHER AS A SUPPLY OF GOODS NOR A SUPPLY OF SERVICES

1 to 4…

5. Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.”

It is observed that the sale of land is listed in entry No.5 of the Schedule III which treats the transaction listed in same as neither amounting to supply of goods or supply of Services. In other words, the transactions mentioned in the said Schedule are not liable to GST.

The Ld. AAR also made reference to Circular no.177 dated 3rd August, 2022 in which clarification as to whether sale of land after levelling, laying down of drainage lines etc., is taxable under GST Act is given.

The ld. AAR reproduced para 14 of said circular as under:

“14. Whether sale of land after levelling, laying down of drainage lines etc., is taxable under GST

14.1 Representation has been received requesting for clarification regarding applicability of GST on sale of land after levelling, laying down of drainage lines etc.

14.2 As per Sl. no. (5) of Schedule III of the Central Goods and Services Tax Act, 2017, ‘sale of land’ is neither a supply of goods nor a supply of services, therefore, sale of land does not attract GST.

14.3 Land may be sold either as it is or after some development such as levelling, laying down of drainage lines, water lines, electricity lines, etc. It is clarified that sale of such developed land is also sale of land and is covered by Sr. No. 5 of Schedule III of the Central Goods and Services Tax Act, 2017, and accordingly does not attract GST.

14.4 However, it may be noted that any service provided for development of land, like levelling, laying of drainage lines (as may be received by developers) shall attract GST at applicable rate for such services.”

Considering above legal position, the ld. AAR held that sale of land in case of applicant does not attract GST. The order was passed accordingly.

5 Zydus Lifesciences Ltd (Fomerly known as Cadila Healthcare Ltd) (AR No. GUJ/GAAR/R/2022/42 Dated 28th September, 2022) (Guj)

Recovery from employees towards canteen facility – No liability under GST

Applicant, Zydus Lifesciences Ltd is engaged in the manufacture, supply and distribution of various pharmaceutical products. They have 1,200 (approx.) employees in their factory, and are registered under the provisions of the Factories Act, 1948. Zydus is required to comply with all the obligations and responsibilities cast under the provisions of the Factories Act.

The applicant avails canteen services from canteen service providers. The applicant pays full amount to said service providers.

No ITC is claimed on such inward supply. The applicant collects some part of such canteen expenses from the employees by deducting from their salary slips. Based on above facts following questions were raised before ld. AAR.

“Whether the subsidized deduction made by the Applicant from the employees who are availing food in the factory/corporate office would be considered as a supply by the Applicant under the provisions of Section 7 of Central Goods and Service Tax Act, 2017 and Gujarat Goods and Service Tax Act, 2017.

a. In case answer to above is yes, whether GST is applicable on the amount deducted from the salaries of its employees?

b. In case answer to above is no; GST is applicable on which portion i.e. amount paid by the Applicant to the Canteen Service Provider or only on the amount recovered from the employees?”

The applicant cited various precedents on above issue as well as explained legal provisions to submit that it is not supply within GST Act and hence no liability. The aspects like, canteen service is mandatory under the Factories Act, no business of canteen supply by applicant, no contract nor relationship between applicant and employee for supply, service by employee not supply of goods or services as per entry in Schedule III, were highlighted.

The ld. AAR, based on above facts and legal position, held that there is no supply in respect of such recovery from employees and hence no liability under GST.

6 Kirloskar Oil Engines Ltd

(AR No.GUJ/GAAR/R/2022/44

Dated 28th September, 2022 (Guj)

Classification – Power driven Mechanical Sprayer

The applicant, Kirloskar Oil Engines Ltd is engaged in manufacturing of Pump Sets and Diesel Engines at Rajkot plant and intends to sell mechanical sprayers. The applicant intends to classify the same under Tariff Heading 8424 in the Notification No. 11/2017- CT (Rate) dated 28th June, 2017 as amended vide Notification No. 6/2018-CT (Rate) dated 25th June, 2018 under Entry No. 195B.

The applicant submitted the details of the product HTP (Horizontal Triplex Plunger) Kirloskar Power Sprayer (Engine Driven) as under:

“HTP Sprayer – Horizontal Triplex Plunger sprayer is a mechanical pumping system which develops the required pressure to spray water and other liquids for various agriculture and industrial purposes.”

The applicant submitted that following are major parts of HTP Sprayer:

“Petrol Engine
Base frame made of Steel
V Pully
Power Sprayer etc.”

Based on above, following question was raised about classification under HSN and rate of GST.

“(1) What is the 8 digit HSN and GST tax rate of HTP Kirloskar Power Sprayer (engine driven).”

Ld. AAR referred to information about product available on website of applicant, which threw light on nature of product as under:

“Kirloskar Farm Mechanization power sprayer is a perfect combination of advance technology, user-friendliness and versatility. The sprayer is ergonomically designed to ensure effective pesticide application in agricultural fields, orchards, tea plantations and vegetable gardens. The gun-type power sprayer aids in uniform spraying, ensuring effective control of pests.

Suitable to spray pesticides and insecticides for pest control in Guava, Grapes, Mango, Coconut, Banana, Papaya, Pomegranate and Chikku
Properly segregated containers for seeds and fertilizer
Pulley-driven multipurpose spraying machine
All-purpose farm equipment, ideal for both small and large scale spraying
Rugged and sturdy construction

The power sprayer by Kirloskar Farm Mechanization ensures comfort and reduced time, with improved productivity.”

Accordingly the ld. AAR found that the HTP (Horizontal Triplex Plunger) Kirloskar Power Sprayer (Engine Driven) is a mechanical pumping system which develops the required pressure to spray water and other liquids and its applications are in agriculture field and other fields.

Based on the above and considering submission of applicant the ld. AAR observed that the product would be covered under HSN 8524 of First schedule to Custom Tariff Act.

The ld. AAR referred to said Tariff in Custom Tariff Act as well as in HSN in detail.

Based on the fact that power sprayer is suitable to spray pesticides and insecticides for pest control in Guava, Grapes, Mango, Coconut, Banana, Papaya, Pomegranate and Chikku and that the impugned goods can be used in various places as per the requirements and does not have exclusive use in agriculture and horticulture only, the ld. AAR found that the given product, ‘HTP kirloskar Power Sprayer’ merits classification under HSN 8424 89 90.

Regarding finding of rate under GST, the ld. AAR referred to entry 325 in Schedule III of Notification no.1/2017- CT (Rate) dated 28th June, 2017 and several amendments made there in and also entry 195B in Schedule II of Notification no.1/2017 which is inserted from 25th January, 2018. The said entry 195B reads as under:

“S. No.	Chapter/ Heading/ Subheading/Tariff item	Description of goods
195B	2017-18	Sprinklers; drip irrigation system including laterals; mechanical sprayers”;”

The ld. AAR also referred to Circular No. 113/32/2019-GST in which clarification is given on ‘Applicable GST rate on Mechanical Sprayer’.

From the said circular ld. AAR found that the CBIC has clarified that mechanical appliances, whether or not hand operated for projecting, dispersing or spraying liquids attract GST @18 per cent at Sr. No. 325 of Schedule III. Since the applicant’s goods are mechanical appliances used in dispensing and spraying the liquids in various fields as per the requirements, the ld. AAR concluded that the product ‘HTP kirloskar Power Sprayer’ merits classification under HSN 8424 89 90 and is covered under Entry No. 325 of Schedule-III of Notification No. 1/2017-Central Tax (Rate), dated 28th June, 2017 liable to GST at 18.per cent

7 M/s Power Solutions

(AAR No.A. R. Com/09/2021

Dated15th July, 2022)

(TSAAR Order No.44/2022)(Telangana)

Government Contract – Rate of tax

The applicant, Power Solutions executes works for Hyderabad Metropolitan Water Supply and Sewerage Board (HMWSSB) and being contract desirous of obtaining clarification regarding the rate of tax on such works, filed this application.

Based on information given, the ld. AAR observed that HMWSSB is governmental authority as per definitions given in Notification no.11/2017 CT (Rate) dated13th October, 2017.

The ld. AAR also found that the contracts executed by the applicant fall under entry at S. No. 3(vi) of Notification No.11/2017 which reads as under:

“(vi) [Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017, {other than that covered by items (i), (ia), (ib), (ic), (id), (ie) and (if) above provided to the Central Government, State Government, Union Territory, a local authority, a Governmental Authority or a Government Entity by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of –

(a) a civil structure or any other original works meant predominantly for use other than for commerce, industry, or any other business or profession;

(b) a structure meant predominantly for use as (i) an educational, (ii) a clinical, or (iii) an art or cultural establishment; or

(d) a residential complex predominantly meant for self-use or the use of their employees or other persons specified in paragraph 3 of the Schedule III of the Central Goods and Services Tax Act, 2017.

Provided that where the services are supplied to a Government Entity, they should have been procured by the said entity in relation to a work entrusted to it by the Central Government, State Government, Union territory or local authority, as the case may be.

Explanation.- For the purposes of this item, the term business‘ shall not include any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities.”

Therefore, as per above entry the contractor was liable to tax @ 12 per cent.

However, the ld. AAR also referred to amendment effected in above entry vide notification no.15/2021 dated 18th November, 2021 whereby the phrases ‘Government Entity’ and ‘Government Authority’ were deleted from said Entry 3(vi) of Notification no.11/2017 with effect from 1st January, 2022. Accordingly, the ld. AAR observed that the works executed for ‘Government Entity’ and ‘Government Authority’ are taxable @ 18 per cent from 1st January, 2022.

In view of the above discussion, the ld. AAR clarified the questions raised by the applicant as under:

“Questions	Ruling
1. GST rate of tax on TS Government, HMWSSB work contracts including material & services and services only.	a. For works contract including material & services the rate of tax applicable upto 31.12.2021 is 6% of CGST & 6% of SGST, and from 01.01.2022 the rate of tax is 9% of CGST & 9% of SGST for the reasons discussed above.
	b. For pure services not involving any material the transaction is exempt for the reasons discussed above.”

8 Hyderabad Security Offset Printers Pvt Ltd

(AAR No.A. R. Com/06/2022

Dated15th July, 2022)

(TSAAR Order no.45/2022) (Telangana)

Classification – Rate of GST on supply of Printing Services

The applicant, Hyderabad Security Offset Printers Pvt Ltd is engaged in printing of leaflets and packing materials pertaining to pharmaceutical sector. The leaflets contain the literature pertaining to said medicine. The applicant, desirous of knowing the rate of tax on the services supplied by them, raised following question:

“What is the rate of tax including HSN code for printing of leaflets?”

In hearing the applicant clarified that, they are into the business of printing and sale of packing material for pharmaceutical companies and further that, they also print leaflets containing the literature pertaining to the said medicines.

It was further clarified that they are presently charging 18 per cent on such leaflets. However, they desired of ascertaining the actual liability.

The ld. AAR referred to amended Notification no.11/2017 which was amended on 22nd August, 2017 to insert the following at sr. no.27 by substitution:

“(1)	(2)	(3)	(4)	(5)
27	Heading 9989	(i) Services by way of printing of newspapers, books (including Braille books), journals and periodicals, where only content is supplied by the publisher and the physical inputs including paper used for printing belong to the printer.	6	–
27	Heading 9989	(ii) Other manufacturing services; publishing, printing and reproduction services; materials recovery services, other than (i) above.	9	-“

The ld. AAR also referred to Notification No.31/2017 – Central Tax (Rate) dt.13.10.2017 by which following entry is introduced at serial no. 26 with chapter heading 9988 at sub-item (iia):

“(iia) Services by way of any treatment or process on goods belonging to another person, in relation to printing of all goods falling under Chapter 48 or 49, which attract CGST @ 6per cent.”

Based on above two entries the ld. AAR gave ruling as under:

“Questions	Ruling
What is the rate of tax including HSN code for printing of leaflets?	a. Where the physical inputs are used by the applicant, the activity falls under S. No. 27(ii) of the Notification No. 11/2017 and hence is liable to be taxed @9% CGST & SGST each.b. Where the physical inputs are supplied by the recipient of services, the activity falls under S. No. 26(iia) of Notification No. 11/2017 as amended on 13.10.2017 and same is taxable @6% CGST & SGST each.

9 Maddi Seetha Devi (AAR No. A. R. Com/15/2019 dt.13.7.2022) (TSAAR Order no. 47/2022) (Telangana)

Liability on ‘Development rights’ under GST

The facts are that Maddi Seetha Devi (also referred to as land-owner promoter), the applicant, is a registered tax payer and a land owner and has entered into a development agreement with PHL (also referred to as developer promoter) and entrusted the land to PHL by way of a joint development agreement in the year 2016. PHL will hand over 27 per cent of the developed property to the applicant. Being desirous of clarification regarding liability on transfer of development rights and time of supply under GST, this application was filed, raising following questions:

“1. Whether transfer of land or transfer of ‘development rights’ to the developer by the landowner is to be considered as receipt of consideration by the developer as per Notification No.04/2018-CT (Rate) dt.25.01.2018 and as per the clarifications issued after introduction of GST and prior thereto towards the construction of flats in the residential complex to be taken up by the developer for the landowner?

2. Whether the liability to pay GST or service tax as applicable arises on the developer immediately on receipt of development rights or immediately on conveyance of the flats to be constructed by way of an allotment letter?”

The ld. AAR referred to background of taxation of real estate services prior and after 1st April, 2019and drew following observations about the liability of the developer-promoter and land owner-promoter for projects which have commenced prior to 1st April, 2019:

“i) The applicant who is the developer-promoter shall pay CGST & SGST on the supply of construction of apartment to the land owner promoter.

ii) If the land owner promoter further supplies such apartment to the buyers before the issuance of completion certificate he shall be liable to pay CGST & SGST on such supplies. However, the land owner promoter shall be eligible for input tax credit of the taxes charged from him by the developer-promoter.”

Based on above position the ld. AAR held that the tax on the portion of constructed area shared with the land owner promoter has to be paid by developer-promoter. Simultaneously, the applicant i.e., the land owner promoter will claim such tax as ITC whenever she makes further sale of such property before issuance of completion certificate.

Regarding the liability to pay tax on transfer of development right the ld. AAR referred to the conditions laid down in Notification No. 04/2018 wherein it is provided that the liability to pay tax on consideration received by the developer-promoter in form of development rights shall arise at a time when such developer-builder transfers possession or right in the constructed complex. The ld. AAR thus clarified that after the completion of the construction of a civil structure the time of supply arises when the right or possession in such constructed complex is transferred to the land owner-promoter.

Accordingly, the ld. AAR clarified the tax position for land owner promoter as well as developer promoter.

BCAJ Admin

Goods and Services Tax

I. SUPREME COURT

9. State of Karnataka vs. Ecom Gill Coffee Trading Pvt Ltd (2023) 4 Centax 223 (SC)
Date of order: 13th March, 2023

A burden to prove goods were actually received for the genuineness of ITC claimed was on the purchaser and not on Department

FACTS

The respondent was a dealer in coffee beans. The Adjudicating Authority issued a show cause notice after noticing some irregularities in the availment of ITC claimed by the respondent. The authority denied ITC on the grounds of doubt in the genuineness of purchases made since registrations of sellers were cancelled/they had filed nil returns. The Appellate Authority also rejected the Respondent’s claim. However, the Tribunal ruled in favor of the Respondent and allowed ITC considering that payments were made through bank transactions against proper invoices. The high court affirmed the Tribunal order. Being aggrieved by such an order, the Department filed an appeal before Hon’ble Supreme Court.

HELD

The Hon’ble Supreme Court held that the burden of proving the genuineness of claiming ITC remains on the respondent. Merely producing invoices or substantiating payment through a bank was not sufficient to prove the actual receipt of goods. Furnishing cogent material like the name and address of the selling dealer, details of the vehicle which has delivered the goods, payment of freight charges, acknowledgment of taking delivery of goods, tax invoices, payment particulars and the actual physical movement of the goods was on Respondent. Thus, the impugned order passed by Tribunal and High Court was set aside.

II. HIGH COURT

10. Wipro Ltd vs. ACIT, Bengaluru
2023 4 Centax 179 (Kar.)
Date of order: 6th January, 2023

The benefit of Circular No. 183/15/2022-GST dated 27th December, 2022 which provides relief for errors pertaining to 2017-18 and 2018-19 would also be extended for 2019-20 where identical errors were committed.

FACTS

Petitioner had filed a GSTR-1 return for the F.Ys. 2017-18, 2018-19, and 2019-20 and had inadvertently mentioned the wrong GSTIN of the recipient. Further, the recipient availed input tax credit which created a mismatch between Form GSTR2A and GSTR3B filed by the recipient. The petitioner filed an affidavit stating that all the conditions in paragraph 4.1.1 of Circular No. 183/15/2022-GST dated 27th December, 2022 have been complied with by enclosing details of invoices. Thereafter, a petition was filed before Hon’ High Court requesting to access the GST portal to rectify Form GSTR-1 for F.Y. 2017-18 to F.Y. 2019-20 on the ground that identical error was committed in all the years due to bonafide reasons as prescribed by the circular.

HELD

By adopting a justice-oriented approach, the High Court held that though the circular refers only to years 2017-18 and 2018-19, the petitioner would also be entitled to the benefits of the abovementioned Circular for ITC pertaining to F.Y. 2019-20, since identical errors had occurred during that period. Thus, the petition was allowed in favor of the petitioner.

11. Yash Kothari Public Charitable Trust vs. State of U.P.
(2023) 4 Centax 159 (All.)
Date of order: 16th January, 2023

Appeal filed in offline mode cannot be denied by respondent where order against which was not available on GST portal owing to some technical issue.

FACTS

The petitioner was a registered public charitable trust. He claimed certain exemptions which were not granted by the assessment order passed on 12th January, 2022. The petitioner reversed certain ITC through Form GSTR-3B, filed on 8th February, 2022. He tried to file an online appeal for the balance, but an error was displayed on the web portal. A complaint was raised by submitting a letter to the authority. Further, an appeal was filed offline. The Appellate Authority dismissed the appeal on the grounds that acknowledgment of the appeal should be filed online or as notified by the commissioner as per Rule 108 of the CGST Act. Being aggrieved by such a dismissal, a writ petition was filed before Hon’ble High Court.

HELD

The High Court relied upon its earlier decision in the matter of Ali Cotton Mill vs. Appellate Joint Commissioner (ST),2022 (56) GSTL 270 (AP) [Para 20] and held that filing an appeal offline was tenable although Commissioner has not specified any other mode of filing. Accordingly, taxing authorities cannot stop the petitioner from claiming his statutory right on grounds of technicality and directed the Appellate Authority to consider the appeal filed offline. Therefore, the appeal was partly allowed in favor of the petitioner.

12 Premier Sales Promotion Pvt Ltd vs. Union Of India
2023 (70) GSTL 345(Kar)
Date of order: 16th January, 2023

GST is not applicable on vouchers as those are neither goods nor services since they merely represent value of future redeemable goods and services.

FACTS

The petitioner was acting as an intermediary in procuring pre-paid vouchers for companies who issue them to their employees as incentives that can be redeemed against goods or services as specified. He submitted an application before Karnataka Authority for Advance Ruling for clarification on whether vouchers are taxable and when and at what rate. The order passed through advance ruling stated that the supply of vouchers will be taxable as goods/services at the time of supply at the rate of 18 per cent. The petitioner challenged the order on the grounds that vouchers are not goods/services, but mere instruments and tax should be levied at the time of redemption of voucher. The Appellate Authority affirmed the order passed by the Advance Ruling Authority. Aggrieved, the assessee filed the writ petition.

HELD

It was held that the issuance of vouchers is similar to pre-deposit and not a supply of goods or services. Hence, vouchers are neither goods nor services and therefore cannot be taxed. Accordingly, the order passed by the Advance Ruling Authority was quashed. The petition was allowed in favor of the petitioner.

13 Mehndihasan Rahemtulla Hariyani vs. Deputy Commissioner of Revenue 2023 (70) GSTL 272 (Cal.)
Bureau of Investigation (North Bengal), Alipurduar
Date of order: 3rd November, 2022

Any person aggrieved by any decision or order passed under CGST Act may file an appeal even though the proceedings were not initiated against him.

FACTS

The petitioner was the consignee of the goods transported through a vehicle. The respondent intercepted and confiscated goods as well as a conveyance under section 129 of the West Bengal GST Act (WBGST). Further proceedings were initiated against the driver/person in charge of the vehicle and tax and penalty were imposed. Aggrieved by the same, the petitioner filed an appeal under section 107 of the WBGST Act against the order passed. The Appellate Authority rejected the appeal stating that the order was passed against the driver of the relevant vehicle and the petitioner had no right to challenge the said order. Being aggrieved by such rejection, the petitioner filed a writ petition.

HELD

Hon’ble High Court held that section 107 of the WBGST Act states that any person aggrieved by the order may appeal to the Appellate Authority within the time limit prescribed. The petitioner’s goods were confiscated along with conveyance and thus had justified reasons for being aggrieved by such order. The appeal filed by the petitioner should be heard by the Appellate Authority in accordance with the law. Thus, the appeal was disposed off in favor of the assessee.

14 Ayann Traders vs. State of U.P [2023] 148
taxmann.com 357 (Allahabad)
Date of order: 27th February, 2023

In the facts and circumstances of the case, and evidence leading to the conclusion that the dealer has evaded the tax, the Court upheld the action of revenue authorities stating that if the movement had not been commenced on the same day when the e-way bill was generated, the said e-way bill should be cancelled electronically as per Rule 138(9) failing which the concerned authorities can seize the goods.

FACTS

Petitioner sold 300 bags of Pan Masala to a dealer in Meghalaya. According to the petitioner, goods were handed over to the transporter for transporting by truck, and an E-Way bill was generated on 08th April, 2018 i.e. the same day. However, the truck was made available to the petitioner for transportation on 17th April, 2018, as it was not available from 07th April, 2018. The petitioners did not cancel the E-way bill. The goods were intercepted on 18th April, 2018 and the seizure order was passed on 1st May, 2018.

Before the Hon’ble High Court, the revenue raised apprehensions about the number of transactions that possibly could have been made during this period on the strength of the same tax invoice, bilty, and E-Way Bill generated on 08th April, 2018 through the same vehicle. To illustrate the same, they pointed out that E-Way Bill, which was generated on 08th April, 2018, and a transporter bill, both specifically mentioned the same vehicle number which means that the transit of goods had taken place on 08th April, 2018. They also pointed out that another E-Way bill was generated on 08th April, 2018 for the same vehicle for the transportation of fruits and vegetables to West Bengal. Further, one more E-way bill was generated on 12th April, 2018 being bility no.305 for transporting rice to Darbhanga (Bihar) and, on inquiry, it was found that no such goods were transported to the dealer at Darbhanga and the firm had closed down two months back. It was further brought to the notice of the Court that the said vehicle has been found to have passed from 08th April, 2018 to 18th April, 2018 through three toll plazas viz., Anantram Toll Plaza, Badori Toll Plaza, Fatehpur, and Kokhraj Toll Plaza, Allahabad. It was further stated that the purchasing dealer did not come forward nor any explanation was furnished after the notice was issued when the goods were intercepted and the vehicle was detained.

HELD

Looking at the facts and evidence brought before it, the Hon’ble Court concluded that through the tax invoice and E-Way Bill generated on 08th April, 2018, the dealer has made several transactions and evaded tax. Referring to Chapter XVI of the CGST Rules, it held that once, Part-B of Form GST EWB-01 is filled, a presumption is raised that the goods are in movement. However, if the movement of goods has not commenced, the legislature has provided for a way out through Rule 138(9) whereby E-Way which has been generated on the common portal, may be canceled electronically. The dealer in the present case had waited for 10 long days and did not cancel the E-Way Bill generated by him on the common portal, though, the vehicle was not provided by the transporter. In these circumstances, the Hon’ble Court held that there has been a complete misuse of statutory provision of the Act and Rules by the dealer, and the inference drawn by the taxing authorities after an interception of goods needs no interference by the Court.

15. Sri Sai Balaji Associates vs. State of Andhra Pradesh [2023] 149 taxmann.com 66 (Andhra Pradesh)
Date of order: 7th March, 2023

Section 70(1) does not empower the GST officer to issue a summon to the customers of the assessee instructing them for stopping payment to the assessee.

FACTS

The Petitioner’s customer was issued a notice under section 70(1) of the CGST Act directing to stop payments to the petitioner. Aggrieved by the same the petitioner filed a writ petition before the High Court.

HELD

The Hon’ble Court observed that the impugned notice was issued under section 70(1) of the GST Act but not under section 83 of the GST Act. Section 70(1) of the GST Act only says that the proper officer shall have the power to summon any person whose attendance is considered necessary either to give evidence or to produce a document or any other thing in the inquiry and nothing more. The Court, therefore, held that under section 70(1) of the GST Act, the proper officer cannot exercise powers to direct the summoning party to stop payment to the assessee which is beyond the scope of section 70(1) of the GST Act.

16 . New Hanumat Marbles vs. State of Punjab [2023]
149 taxmann.com 82 (Punjab & Haryana)
Date of order: 30th January, 2023

The Hon’ble Court sets aside adjudication/assessment orders passed without uploading the summary of the Show Cause Notice on the web portal in Form DRC-01 under Rule 142(1) (a) of the CGST Rules.

FACTS

Summons/notices were issued to the assessee before initiating proceedings of passing an assessment order under section 74(5) of the Central GST Act/Punjab GST Act, 2017. As the petitioner did not appear, the matter was decided ex-parte, and the order was passed. The petitioner challenged the said order on the ground that before passing the final order on assessment, Rule 142(1) of the CGST Act is mandatory to be followed and GST DRC-01 has to be uploaded electronically on the website.

HELD

The Court observed that the department did not upload the notice on the website of the revenue as per Rule 142(1) of the CGST Act, 2017 before passing final orders. On this ground, the said orders were set aside and the matter was remanded back to the officer for passing fresh orders and after issuing notice as contemplated under Rule 142(1) of the CGST Act and affording the opportunity of hearing to the petitioner(s) in accordance with the law.

17. Shree Shyam Granites and Marbles vs.Assistant Commissioner (ST) (FAC), Hosur (South) III Circle [2023] 148 taxmann.com 463 (Madras)
Date of order: 13th February, 2023

Principles of natural justice are violated when no reasons were given by the Revenue for rejecting the assessee’s objections raised in replies and a personal hearing was afforded to the assessee before replies were received by the Revenue

FACTS

The petitioner challenged the orders on the grounds of violation of the principles of natural justice.

HELD

The Court observed that the petitioner has already submitted replies to the show cause notice clarifying the defects pointed out by the department stating that there is no mismatch for which they have also substantiated through documents. However, the said replies have not been considered in the impugned assessment orders. Further, a personal hearing was afforded to the petitioner prior to the receipt of the replies of the petitioner by the respondent. The Court held that only after a reply is sent by the assessee, the Authority can apply its mind, and if they contemplate an adverse decision for which they must provide an opportunity of a hearing. Hence, issuing a personal hearing notice prior to the receipt of the explanation from the petitioner cannot be said to be in compliance of Section 75 (4) of the TNGST Act, 2017. The impugned assessment orders were thus quashed.

18. Mohan Agencies vs. State of U.P. [2023]
148 taxmann.com 323 (Allahabad)
Date of order: 13th February, 2023

The opportunity of a personal hearing is mandatory before passing an adverse order even if the taxpayer had selected “NA” against personal hearing in the online mode.

FACTS

The petitioner challenged the order passed by the Assistant Commissioner on the basis that a show cause notice seeking a reply was issued but at that stage itself authority chose not to give any personal hearing by mentioning ‘NA’ against the column of “date of personal hearing”.

HELD

The Hon’ble Court reiterated the principle of law laid down in the case of Bharat Mint & Allied Chemicals v. Commissioner Commerical Tax & 2 Ors., [2022] 48 VLJ 325 that the assessee is not required to request for an opportunity of personal hearing and it is mandatory for the authority to afford such opportunity before passing an adverse order. The fact that the petitioner may have signified ‘No’ in the column meant to mark the assessee’s choice to avail personal hearing, would bear no legal consequence.

19 Swasti Rubber Agency vs. State of Tripura [2023]
149 taxmann.com 4 (TRIPURA)
Date of order: 7th December, 2022

When the department issued a show cause notice for cancellation of registration and suspended the GST registration simultaneously with the issue of such notice and also kept the registration suspended even after furnishing of the replies by the assessee, the Hon’ble Court directed the GST officer to consider the explanation submitted by the assessee expeditiously and revoke the suspension if the orders are not passed within 2 weeks.

FACTS

The order of cancellation of GST Registration was passed. Also, allegations of claiming excess input tax credit (ITC) were raised. While issuing a show-cause notice for the cancellation of the GST registration, simultaneously order of suspension of registration was also passed without affording any opportunity of hearing to the petitioner and/or without assigning any reason thereof. Also, the explanation submitted by the petitioner was not considered by the respondent authority. The Petitioner challenged the show-cause notice on the ground that though the Petitioner-dealer had replied to the impugned show-cause notice on 11th November, 2022and 23rd November, 2022, the respondent authority did not communicate any decision and kept suspending the registration.

HELD

The Hon’ble Court directed the department to consider the explanation submitted to show-cause notice within two weeks and held that in any event, if the explanation is not considered and final orders are not passed, the suspension order shall stand revoked.

20 Ernst & Young Ltd. vs. Additional Commissioner, Central Goods, and Services Tax Appeals-IT [2023] 148 taxmann.com 461 (Delhi) dated 23-03-2023

Professional services provided to overseas entities do not amount to intermediary services merely because such services are provided as outsourced services or on behalf of the third party for its customers if such services are directly provided and do not amount to facilitating or arranging of services between the overseas entity and third party.

FACTS

The assessee entered into service agreements for providing professional consultancy services to various entities of E&Y group located abroad. In terms of those agreements, the petitioner had provided various professional services to overseas EY Entities, and invoices raised described the nature of services for the invoiced amount as “Professional Fees for Services”. A refund was duly filed by the petitioner but the Refund of input tax credit (ITC) was rejected on the grounds that such services qualify as intermediary services as it was provided on behalf of group companies in India to such group companies overseas clients. The Appellant Authority confirmed the order of Adjudicating Authority. The petitioner thus challenged the said order before the High Court.

HELD

The Hon’ble High Court held that the reasoning adopted by the authorities that because the party provides services on behalf of E&Y Ltd, UK in India to overseas clients of E&Y Ltd, UK, it is rendering intermediary services is fundamentally flawed. Referring to the definition of ‘intermediary’ under section 2(13) of the IGST Act, the Court held that the last line of the definition (i.e. “but does not include a person who supplies such goods or services or both or securities on his own account”) merely clarifies that the definition is not to be read in an expansive manner and would not include a person who supplies goods, services or securities on his own account. The Court further held that there may be services entailing outsourcing some constituent part to a third party, but that would not be construed as intermediary services if the service provider provides services to the recipient on his own account; as opposed to merely putting the third party directly in touch with the service recipient and arranging for the supply of goods or services. Thus, even if it is accepted that the petitioner has rendered services on behalf of a third party, the same would not result in the petitioner falling within the definition of ‘intermediary’ under section 2(13) of the IGST Act as it is the actual supplier of the professional services and has not arranged or facilitated the supply from any third party. Referring to the letter issued by RBI the Court held that merely because one of the activities that could be carried on by the petitioner is to act as buying/selling agent in India does not mean that the petitioner had carried on such activities and the invoices raised were for services as a buying/selling agent.

BCAJ Admin

Service Tax

I. HIGH COURT

1 Commissioner of CGST vs. Shriram General Insurance C. Ltd

Date of order: 19th January, 2022

Service Tax paid on re-insurance by the insurance company would be allowable as input service within the meaning of Rule 2(l) of the Cenvat Credit Rules, 2004

FACTS

The assessee, an insurance company, deposited service tax on the insurance services. It had claimed input service credit for re-insurance services availed from other insurance companies. The department challenged the input service benefit claimed by the assessee on the grounds that the transaction comes to an end after issuing the insurance policy by the insurer and the same would not depend on re-insurance policy. The Appellate Tribunal passed its decision in favor of the assessee and hence an appeal was filed by department against the decision passed by the Tribunal before Hon’ble Court.

HELD

The High Court held that re-insurance is a statutory obligation and not a voluntary requirement. The assessee was entitled to CENVAT credit on the service tax paid which was necessary for its business to avoid double taxation. Relying on the decision of the Tribunal, the credit availed on re-insurance policy was held eligible.

II. TRIBUNAL

2 SGS India Pvt Ltd vs. Commissioner of CGST, Thane

Date of order: 29th December, 2021

The appellant is not liable to reverse the CENVAT credit availed irregularly and not utilized, where he had compensated exchequer by interest payment.

FACTS

The appellant was engaged in providing various taxable services. It discharged service tax liability under Reverse Charge Mechanism and availed the CENVAT credit facility.

During audit, the department observed that the appellant had paid service tax on 6th of the following month and the entitlement to the credit for some months was available in the next month. Department initiated show cause notice proceedings since the appellant had availed the credit without payment of service tax. Service tax demand along with interest and penalty under sections 77 and 78 of Finance Act, 1994 was raised. The appellant filed an appeal before the Learned Commissioner (Appeals) and the same was rejected. Being aggrieved by the order, appeal was filed before the Tribunal.

HELD

It was held that the appellant had availed the CENVAT credit without payment of service tax, but credit availed irregularly was not utilized for the payment of service tax. The appellant also discharged the interest liability for the same. Hence proceedings initiated for denial of the CENVAT benefit and the recovery did not stand for judicial scrutiny. There was no fraud, collusion, wilful misstatement, etc. as mentioned in section 78 of the Finance Act, 1994 since irregular Cenvat credit taken, payment of interest thereon and availability of CENVAT credit in the books of accounts were known to the department.

BCAJ Admin

Goods and Services Tax

I. SUPREME COURT

1 Vipin Garg Alias Bindu vs. State of Haryana

2023 (69) GSTL 3

Date of order: 9th January, 2023

Granting of bail in case of misuse of Input Tax Credit (ITC) under section 132 of CGST Act and sections 438 and 439 of Code of Criminal Procedure, 1973 where the detention of the appellant was not warranted.

FACTS

The appellant was arrested and detained on the allegation of misuse of ITC under the CGST Act. A co-accused was already granted bail in this case. Further, charge sheet was also submitted. The Revenue refused the appellant’s plea for bail on the grounds of loss to the exchequer with no recovery till date. Being aggrieved by the order, the case was filed before the Hon’ble Supreme Court.

HELD

The Hon’ble Supreme Court held that further detention of the appellant was not warranted. The impugned order was thus quashed, and the accused appellant was ordered to be released on bail subject to any conditions imposed by trial court.

II. HIGH COURT

2 Aditya Narayan Ojha vs. Principal Commissioner, CGST, Delhi North

2023 (69) GSTL 22 (Del.)

Date of order: 2nd August, 2022

Registration cancelled for failure to respond to SCN issued by department. Court directs department to restore the cancelled registration.

FACTS

The petitioner was served SCN by the department on the grounds that the registration was obtained in a fraudulent manner. The registration was cancelled since no reply was filed by the petitioner before the officer. Being aggrieved by the order, the petitioner filed an appeal, and the impugned order was reversed by the first appellate authority. An undertaking was submitted by the petitioner that all the GST returns were filed up to the date of order, and also pending GST returns along with interest would be filed after restoration of registration. Further, an appeal was filed by petitioner for non-compliance of order passed by the first appellate authority by the department. However, the department did not restore the registration on the grounds that the assessee was not in existence at the time of physical inspection. Being aggrieved, the petitioner filed a petition before the Hon’ble High Court.

HELD

The Hon’ble High Court observed that, the fact that the registration was cancelled because the assessee did not exist was not mentioned in the order. No notice was served by the department before carrying out the physical inspection as mandated by Rule 25 of CGST Rules. Further, the impugned order was also revoked by first appellant authority after receipt of undertaking. Accordingly, writ petition was disposed of in favour of assessee with a direction by the Court to restore the cancelled registration.

3 Deepam Roadways vs. Deputy State Tax Officer [2023]

147 taxmann.com 35 (Madras)Date of or

der: 23rd January, 2023

An order passed for payment of penalty under section 129(1)(a) or (b) of the CGST Act, beyond seven days of the service of the show cause notice issued to the petitioner is barred by limitation, and hence is liable to be quashed.

FACTS

The petitioner challenged the detention order and the consequential order calling upon the petitioner to pay a penalty under section 129 of the CGST Act. The issue before the Court was whether section 129(3) of the CGST Act was adhered to or not.

HELD

The Hon’ble Court noted that as per section 129(3) of the CGST Act, the proper officer, after detaining the goods or conveyance, shall issue a notice of such detention or seizure specifying the penalty payable and thereafter, pass an order within a period of seven days from the date of service of such notice, for payment of penalty under section 129(1)(a) or (b). However, in the present case, the consequential order for payment of penalty was passed beyond the period of seven days from the date of service of notice on the petitioner, which is contrary to section 129(3) of the CGST Act, 2017. The Court, therefore, quashed the impugned order and allowed the writ petition.

4 Acambis Helpline Management (P) Ltd vs. UOI [2023]

147 taxmann.com 100 (Allahabad)

Date of order: 15th December, 2022

Whether the registration is cancelled on the sole ground that the assessee did not furnish any reply to the show cause notice, the said order is liable to be set aside as a non-speaking order.

FACTS

The petitioner challenged the order whereby the registration of the petitioner has been cancelled under section 29 of the CGST Act as well as the order dismissing the appeal preferred by the petitioner.

HELD

The Court observed that the only reason stated in the impugned order was that the petitioner did not respond to the show cause notice. The Court held that even in the case that the petitioner did not give a response to the show cause notice, it was incumbent on the competent authority to consider the facts of the case and come to the conclusion that the facts necessitate cancelling the registration of the petitioner under section 39 of the CGST Act. The Court, therefore, held that the impugned order is illegal and set aside the same.

5 Shraddha Overseas (P) Ltd vs. Assistant Commissioner of State Tax – [2023]

147 taxmann.com 209 (Calcutta)

Date of order: 16th December, 2022

To conclude that the dealer is non-existent, there should be material to show that on the date when the appellants had a transaction with him, there was no valid registration. Hence, the investigation is insufficient.

FACTS

A petition was filed challenging the order of the first Appellate Authority for disallowance of input tax credit based on the cancellation of the vendor’s registration.

HELD

The Court observed that a substantial portion of the transaction has been found by the Appellate Authority to have been done with valid documentation. However, a doubt had arisen in the mind of the Appellate Authority about the genuineness of the transaction going by the payload of the vehicles, which was used for transporting the goods in question. The Appellate Authority then referred to the action taken by the department against two parties on 14th November, 2019 and 17th February, 2020 based on which it was concluded that the said dealers were non-existent.

The Court observed that the transactions in respect of which ITC was disallowed were carried out by the petitioner with these parties in October 2018. The Court, therefore, held that to conclude that the other end dealer is non-existing, there should be material to show that on the date when the appellants had a transaction with him, there was no valid registration. If the cancellation of the registration of the other end dealer is by way of retrospective cancellation, then the question would be whether it would affect the transaction done by the appellants, more particularly when the appellants have been able to show that the payments for the transaction have been done through banking challans. The Court further held that in this case, the Appellate Authority was solely guided by the action taken by the tax authorities against the vendors without examining the specific facts and circumstances of the case at hand. The Court also noted that there were no allegations against the appellants in the SCN and though several grounds were raised by the Adjudicating Authority, none of these were considered.

In the circumstances, the Court held that the order of the Appellate Authority is a non-speaking order as there is no independent finding rendered qua the allegation against the appellants. Hence, the matter was remanded back to the Appellate Authority to specifically consider the contentions, which were advanced by the appellants and also the fact that the other end dealer’s registration was cancelled with retrospective effect.

6 Rohit Enterprises vs. Commissioner, State GST [2023]

147 taxmann.com 505 (Bombay)

Date of order: 16th February, 2023

The provisions of the GST enactment cannot be interpreted to deny the right to carry on trade and commerce to any citizen and subject. The issue relates to cancellation of registration. Right of the State is not adversely affected by the cancellation when the petitioner is willing to pay the tax along with interest and penalty.

FACTS

The petitioner’s GST registration was cancelled for non-filing of GST returns. In the show cause proceedings under section 29 of the CGST Act, the petitioner stated financial crunch as the reason and requested for revocation of the notice. However, the registration was cancelled w.e.f. August 2021. The petitioner applied for revocation of the order cancelling the registration. However, the said application was rejected. The petitioner filed an appeal under section 107 of the Maharashtra Goods and Service Tax Act, 2017 challenging the cancellation of registration which was rejected on the ground of limitation. Before the High Court, the petitioner contended that the petitioner earns his livelihood through the fabrication business. Due to the pandemic situation, the business activities of the petitioner were hampered causing huge financial loss. The petitioner was also unwell and had undergone angioplasty as a result of which he could not submit the returns. The revenue defended the order stating that the order is passed in accordance with the law and after giving the petitioner a reasonable opportunity to be heard and submit the documents.

HELD

The Court took note of the factual position and expressed a view that the provisions of the GST enactment cannot be interpreted so as to deny the right to carry on trade and commerce to any citizen and subjects. The constitutional guarantee is unconditional and unequivocal and must be enforced regardless of shortcomings in the scheme of GST enactment. The right to carry on trade or profession cannot be curtailed contrary to the constitutional guarantee under Article 19(1)(g) and Article 21 of the Constitution of India. If a person is not allowed to revive the registration, the State would suffer a loss of revenue and the ultimate goal of the GST regime will stand defeated. The petitioner deserves a chance to come back into the GST fold and carry on his business. The Court further stated that the objective of limitation is to terminate the lis and not to divest a person of the right vested in him by efflux of time. Since the issue involved is only the cancellation of registration, it cannot be said that any right has accrued to the State which would rather be adversely affected by the cancellation. The Court thus held that the petitioner, who is a sufferer of unique circumstances resulting from the pandemic and his health barriers, would be put to a great hardship for want of GST registration. The petitioner, who is a small-scale entrepreneur, cannot carry on production activities in absence of GST registration. Resultantly, his right to livelihood is affected. Hence, the petitioner must be allowed to continue business. Since his statutory appeal suffered dismissal on technical grounds, the Court held it appropriate to exercise its jurisdiction under Article 226 of the Constitution and allowed the writ petition as the petitioner agreed to pay all the dues along with penalty and interest, as applicable.

7 Abhishek Gumber vs. Commissioner of GST [2023]

146 taxmann.com 37 (Delhi)

Date of order: 6th July, 2022

When the Order rejecting the refund of ITC on the ground of bogus ITC claim is the subject matter of the appeal, the SCN issued by the department under section 73 for recovery of the said ITC claim is held to be pre-mature and set aside.

FACTS

The petitioner’s claim for a refund of the input tax credit was rejected on the ground that the refund was founded on a forged input tax credit claim and the same had to be rejected. The petitioner filed an appeal against the same. However, the petitioner was served with a show cause notice under section 73 of the CGST Act for recovery of such credit. The petitioner moved to the Court for quashing the said show cause notice. The department argued that the demand notice was issued to protect the interests of the revenue.

HELD

The Court held that once the petitioner’s refund claim was rejected on the ground that it was founded on forged ITC, the petitioner would be liable to pay tax, interest, and perhaps also a penalty, in the event the adjudication order is sustained. The Court further held that as the petitioner has filed an appeal against the order rejecting the refund which is pending adjudication, at this stage, the impugned show cause notice is premature and in case the appeals are dismissed it would be
open to the respondent/revenue to take recourse to section 75 of the Act and the attendant rules framed thereunder.

III. TRIBUNAL

8 Shriram Chits Pvt Ltd vs. Commissioner of C. EX., CUS. & S.T., Hyderabad

Date or order: 13th December, 2019

Agreement for granting of right to access to branch network not included under Business Support Services prior to introduction of negative list regime of service tax

FACTS

The appellant entered into agreements dated 1st December, 2005 and 1st December, 2008 with a third party for providing access to the entire branch network for a consideration. Show Cause Notice dated 19th October, 2011 was issued by revenue demanding service tax under purview of Business Support Services under section 65(104c) of Finance Act, 1994. The Adjudicating Authority, after appeal being filed by assessee, approved the demand made by the revenue along with interest and penalty. Being aggrieved by the order passed, an appeal was filed with the Tribunal.

HELD

It was held that after introduction of the negative list of Service Tax w.e.f. 1st July, 2012, the service provided by appellant became taxable. Hence, granting of the right to access branch network was not taxable before 1st July, 2012, since it was not in the inclusive list for definition of Business Support Services. Also, the extended period of limitation cannot be invoked since there was no evidence for existence of fraud, wilful suppression, misrepresentation, and evasion of tax, since the department was already aware of material facts through statutory documents filed. In view thereof, appeal was allowed in favour of the assessee.

BCAJ Admin

Recent Developments in GST

I. NOTIFICATIONS

1. Notification No.1/2023-Central Tax (Rate) dated 28th February, 2023

By the above notification, changes have been done in notification no. 12/2017
CST (Rate) dated 28th June, 2017 which is regarding exempt services. By this
notification, an explanation (iva) is inserted in the said notification. By the
above clause, it is clarified that any authority, board or body set up by the
Central or State Government including the National Testing Agency for conducting
entrance examination should also be treated as an Educational Institution for
providing services of conducting entrance examination for admission to
Educational Institutions. It seems to be a beneficial amendment.

2. Notification No.2/2023-Central Tax (Rate) dated 28th February, 2023

By the above notification, an amendment is made in the Notification no.13/2017
dated 28th June, 2017 which is regarding Reverse Charge Mechanism (RCM). The
explanation in clause (h) is now amended, and, Courts and Tribunals are added
in the Explanation. By this amendment it appears that the scope of RCM is
expanded.

3. Notification No.3/2023-Central Tax (Rate) dated 28th February, 2023

By the above notification, changes are made in notification no.1/2017 Central
Tax (Rate) dated 28th June, 2017. The rate of tax in Schedule 1, 2 and 3 of the
said notification has been amended. The changes are mainly in relation to items
Rab and pencil sharpener.

4. Notification No.4/2023-Central Tax (Rate) dated 28th February, 2023

By the above notification, an amendment is made in notification 2/2017 Central
(Rate) dated 28th June, 2017 regarding exempt goods. By this amendment
sub-entry (iii) is inserted in sr. no.94 so as to cover ‘Rab, other than
pre-packaged and labeled’ in the said notification.

v) Similar changes are also made in
IGST by issuing separate notifications bearing no. 1/2023, 2/2023, 3/2023 and
4/2023 Integrated Tax (Rate) dated 28th February, 2023.

II. GSTN NEWS

It is informed by the GSTN that a facility has been created in the portal
whereby negative values will be accepted in Table 4 of GSTR-3B.

III. ADVANCE RULINGS

1 Eberspaecher Suetrak Bus Climate Control Systems India Pvt Ltd

AAR No. KAR ADRG 34/2022

dated 14th September, 2022 (Kar)

Classification – Bus Rooftop Air conditioning Systems

The applicant was a manufacturer and supplier of air-conditioning systems.
There are different combinations of supply. The applicant has raised following
the three questions for determination by the AAR.

“i. Classification of Bus air-conditioning system
inclusive of Rooftop unit, compressor and installation kit for one consolidated
price to a single customer.

ii. Classification of Rooftop unit, compressor and
installation kit sold to single customer for a single fitting at customer end,
but price negotiated and agreed separately for each unit.

iii. Classification of Rooftop unit, compressor and
installation kit sold as mentioned below:

a. Rooftop unit alone

b. Rooftop unit and compressor

c. Compressor

d. Installation Kit

e. Compressor and installation kit

f. Rooftop unit and installation kit

g. Rooftop unit and compressor”

The applicant has provided basic information about the products. There are
different components of the system like, a rooftop unit, compressor and an
installation kit. Information is also provided about the installation of the
above units and the working mechanism of these units. It is further submitted
that a customer purchasing rooftop unit has the choice of purchasing
installation kits and compressor separately from other suppliers also. The
learned AAR has also noted the functions of the above units. Like, a rooftop is
fixed on the roof of the bus which has heat exchangers, blowers, fans, copper
tubings, relay panel, rubber hoses and electrical wiring harness, etc.

An installation kit consists of a controller, hoses, wiring harness, drain
hoses, hardware accessories.

Compressor is like heart of the complete AC system and it is a main unit to
give cold air.

The learned AAR referred to relevant notifications about rate of tax and
interpretation rules given therein.

In respect of classification of bus air conditioning system comprising of
rooftop unit, compressor and installation kit for one consolidated price to one
single customer, the learned AAR observed that it is supply of air conditioning
system for buses and it merits classification under heading 8415 2010 and the
same is classified under the said heading.

In respect of second question about classification of rooftop unit, compressor
and installation kit sold to single customer for a single fitting at the
customer end but prices negotiated and specified separately, the learned AAR
observed that though the prices are negotiated and stated separately, in view
of notes in Customs Tariff Act,1975, particularly note 3 and 4, it will amount
to supply of composite machine designed for the purpose of performing the
principle function of bus air conditioning system and it is classifiable under
Tariff heading 8415 2010. Accordingly, the classification is done under above
heading.

Regarding third question where the units are sold in different combinations,
the learned AAR held that they will be considered as supply of
identified/recognized parts of composite machine i.e. air conditioning system
of the bus itself. Therefore, the learned AAR held that they are to be
classified under Tariff heading 8415 9000.

In respect of sale of compressor, when sold individually, the learned AAR
referred to heading 8414 and finding that there is separate item for gas
compressor of kind used in air conditioning equipment, the learned AAR
classified the same under Tariff heading 8414 8011.

The learned AAR passed the order suggesting to levy tax as per above
classification.

2 KMV Projects Ltd

(AAR No. KAR ADRG 35/2022

dated 16th September, 2022)(Kar)

Rate of taxes for Government contracts from 1st January, 2022

The applicant in this case was involved in the construction activity for
Government and Government entities. The applicant filed an application to know
the rate of tax in specific contracts in view of changes in rate of taxes for
government contracts. The questions put before the learned AAR are reproduced
as under:

“i. Applicable GST rates with regards to

a. Government works contract services of Airport Terminal
Building at Sogane Village in Shivamogga taluk and District, Karnataka.

b. Work received from Public Works Department for Development
of Greenfield Airport at Vijaypur in Karnataka State.

c. Work received from Karnataka State Police Housing and
Infrastructure Development Corporation Limited for construction of High
Security Prison at Central Prison, Parappana Agrahara, Bangalore Karnataka
State.

d. Work received from Commissioner, Kudalasangam Development
Board, Kudalasangam for construction of Basava International Center and Museum
at Kudalasangam of Hunagunda Taluka in Bagalkot District.

e. Work received from Karnataka Residential Educational
Institutions Society for construction of Government School Buildings and
Hostels at various places in Karnataka State.”

The applicant submitted that there are changes by the Notification No.15/2021
dated 18th November, 2021-Central Tax (Rate) in respect of rates. The applicant
wanted to know the correct rates applicable to its contracts in view of above
changes.

The learned AAR examined the status of each of the entities involved in the
given contracts. For the said purpose, the learned AAR made a reference to the
meaning given to the governmental authority and government entity given in
notification no.11/2017 – Central Tax (Rate) dated 28th June, 2017 as amended
by notification no.31/2017 – Central Tax (Rate) dated 13th October, 2017. The
meanings given in the said notification for above terms are reproduced as
under:

“(ix) “Governmental Authority” means an authority or a
board or any other body, –

(i) set up by an Act of Parliament or a State Legislature; or

(ii) established by any Government, with 90 percent, or more
participation by way of equity or control, to carry out any function entrusted
to a Municipality under article 243W of the Constitution or to a Panchayat
under article 243 G of the Constitution.

(x) “Government Entity” means an authority or a board or any
other body including a society, trust, corporation,

i) set up by an Act of Parliament or State Legislature; or

ii) established by any Government, with 90 per cent, or more
participation by way of equity or control, to carry out a function entrusted by
the Central Government, State Government, Union Territory or a local
authority.”

The learned AAR held that the Karnataka State Police Housing and Infrastructure
Cooperative Ltd is a company of the Government of Karnataka and all its shares
are held by the Government of Karnataka. In view of above, the learned AAR held
that the above Corporation is a Government entity.

In respect of Kudala Sangama Development Board the learned AAR observed that it
was established under Kudala Sangama Development Board Act, 1994 where 90 per
cent of the members are from the State Government. In view of above the Board
is also held as Government entity.

In respect of Karnataka Residential Educational Institutions Society (KRIES)
the learned AAR held that it was formed under the Societies Registration Act,
and the Government of Karnataka is authorized to supervise the affair of the
society. Therefore, the society is also held as a government entity.

In respect of work of construction of airport terminal buildings/facilities and
associated works at Sogane village in Shivamogga Taluk and the development of a
Greenfield Airport at Vijaypur in Karnataka State, the learned AAR observed
that the works are awarded by the Public Works Department of the Government of
Karnataka. Therefore, these are services provided to State Government. However,
the learned AAR also observed that the said works for the construction of an
airport terminal building or a Greenfield airport are predominantly meant for
commerce and hence are not covered under entry 3 (iii), (vi), (ix) and (x). The
said works are covered under entry 3(xii) of notification no.11/2017 Central
Tax (Rate) dated 28th June, 2017.

After considering the nature of each contractee, the learned AAR referred to
the amendments made in Notification No.11/2017 – Central Tax (Rate) dated28th
June, 2017 by Notification No.22/2021- Central Tax (Rate) dated31st December,
2021 as well as Notification No.3/2022- Central Tax (Rate) dated 13th July,
2022. In view of the changes made by Notifications in the rates of taxes, the
learned AAR held that the rates become 18 per cent for services to Government
entities and authorities. In view of the above, in respect of works contract
with the Karnataka State Police Housing and Infrastructure Development Corporation
Ltd, Kudala Sangama Development Board and Karnataka Residential Educational
Institutions Society (KRIES), the rate is determined at 18 per cent from 1st
January, 2022, by the learned AAR. For the contracts executed for airport
terminal buildings also the tax rate is determined at 18 per cent from 18th
July, 2022.

3 Vouchers – ITC vis-à-vis Section 17(5)(h)

Myntra Designs Pvt Ltd

(AAR No. KAR ADRG 33/2022

dated 14th September, 2022)(Kar)

The applicant in this case is engaged in the business of selling fashion and
lifestyle products through the portal. The suppliers of such products,
intending to sell their products through the applicant’s portal, list them on
the portal and sell them to customers, who place their order by using the
applicant’s portal. Once an order is placed by the customer, the applicant
collects the money from them through its portal in the capacity of an
e-commerce portal operator and settles the amount payable with the supplier of
the said order within a specified period.

To incentivise the customers visiting the portal / e-commerce platform, the
applicant proposes to run a loyalty program, by issuing points to the customers
on the basis of the purchases effected by these customers from various sellers
on the said platform. The participation in the proposed loyalty program will be
on meeting the pre-defined eligibility criteria laid down by the applicant and
the same will be subject to acceptance of the applicant’s terms and conditions.
Further, the customers will be bound by the said terms and conditions and any
changes or modifications to the same.

As per the scheme, the applicant will issue vouchers and subscription packages
to the eligible visitors to the portal.

The applicant has to procure the above vouchers and subscription packages from
third party vendors. The applicant wanted to know whether it will be eligible
to claim ITC on such procurement. Therefore, applicant put following question
for determination by the learned AAR.

“Whether the applicant would be eligible to avail the input tax credit, in
terms of Section 16 of the CGST Act 2017, on the vouchers and subscription
packages procured by the applicant from third party vendors that are made
available to the eligible customers participating in the loyalty program
against the loyalty points earned / accumulated by the said customers.”

The applicant submitted that the above vouchers and subscription packages are
for use in the course of business. It was explained that the loyalty programme
is sought to be introduced with an object of increasing customer base of the
applicant’s platform which will lead to increased footfall and sales through
the said platform, and thus the said loyalty program will directly impact and
enhance the amount of commission earned by the applicants in the course of
their business.

It was further submitted that the vendors of the applicant, who supply the
voucher and subscription packages, describe the above products in their
invoices as “other professional, technical and business services”.

It was tried to impress upon that these are services, and not goods. In view of
above it was further tried to impress upon that section 17(5) will also not
apply as they are services, and not goods.

The learned AAR on above facts first tried to decide the nature of items
involved i.e. nature of vouchers and subscription packages.

The learned AAR referred to definition of ‘voucher” given in section 2(118) of
CGST Act, which is reproduced as under:

““voucher” means an instrument where there is an obligation to accept it as
consideration or part consideration for a supply of goods or services or both
and where the goods or services or both to be supplied or the identities of
their potential suppliers are either indicated on the instrument itself or in
related documentation, including the terms and conditions of use of such
instrument.”

In light of the above definition, the learned AAR held that subscription
packages are ‘vouchers’ as they place an obligation on the potential supplier
to accept them as consideration for supply of goods and services to the holder
of the instrument of the customer. Therefore, the subscription package is a
‘voucher’.

The learned AAR also referred to the definition of ‘goods’ given in section
2(52) of the CGST Act which is reproduced as under:

“Section 2(52) – ‘goods’ means every kind of movable property other than
money and securities but includes actionable claim, growing crops, grass and
things attached to or forming part of the land which are agreed to be severed
before supply or under a contract of supply.”

The learned AAR referred to the decided cases to know the meaning of ‘voucher’
vis-à-vis goods. The learned AAR referred to judgment of Supreme Court in case
of Tata Consultancy Services vs. State of Andhra Pradesh (2004) –
2004-VIL-06-SC-CB wherein the Supreme court has observed that goods can
be tangible or intangible and the test to determine whether property is goods
is whether the concerned item is capable of abstraction, consumption and use,
and whether it can be transmitted, transferred, delivered, stored, possessed,
etc. The learned AAR held that the ‘voucher’ in present case has all the
aforesaid capabilities and hence it gets covered under ‘goods’, though it is
intangible.

Thereafter the learned AAR referred to section 17(5)(h) which is also
reproduced in AR as under:

“(5) Notwithstanding anything contained in sub-section (1) of section 16 and
sub-section (1) of section 18, input tax credit shall not be available in
respect of the following, namely:

(a)….

(b)….

(h) goods lost, stolen, destroyed, written off or disposed of by way of gift or
free samples; and

(i)….”

The learned AAR though agreed that the items are used in the course of
business, it further held that they are covered by section 17(5)(h) above.

The learned AAR concluded its observations, in para 18, as under:

“18. It can be seen from the loyalty program that the applicant, on the basis
of a particular transaction / purchase by the customer through their e-commerce
platform and subject to acceptance of the terms and conditions of the applicant
by the customer, allows the customer to earn loyalty points. The applicant in
the said transaction recovers the full amount from the customer and gives the
loyalty points free of cost. Further the said loyalty points, in the
applicant’s own admission, do not have any monetary value, are non-transferable
and cannot be converted to cash. The redemption of loyalty points, admittedly
involves no flow of consideration from the customer. Thus, redemption of
loyalty points by the customer for receiving vouchers from the applicant
implies that the vouchers are issued free of cost to the customer and amounts
to disposal of vouchers (goods) by way of gift and squarely covered under
clause (h) of Section 17(5) of the Act, ibid.”

Accordingly, the learned AAR held that the applicant is not eligible to avail
the ITC on the vouchers and subscription packages procured by the applicant for
loyalty programme.

(Note: Recently, Hon. Karnataka High Court in the case of Premier Sales
Promotion Pvt. Ltd vs. Union of India & ors. (2023 Live Law (Kar) 53 dated
16th January, 2023) held that ‘vouchers’ are neither ‘goods’ nor ‘services’
and supply of them will not attract GST.)

BCAJ Admin

Service Tax

TRIBUNAL

29. Lindstrom Services India Pvt Ltd vs.

CCE & ST Vadodara-1

2023-TIOL-97-CESTAT-AHM

Date of order: 23rd January, 2023

Whether services of leasing – workwear (uniform) liable for service tax when VAT is paid on the same.

FACTS

Appellant is in the business of leasing workwear (uniform) to the clients upon conditions mentioned in the agreement with the clients. The conditions inter alia included delivering, collecting for washing, and servicing individually customized with workwear of every worker’s size along with logo and label as specified. The appellant would own such uniforms and would have the exclusive right to wash and service them. Also, if the workwear was not usable on account of wear and tear, they were returnable to the appellant and the price was fixed for the customer to pay at a depreciated price as agreed upon. For replacement also, it was redeemed at an agreed price. VAT was charged on the rental charges charged by the appellant to their clients. In the scenario, the case of Revenue was that the contract involving the service of renting, using workwear, washing, maintenance, repairing, alteration, designing of workwear, etc. for use while transferring possession without transferring right was a service of “supply of tangible goods” as contained in section 65(105)(zzzzg) of the Finance Act, 1994 and/or a declared service post 1st July, 2011 i.e. in the negative list regime as the effective control over the workwear was not transferred.

According to the appellant, two benches of Chandigarh and Chennai respectively had taken a consistent view on an identical service agreement that the purported service was not taxable under service tax and hence the decision had to be followed; whereas the Revenue contended that against the two orders of Chennai Tribunal, the revenue had filed an appeal before Supreme Court. However, either side could not produce a stay order. In one of the appeals filed by the appellant, at the first appeal level, the demand was set aside. Hence, the Revenue filed the appeal against the said order. Both appeals are accordingly bunched here.

HELD

Hon. Division Bench went through and recorded excerpts from CESTAT Chandigarh Order No.60716 of 2nd August, 2019 and CESTAT Chennai’s final Order No. 40818 dated 29th October, 2020 and final Order No.42148 dated 25th August, 2021. In these cases, the judgments in the cases of Bharat Sanchar Nigam vs. UOI 2006 (2) STR 161 (SC), the case of Gimmco Ltd vs. CCE & ST, Nagpur 2017 (48) STR 476 (Tri.- Mum) as well as Andhra Pradesh High Court in the case of G S Lamba & Sons 2011-TIOL-49-HC-AP-CT were analysed to conclude that the workwear rented was always in the exclusive possession and control of the clients. Some of the activities such as maintenance and washing of workwear rented will not mean that effective control was retained by the appellant. The workwear could not be used by anyone else except the users and hence effective control and possession was always with the client and hence the transaction was one of “deemed sale,” and was not taxable as the service of supply of tangible goods or a declared service. Further, as for the appeals filed by the Revenue before Supreme Court, it was held that since either side could not produce any stay order staying the operation of the Chennai Tribunal’s order, the fact of mere filing of an appeal before the Supreme Court would not help the Revenue and the decision of two benches will be followed. Hence the appeal of the appellant was allowed and the order of the Commissioner (Appeals) was upheld.

30. Coface India Credit Management Services Pvt Ltd. vs. Commissioner of CGST & CE, Belapur

2023-TIOL-111-CESTAT-MUM

Date of order: 10th January, 2023

Rejection of refund application under Rule 5 of CCR on the grounds of the utilization of opening balance in the CENVAT register and inability to establish nexus of input service with output service set aside.

FACTS

The appellant filed a refund application under Rule 5 of CENVAT Credit Rules, 2004 (CCR) which was rejected because the opening balance of CENVAT register should not be taken into consideration for grant of refund and that some of the input services did not have nexus with the output services.

HELD

As for the issue of opening balance in the CENVAT register, CBE&C Circular No.120/01/16 clarifies that the closing balance of the previous quarter can be considered for the utilization towards export as the opening balance for the subsequent quarter. On the second issue of nexus between input services and export of services, it was noted that the department had not initiated any proceeding for the recovery of irregular credit under Rule 14 of CCR r.w.s 73 of the Finance Act, 1994. If availment of credit is not questioned at the material time, it cannot be questioned by the revenue at a later date. The said issue being a covered matter inter alia in the cases of Ness Technologies (I) Pvt. Ltd. vs. CST Division V Mumbai 2016. (41) STR 984 (Tri.-Mum) and M. Net Partner Technologies Pvt Ltd vs. Commissioner, CGST Mumbai at 2019-TIOL-3657-CESTAT-MUM, the department could not have any objection to the claim. The appeal was thus allowed.

31. Rajasthan State Board Development Construction Corporation Ltd vs. Commissioner CGST&CEX Jodhpur

Date of order: 31st May, 2022

Whether the appellant held Government Authority for the exemption Notification No.25/2012 dated
20th June, 2012.

FACTS

The appellant is a company registered under section 617 of the Companies Act, 1956, a Government company of which 100 per cent shares are held by the Rajasthan Government. They provided the service of laying fresh water pipeline by sub-contracting the said service which is a work entrusted to the municipality under Article 243W of the Constitution of India. Consequent upon an inquiry conducted on the subcontractor who provided the said service– a proprietary concern, it was found that the said proprietary concern from July 2012 to March 2015 provided works contract service to the appellant. Since there is a Reverse Charge Mechanism (RCM) applicable to the works contract service whereby a recipient has to pay 50 per cent of service tax liability vide Notification No.30/2012-ST dated 20th June, 2012, a show cause notice was issued to the appellant in this case for recovery of such 50 per cent service tax, being the recipient of the said service provided by subcontractor.

HELD

It was held that the appellant was set up by the State Government of Rajasthan having 100 per cent control in the hands of the State Government of Rajasthan, the appellant is a Government Authority. Since “Government Authority” is mentioned in sl. no.25 of the said exemption notification no. 25/2012-ST and further elaborated in the definition clauses that “Government Authority” means a Board or authority or any other body established with 90 per cent or more participation by way of equity or control by Government and set up by an Act of the Parliament or State legislation to carry out any function entrusted to a municipality under Article 243W of the Constitution. Hence, the appellant was entitled to the exemption and the appeal was thus allowed.

BCAJ Admin

Goods and Services Tax

I. HIGH COURT

73 Prerana Enterprises vs. Commissioner of Delhi Goods & Service Tax

2022-TIOL-227-HC-DEL-GST

Date of order: 7th February, 2022

Refund for the zero-rated supply of goods and/or services requires to be granted in terms of the provisions of the law.

FACTS

Refund for April to September 2020 was sought by a proprietary concern – petitioner herein along with applicable interest under section 56 of the CGST Act. The petitioner exported zero-rated dental care solutions and he is duly registered under the CGST Act and had filed the refund application in the prescribed form. However, the refund application was not processed by the revenue. The petitioner submitted to the Court that in terms of sections 54(6) and 54(7) of the CGST Act read with Rule 91(2) of the CGST Rules, the proper officer is required to refund at least 90 per cent of the refund claimed when zero-rated goods or services are supplied by a registered person within seven days from the date of acknowledgment issued under section 90(1) or (2) and as per section 54(7) of CGST Act, the whole amount requires to be refunded within sixty days from the date of receipt of the refund application whereas the time limit had already expired and he relied upon the order of Hon. Delhi High Court in W.P. (e) 4205/2020 Jan International vs. Commissioner of Delhi Goods and Service Tax 2020-TIOL-1235-HC-DEL-GST.

HELD

Counsel for the revenue undertook that the petitioner’s refund application shall be decided in accordance with law within the time of 3 weeks. Hence the department was bound by the same.

74 Taghar Vasudeva Ambrish vs.

AAAR Karnataka & Commissioner of Central Tax, Bangalore South

2022-TIOL-242-HC-KAR-GST.

Hostel rooms for students and others – purpose is for residence. Hence lease rent exempt from GST.

FACTS

Petitioner, a co-owner of a residential property having 42 rooms is situated in Bengaluru. The property was leased by all the co-owners to a corporate vide executing a lease deed. The said lessee leased the property as a hostel to provide long-term accommodation to students and working professionals with the stay ranging from 3 months to 12 months. Since the entry 13 of Exemption Notification No.9/2017-Intergrated Tax (Rate) dated 28th June, 2017 exempts renting service provided for use as a residence, with the intent of seeking clarification as regards eligibility of the exemption from GST on the rent received from the lessee, the petitioner filed an Advance Ruling Application before the Authority of Advance Ruling, Karnataka (AAR Karnataka). AAR vide it’s Ruling 2020-TIOL-84-AAR-GST inter alia held that the service of renting of residential dwelling for use as residence does not fall under Entry 13 of the said Exemption Notification, and further held that the lessee itself is not using the accommodation. Thereafter, the Appellate Authority for Advance Ruling Karnataka (AAAR Karnataka) on hearing the appeal filed by the petitioner in the matter held that the property rented by the petitioner is a hostel building which is more akin to sociable accommodation rather than what is commonly understood as residential accommodation. Hence it cannot be termed as a residential dwelling. Further that the benefit of the exemption is available only if the residential dwelling is used as a residence by the person who has taken the same on rent/lease and accordingly dismissed the appeal. Hence the writ for the petitioner. It was submitted for the petitioner that the expression residential dwelling is not defined in the law. Therefore the trade parlance meaning has to be taken into account. The zonal regulations of Bengaluru clearly provide for operation of hostels in residential category plots. It was further urged that students use a hostel for residential purposes. Hence hostels have to be treated as residential accommodation and principles of purposive interpretation must be applied while interpreting an exemption notification. Regard must be had to the object and purpose of the exemption. It was also urged that in the exemption notification, no condition is laid down that the tenant alone must occupy and hence additional conditions cannot be read in the exemption notification. Reliance was placed inter alia on the decision of the Supreme Court in the State of Kerala vs. Mother Superior Adoration Convent 2021-TIOL-156-SC-Misc and also relevance was made to AAR West Bengal in Borbheta Estate (P.) Ltd. In Re (2019) 106 Taxmann.com 386 (AAR-West Bengal). Revenue’s case was that the lessee runs a business of leasing out of premises. The court’s attention was drawn to the trade license issued by the Mahanagar Palika of Bengaluru to the lessee wherein the trade name was described as boarding and lodging to which the public are admitted and that the lessee was registered as a commercial establishment under the Karnataka Shop & Establishment Act, 1961. Further that the exemption notification requires to be strictly construed. Reliance was placed on the Constitution Bench decision of Supreme Court in Commissioner of Customs (Imports) Mumbai vs. Dilip Kumar & Company & Others 2018-TIOL-302-SC-CUS-CB.

HELD

Hon. Bench had due regard for the Supreme Court’s Constitution Bench’s decision in Dilip Kumar & Company and Others (supra) in relation to interpretation of an exemption notification. It was stressed that there is a need for strict interpretation and discussed the said legal principle accordingly while interpreting Entry 13 of the exemption notification vis-à-vis the expression “residential dwelling”. A reference was made to the Education Guide issued by CBIC which clarified the meaning of residential dwelling in normal trade parlance as any residential accommodation and which is different from a hotel, motel, inn, guest house, etc. meant for a temporary stay. It was also noted that the accommodation used as a hostel for students and working women is classified in the residential category in the Revised Master Plan 2015 of Bangalore City. Recognizing that the students use the hostel for sleeping, eating and carrying out studies for a period from 3 to 12 months, the duration is longer compared to a hotel or a guest house, etc. Also examined by the Bench as to what is being rented and for which the residence is used and held that since the residential dwelling is being rented as a hostel for students and working women for residence whether by the lessee itself or not. Hence it was held that the benefit of the exemption under Entry 13 of the Notification No.9/2012 dated 28th June, 2017 was available to the petitioner and accordingly the order passed by AAAR Karnataka was quashed.

BCAJ Admin

Recent Developments in GST

I. CIRCULARS

a) Clarification about GST rates and classification of certain goods – Circular no.189/01/2023-GST, dated 13th January, 2023

The CBIC has issued the above circular giving a clarification about certain items like Rab, by-products of milling of dal/pulses, carbonated beverages of fruit drink or with fruit juice, etc., snack pellets (fryums), compensation cess on sports utility vehicles and goods specified under the Notification No.3/2017-Integrated (Rate) dated 28th June, 2017.

b) Clarification about classification of certain services – Circular no.190/02/2023-GST, dated 13th January, 2023

The CBIC has issued the above circular giving a clarification about classification of services like, applicability of GST on accommodation services supplied by Air Force Mess to its personnel and applicability of GST on incentive paid by Ministry of Electronics and Information Technology (MEIT) to acquiring banks under Incentive scheme for promotion of RuPay Debit Cards and low value BHIM-UPI transactions.

c) In communication titled “GST updates” dated 12.01.2023 various new functionalities made available on portal are informed.

d) Similarly, Advisory about facilities of “Initiating Drop Proceeding” of suspended GSTINs due to non-filing of returns dated 24th January, 2023 is issued.

II. ADVANCE RULINGS

Scope of Advance Ruling Provisions and liability in respect of lease:

40 Karnataka Text Book Society (R)

(AAR No. KAR ADRG 18/2022

dated 1st July, 2022)

The applicant is a registered Society and it has been formed by the Karnataka State Government as an umbrella body in the context of preparation, printing and distribution activity of all Government approved school text books. It has also rent activity, and holds GST registration. The applicant has put up various questions before the learned AAR. The questions and replies given by the learned AAR on each issue can be noted as under:

Qi. Whether the service of printing and supply of textbooks received by the government entity (the Applicant) from private printers where content belongs to the Applicant and physical inputs belong to the printer, would be covered by Notification No.12/2017-Central Tax (Rate), as amended and subject to Nil rate of tax. This clarification is sought so as to enable the Applicant to avail the benefit of the Notification during the tendering process.

Qii. If the printing and supply of textbooks is held to be taxable, what would be the rate of GST and the SAC Code.

Qiii. Whether the amendment of Sl.No.27 of Notification No. 11/2017 vide Notification No.06/2021 would apply to the Applicant, or whether the Notification 12/2017 Central Tax (Rate) would supersede it so as to make the Applicant liable for nil rate of GST on printing and supply of textbooks.

Reply: The learned AAR noted the nature of activity. It observed that the applicant provides contents and gets the printing done from a printing contractor who uses his own physical input like paper. The learned AAR held that in this case the applicant is a recipient of service and not the supplier. Referring to section 95(c) of the CGST Act, the learned AAR held that it cannot give ruling on above questions.

Qiv. Whether GST should be collected on the rental income from property leased by the Appellant to Karnataka Food & Civil Supplies Corporation Ltd (Government of Karnataka Undertaking), and if yes, whether rent received in January 2022 for past periods (2005-2021) is liable for GST.

Reply: In this respect, the learned AAR noted that the applicant has leased the property to Karnataka Food and Civil Supplies Corporation Ltd and receives rent for the same. Referring heading 9972, which covers real estate services, the learned AAR held that the applicant is liable to pay GST at 18 per cent on above rentals.

Qv. Whether GST is applicable on sale of scrap by the Applicant.

Reply: Since no details about nature of scrap, etc. were provided, the question was not answered.

Qvi. Whether the Applicant’s GST registration should be retained or surrendered.

Reply: In respect of this question, the learned AAR referred to section 97 and reproduced the following part in the advance ruling.

“Section 97. Application for advance ruling. –

1)……………………………

2) The question on which the advance ruling is sought under this Act, shall be in respect of-

(a) classification of any goods or services or both;

(b) applicability of a notification issued under the provisions of this Act;

(d) admissibility of input tax credit of tax paid or deemed to have been paid;

(e) determination of the liability to pay tax on any goods or services or both;

(f) Whether applicant is required to be registered;

(g) Whether any particular thing done by the applicant with respect to any goods or services or both amounts to or results in a supply of goods or services or both, within the meaning of that term.”

The learned AAR held that the above question, on which advance ruling is sought, is not covered by section 97(2) and hence no answer is given.

E-commerce operator vis-à-vis liability under section 9(5)

41 Multi-Verse Technologies Pvt Ltd

(AAR No. KAR ADRG 36/2022

dated.27th October, 2022)

The applicant provides computer application services (herein after referred to as “APP”) for facilitating business transactions of goods or services or both connecting through the platform of suppliers/sellers and recipients/buyers. The applicant charges a membership and subscription fee to the person who enrolls by furnishing the application in the pre-subscribed form. The applicant discharges the output tax on the membership/subscription fee received from the members registered on the Super App (known as MYn) for availing the benefits.

For the above purpose, the applicant enters into “END USER LICENSE AGREEMENT” (EULA) with supplier of goods and services as well as proposed customers of such suppliers. The modus operandi is that the supplier creates “Business User Account” (BSA) on the App and the transactions are entered through the said account.

The transactions through the above account between the suppliers and their customers are on their own account. The terms and conditions governing such contracts of supply such as class, quality, quantity, price, value of goods, schedule of delivery goods, etc., are as mutually agreed upon by them and the applicant neither has a say / role in that regard nor the applicant is involved directly or indirectly in such supply and delivery of goods or providing services or both as the case may be; the applicant is not in any way concerned with collection of the consideration for supply from the clients/business associates of the subscribed suppliers; all such matters are only within the knowledge and domain of the subscribers of the “APP” of the applicant and their business clients and associates.

Through the app of the applicant, cab services can also be booked. The general features about cab services are stated as under:

“a) We provide technology to cab operators (through the APP). This allows the passenger to identify the nearby cab through which he can take the ride and no further

b) The ride is not monitored by the applicant

c) The completion of the ride is not known to the applicant

d) The fare details are not known to the applicant

e) The fare and method of its collection are not known to the applicant

f) The fare is not collected through the applicant

g) The applicant is not responsible to the supplier for non-receipt of the consideration for the supply

h) The applicant is not responsible to the consumer for deficiency on the part of the supplier in rendering of the services.”

Based on above basic facts the applicant was of the view that it is not the e-commerce operator, as well as not liable to collect and pay GST under section 9(5) of the GST Act.

The applicant put up following questions for opinion of the learned AAR.

“a. Whether the Applicant satisfies the definition of an e-commerce operator and the nature of supply as conceptualized in Section 9(5) of CGST Act 2017 r/w notification No. 17/2017 dated 28.06.2017?

b. Whether the supply by the service provider (person who has subscribed to Applicant’s app) to his customers (who also have subscribed to Applicant’s app) on the Applicant’s computer application amounts to supply by the Applicant?

c. Whether the Applicant is liable to collect and pay GST on the supply of goods or services supplied by the service provider (person who has subscribed to Applicant’s app) to his customers (who also have subscribed to Applicant’s app) on the Applicant’s computer application? “

The learned AAR observed about the nature of e-commerce operator as given in sections 2(44) & 2(45). The said sections are reproduced in AR as under:

“2(44) – electronic commerce means the supply of goods or services or both, including digital products over digital or electronic network;

2(45) – electronic commerce operator means any person who owns, operates or manages digital or electronic facility or platform for electronic commerce;

In light of above definition, the learned AAR observed as under in respect of question whether the applicant is E-commerce operator or not?

“16. It could be inferred from the definitions supra that Electronic Commerce Operator (ECO) means any person who owns, operates or manages digital or electronic facility or platform for electronic commerce i.e. for the supply of goods or services or both, including digital products over digital or electronic network. In the instant case the applicant owns digital platform (APP MYn), for the supply of goods or services or both, thus the applicant squarely fits into the definition and qualifies to be an Electronic Commerce Operator.”

Regarding remaining two questions, the learned AAR referred to section 9(5) of the CGST Act and reproduced the same as under:

“Levy and collection.

(5) The Government may, on the recommendations of the Council, by notification, specify categories of services the tax on intra-State supplies of which shall be paid by the electronic commerce operator if such services are supplied through it, and all the provisions of this Act shall apply to such electronic commerce operator as if he is the supplier liable for paying the tax in relation to the supply of such services:

Provided that where an electronic commerce operator does not have a physical presence in the taxable territory, any person representing such electronic commerce operator for any purpose in the taxable territory shall be liable to pay tax:

Provided further that where an electronic commerce operator does not have a physical presence in the taxable territory and also he does not have a representative in the said territory, such electronic commerce operator shall appoint a person in the taxable territory for the purpose of paying tax and such person shall be liable to pay tax.”

The learned AAR noted three requirements as under, so as to be liable under section 9(5):

“a) The categories of the services shall be specified by notification, on the recommendation of the Council, by the Government.

b) The supply of such specified services shall be intra-state supplies.

c) The supply of such service is through the electronic commerce operator. “

The learned AAR held that the applicant fulfills first two conditions. However, it held that the third condition i.e. the supply is through electronic commerce operator is not fulfilled in case of applicant. In this respect, the learned AAR observed as under:

“18. In this regard, we invite reference to Merriam Webster dictionary, in accordance to which the word ‘through’ is used as a function word to indicate means, agency, intermediacy such as by means of, by the agency of etc. The word ‘through’ is also used as a function word to indicate extent, period of time such as during entire period, from the beginning to the end, to and including etc. Thus, the word ‘through’ in the phrase services supplied through electronic commerce operator, in Section 9(5) ibid, gives the meaning that the services are to be supplied by means of / by the agency of / from beginning to the end / during entire period by ecommerce operator. In the instant case, it is observed that the applicant, because of their unique business model, merely connects the driver and passenger and their role ends on such connection; they do not collect the consideration; they have no control over actual provision of service by service provider; they do not have the details of the ride; they do not have control room/call center, etc. The supply happens independent of the applicant and the applicant is involved only in the identification of the supplier of services and doesn’t take responsibility for the operational and completion of the ride. Thus, it is observed that supply of service is not through the electronic commerce operator, but are independent. Therefore, the applicant does not satisfy the conditions of Section 9(5) for the discharge of tax liability by electronic commerce operator. Thus, the applicant, though qualifies the definition of being an e-commerce operator, is not the person liable for discharge of tax liability under Section 9(5) of the CGST Act, 2017.”

Accordingly, the learned AAR held that applicant is not liable to collect and pay GST on the supply of goods and services supplied by the service providers to their customers through applicant’s computer application.

BCAJ Admin

Service Tax

I. HIGH COURT

27 Mahindra & Mahindra Ltd vs. UOI
[2022] 144 taxmann.com 200 (Bombay)
Date of order: 15th September, 2022

The charging sections for the imposition of CVD and SAD or surcharge are section 90(1) of the Finance Act, 2000, section 3(1) and section 3A(1) of the Customs Tariff Act, 1975, respectively and not section 12 of the Customs Act, 1962. The Court held that section 3(6) and section 3A(4) of the Customs Tariff Act, 1975 do not provide for any interest or penalty. Neither does section 90 of the Finance Act, 2000 provide for the same. Therefore, no interest or penalty can be levied on the portion of payment pertaining to a surcharge, CVD and SAD.

FACTS

The petitioner is engaged in the manufacture of vehicles in India and filed four applications before the settlement commission against four show cause notices demanding differential customs duty. The Orders passed by the Settlement Commission were challenged before the High Court. The High Court quashed these orders and directed to pass fresh orders. The respondents re-heard the matter and passed the orders confirming the earlier orders and imposing interest and penalties.

The petitioner contended that section 90 of the Finance Act, 2000 related to a surcharge, section 3 of the Customs Tariff Act, 1975 related to an additional duty of customs equal to excise duty, and section 3A of the Customs Tariff Act, 1975 related to a special additional duty of customs and none of these provisions provided for the imposition of penalty or interest on the chargeable duty thereunder. Therefore, there was no power under the provisions of law to impose penalties or interest. It was also submitted that the basic customs duty with surcharge had already been paid and the penalty and interest has been levied only on the differential duty which the show cause notice alleged that the petitioner had evaded and since neither section 3 nor section 3A of the Customs Tariff Act, 1975 or the Finance Act, 2000 provided for the imposition of penalty or interest, there is no power under the Act to impose the same upon the petitioner.

HELD

The Hon’ble Court held that any provision made in a statute for charging or levying interest on delayed payment of tax must be construed as substantive law and not adjectival law. The Court held that section 3 and section 3A of the Customs Tariff Act, 1975 are charging sections creating liability for CVD and SAD but do not provide for a penalty. The mere fact that there is a machinery for assessment, collection, and enforcement of tax and penalty under the Customs Act, 1962, it does not mean that the provision for penalty and interest in the Customs Act, 1962 is treated as applicable for penalty and interest under the Customs Tariff Act, 1975. The meaning of penalty or interest under the Customs Tariff Act, 1975 cannot be enlarged by the provisions of the machinery of the Customs Act, 1962 incorporated for working out the Customs Tariff Act, 1975. Referring to various judicial pronouncements the Court reiterated that when the penalty is an additional tax, the constitutional mandate requires a clear authority of law for imposition thereof. Where the Act has to be explained by referential legislation or legislation by incorporation levies penalty or not, it is better for the Court to lean in favour of the taxpayer. There is no room for the presumption in such cases.

The Court held that section 3(6) and section 3A (4) of the Customs Tariff Act, 1975 do not provide for any interest or penalty. Neither section 90 of the Finance Act, 2000 provides for the same. Therefore, no interest or penalty can be levied on the portion of payment pertaining to a surcharge, CVD and SAD. The Court also noted that unlike in the case of section 9A(8) of the Customs Tariff Act, where a specific amendment was made by section 76 of Finance (No.2) Act, 2004 by replacing the words, “relating to non-levy, short levy, refunds and appeals” with “relating to, the date for determination of rate of duty, non-levy, short levy, refunds, interest, appeals, offences and penalties”, no amendment is made to include interest and penalty in sub-section (6) of section 3 or sub-section (4) of section 3A of the Customs Tariff Act, 1975. Therefore, the intention of the legislature was very clear that it wanted to include interest and penalties only with regards to the anti-dumping duty on dumped articles and not for CVD, i.e., levy of additional duty equal to excise duty and SAD, i.e. special additional duty. No such insertion or amendment was made in section 90 of the Finance Act, 2000 relating to a surcharge. Therefore, interest and penalty cannot be levied on the portion of the demand pertaining to surcharge under section 90 of the Finance Act, 2000 or additional duty of customs under section 3 or special additional duty of customs under the Customs Tariff Act, 1975.

The Court also did not accept the contention of the Revenue that the charging section for the imposition of CVD and SAD or surcharge is section 12 of the Customs Act, 1962, and held that the charging sections for the imposition of surcharge, CVD and SAD are section 90(1) of the Finance Act, 2000, section 3(1) and section 3A(1) of the Customs Tariff Act, 1975, respectively.

II. TRIBUNAL

28 Devraj Luxury Hotels Pvt Ltd vs. Commr. of C Ex & CGST, Jaipur
2022 (67) G.S.T.L. 76 (Tri. – Del.)
Date of order: 16th June, 2022.

Extended period of limitation not available to the Revenue when demand is raised on the basis of audit where assessee had maintained records and availed the credit rightly.

FACTS

The appellant was engaged in rendering services of accommodation in hotel, banquet hall and restaurant service. The appellant paid the service tax under RCM on works contract services and legal services and availed Cenvat credit on the same. During the course of the audit, the department noticed that the credit availed on both services was ineligible and issued a show cause notice on 7th November, 2019. The Adjudicating Authority confirmed the demand vide Order-In-Original passed on 2nd July, 2020 for the denial of credit along with interest and penalty under Rule 15(3) r.w.s. 78 of the Finance Act, 1994. Being aggrieved by the impugned order, the appellant filed an appeal before Commissioner (Appeals) stating that all the transactions were properly recorded and the credit towards legal services and works contract services was taken based on the challan paid, and thus, pleaded that an extended period was not available to department. However, the Commissioner (Appeals) passed an impugned order holding that without an audit taking place, it would not have come to the notice of the department of ineligible credit taken pertaining to the works contract services and hence extended period of limitation was rightly invoked. Being aggrieved by the impugned order, the appellant filed an appeal before the Tribunal.

HELD

It was held that the demand raised by the Department alleging suppression of facts or contumacious conduct based on audit notes was not available as the appellant maintained the books of account and vouchers based on the transaction. Further, the credit on tax paid under RCM on legal services was allowed to the appellant and thus there was no suppression of facts. Consequently, invoking an extended period of limitation was not available to department. Accordingly, the impugned order was set aside.

BCAJ Admin

Goods and Services Tax

66 Sunny Jain vs. UOI

[2022] 145 Taxmann.com 601 (Del)

Date of order: 5th December, 2022

The non-payment of consideration within a period of 180 days cannot be the ground for blocking ITC in terms of Rule 86A of the CGST Act. The ineligible credit mentioned in Rule 86A covers only such ITC which has suffered ineligibility on account of situations mentioned in the said Rule and not any other cases of ineligibility. Rule 86A is a drastic measure and has to be construed strictly.

FACTS

The petitioner challenged the action of the GST officer blocking a certain amount of ITC which was credited to the Electronic Credit Ledger (ECL) of the petitioner. The assessee was intimated about the said blockage of ITC by email without any inquiry and without affording the petitioner opportunity of being heard. The petitioner had earlier filed his objection with the department for blocking of the ITC for a period of eighteen months contending that it has been done without inquiry and is beyond the time limit prescribed in Rule 86A of the CGST Act. The petitioner also submitted various documents called for by the GST officer. The GST officer directed the petitioner to deposit the interest on account of non-payment of consideration to a supplier, within a period of 180 days as required in terms of section 16(2) of the Central Goods and Services Tax Act, 2017 (hereafter “the CGST Act”) and Rule 37 of the CGST Rules. The petitioner disputed the said demand on the ground that they are not liable to pay interest as the said amount was never utilised. Before the High Court, the department filed an affidavit to the effect that the ECL of the petitioner has been blocked pursuant to an email received from the Directorate General of Analysis and Risk Management (DGARM) that contained the list of taxpayers who have availed inadmissible credit and had petitioners name in it. The department claimed that in view of the said e-mail, they have a reason to believe that the ITC available in the ECL of the petitioner had been wrongly availed and therefore, the same was blocked on 11th February, 2020.

HELD

Referring to the provision of Rule 86A, the Hon’ble Court held that the restriction applies, where the ITC available in the ECR has been “fraudulently availed” or is “ineligible” as specified in the said rule. The Court noted that in the present case, there is no allegation that the petitioner has fraudulently availed the ITC lying to the petitioner’s credit in the ECR and the only reason for blocking the ECL is that the petitioner is ineligible to take ITC in view of section 16(2) of the CGST Act. The Court held that the said provision is a drastic measure and therefore, can be taken only when the conditions for taking such measures are met as the statutory provisions empowering harsh measures such as freezing the assets of a person, have to be strictly construed. The Court held that the words “inasmuch as” used in Rule 86A(1) qualify the word ‘ineligible’ and is not a phrase of wide import and hence is used in a restrictive sense to qualify the subject. Thus, the use of the expression “inasmuch as” restricts the scope of ineligibility to the conditions as set out in sub-clauses of Rule 86A(1) of the CGST Rules. It is only if any of these conditions are satisfied that the restriction under Rule 86A(1) can be imposed in respect of ITC on the grounds that the ITC available in the taxpayer’s ECL is ‘ineligible’. The Court then referred to the provisions of section 16(2) and provisos thereto and held that it is, clearly, not the scheme of the CGST Act to restrain a person from availing the ITC till he has paid the supplier for such goods/services. The second and third provisos to section 16(2) of the CGST Act make it clear that a party is not disentitled to avail the ITC in respect of goods/services prior to his discharging the liability to pay the supplier for such goods/services and tax thereon. However, if the taxpayer does not discharge his liability to the supplier within a period of 180 days, he is required to account for the benefit of the ITC availed by the taxpayer along with interest as a part of the output liability. However, the taxpayer would be entitled to avail of the ITC once again on payment being made to the supplier. The Court thus held the respondents have completely misdirected themselves in proceeding on the basis that unless a taxpayer pays the supplier, he is ineligible to avail of the ITC lying to his credit in the ECL and directed the GST department to unblock the ITC available to the petitioner in his ECL.

67 OLA Fleet Technologies (P.) Ltd. vs. UOI

[2023] 146 taxmann.com 83 (Telangana)

Date of order: 16th March, 2022

The High Court held that calling upon the respondents to adjust IGST paid by the petitioner with CGST and SGST would amount to going beyond the statute and directs the petitioner to comply with the SCN issued demanding CGST/SGST and file a refund application in respect of IGST.

FACTS

The petitioner inadvertently mapped the State of Telangana as the State of Andhra Pradesh in its IT system and hence the IT system of the petitioner determined the nature of supply to be that of inter-state supply, though the transaction was very much within the State of Telangana and would therefore amount to intra-state supply. Consequently, the petitioner paid IGST instead of CGST/SGST. Hence, a show cause notice was issued to the petitioner demanding CGST/SGST. The petitioner filed the writ praying that the respondents be directed to adjust the amount of IGST against the CGST/SGST. The respondents objected to the same on the grounds that such an adjustment is beyond the provisions of CGST Act, TGST Act and IGST Act. The petitioner however relied upon the decision of Kerala High Court in the case of Saji S. Proprietor, Adithya and Ambadi Traders vs. Commissioner, State GST which allowed a similar petition.

HELD

The Hon’ble Court referred to the provisions of section 77 of the CGST Act and section 19 of the IGST Act which permits the refund of taxes paid erroneously by treating intra-state supply as inter-state supply. The Court also observed that Rule 92(1) lays down a procedure for sanctioning the refund. The Court held that calling upon the respondents to adjust IGST paid by the petitioner with CGST and SGST would amount to adopting a procedure, which is not provided under the relevant statute. The Hon’ble Court, therefore, did not agree with the decision of Kerala High Court in the case of Saji S Proprietor (supra) and directed the Petitioner to respond to show a cause notice with a liberty to file a refund application in respect of IGST erroneously paid.

68 Bharti Airtel Ltd vs. State of UP
[2022] 145 taxmann.com 326 (Allahabad)
Date of order: 25th November, 2022

If the owner of the goods disputes and does not volunteer the payment of penalty specified in clauses (a) or (b) or (c) of section 129(1) of the Act, the department must initiate proceedings under sections 73, 74 or 75 of the CGST Act and penalty can be determined only in terms of section 122 of the CGST Act. In other words, in disputed cases, there is no provision for the determination of tax due under section 129 of the CGST Act.

FACTS

The Petitioner challenged the order purportedly to be passed in the exercise of the power under section 129 of the CGST Act and order dismissing the appeal filed by the petitioner against such order. The petitioner transported the goods on the strength of tax invoice, however, he failed to generate Part B of the E-way Bill. After the vehicle was intercepted, the petitioner generated the Part B of the E-way Bill, however despite that the revenue authorities passed a detention order after four days mainly on the grounds that when the vehicle was intercepted, Part B of the E-way Bill was not generated. A show cause notice was issued to the petitioner under section 129(3) of the CGST Act read with section 20 of the IGST Act. The petitioner submitted a detailed reply to the show cause notice and prayed that the show cause notice be dropped mainly on the ground that the tax was duly paid as was required under the Act and that Part B of the E-way bill was also uploaded prior to the passing of the detention order. Before the High Court petitioner contended that the order is bad in law as no proceedings under sections 73, 74 or 75 are initiated in the present case and the penalty can be determined only in terms of section 122 of the CGST Act. In other words, the petitioner submitted that in terms of the mandate of section 129, the proper officer is neither authorized nor justified in determining the tax or imposing the penalty as has been done by means of the impugned orders.

HELD

The Hon’ble Court held that under the scheme of the Act, the procedure for the determination of tax and penalty is contained in Chapter XV read with sections 122, 123, 125, 126, 127 and 128 of the Act and a parallel procedure is prescribed under section 129 of the Act in case of goods, which are in transit. The Court further held that if in the event the owner of the goods comes forward for payment of penalty as specified in clause (a) or (b) or (c) of section 129(1) of the Act and pays the same, the intent is to give quietus to the litigation. However, if the owner of the goods does not volunteer to pay the penalty, the department is well equipped to initiate proceedings by taking recourse to sections 73, 74, 75 of the Act r.w.s 122 for determination of tax and the penalty leviable.

The Court noted that in the present case, the department has proceeded to determine the tax liability as well as penalty only under the provisions of section 129 of the Act. However, on a plain reading of section 129, there is no provision for the determination of tax due, which can be done only by taking recourse to the provisions of section 73 or 74 of the CGST Act, as the case may be.

The Court, therefore, allowed the appeal and directed the department to refund the amounts paid by the petitioner for the release of the goods.

69 Aartos International LLP vs. Deputy Commissioner (Customs)

[2022] 145 taxmann.com 558 (Gujarat)

Date of order: 2nd December, 2022

Where the petitioner’s claim for refund could not be processed due to system limitations, and there being no other dispute, the Court allowed the petition and directed the refund along with applicable interest.

FACTS

The petitioner exported the goods in the month of February and March 2020 and shipping bills along with GSTR-3B and GSTR-1 are a part of the record. Out of three export invoices, the petitioner received a refund for only two invoices. As regards one invoice, they attempted to approach the department as there is a portal of the Department of Administrative Reforms and Public Grievance (“the CPGRAMS”). However, for two months, there was no response and subsequently, the matter was disposed of stating that Customs Mudra has forwarded various requests to ICEGATE and is also in touch with NIC Team and requesting them to look into and resolve the matter at the earliest. It was also stated that the exporter is advised to contact ICEGATE helpdesk. Aggrieved by the delays caused in processing the refund, the petitioner filed this writ.

HELD

The department filed an affidavit before the High Court contending that the Indian Customs EDI System (“the ICES” hereinafter) has an in-built mechanism to automatically grant a refund after validating the shipping bill data available in ICES against the GST Returns data transmitted by the GSTN. The department then explained the entire system process, validation checks, etc, and stated that since the process of sanction of refund claim is automatic and system driven, as and when the Shipping Bill will be available again in Scroll PC, the same will be taken up for processing for refund and the relevant amount of IGST paid with respect to each Shipping Bill or Bill of Export shall be electronically credited to the petitioner’s bank account. The Court held that as per provisions of section 54(6) read with Rule 91(2) of the CGST Rules the amount is required to be refunded and it is the respondent’s obligation to make an order sanctioning 90 per cent of the amount claimed in Form RFD-04 within a period of seven days from the date of acknowledgment received. There are no separate applications for the refund. The shipping bills are deemed to be refund applications when the goods are exported with the payment of tax. Admittedly, in the present case, it appears to be the difficulty at the end of the GST network or some error in the software itself which would require a cure. When nothing is disputed and everything is done electronically if there is any difficulty at the level of the mismatch or the processing of the claim of the refund, it becomes the duty of the GSTN to look into the same. The Court noted that there is nothing for the Court to adjudicate in this matter except pointing out the limitation of the software of the respondent department. The Court, therefore, allowed the refund along with applicable interest.

70 Sheetal Dilip Jain vs. State of Maharashtra

2022 (67) GSTL 11 (Bom.)

Date of order: 20th September 2022.

30 days’ time limit under section 73(8) of MGST Act for making the payment of tax and interest after the issuance of SCN cannot be reduced by the Adjudicating Authority as per its personal preference.

FACTS

Petitioner was issued a SCN under section 73(8) of MGST Act, demanding the payment of tax along with interest within 7 days on 2nd March, 2022. On 10th March, 2022, the impugned order was passed by the respondent confirming the liability before the completion of minimum time period of 30 days. Being aggrieved by the impugned order passed by the respondent, the petitioner preferred this petition before Hon’ble High Court.

HELD

The High Court held that the impugned order passed without application of mind ignoring and contradicting the basic provisions of the MGST Act and rules made thereunder are unacceptable and resulted in undue hardship to the public. Accordingly, the writ petition was allowed with cost.

71 Mahalaxmi Infra Contract Ltd vs. GST Council

2022 (67) GSTL 140 (Jhar.)

Date of order: 18th October, 2022

Rectification of inadvertent mistake by the supplier in mentioning details of the recipient in his FORM GSTR-1 for the passing of ITC should be allowed in absence of a mechanism to verify inward and outward supplies details.

FACTS

The petitioner was engaged in the business of mining and transportation of goods. While filing of FORM GSTR-1 for January 2019, the petitioner inadvertently quoted GSTIN of its own joint venture company MIPL(NKAS) instead of the recipient of service (Respondent). The petitioner realized this error quite late in June 2021 during the settlement of accounts with the recipient of supplies. However, by then, the time limit to amend the details of outward supply on GSTN portal had already lapsed. Further, MIPL(NKAS) did not utilise the ITC reflected in its GSTR 2A and provided an affidavit for the same. Also, there was no operative mechanism under GST Law to verify or correct the details of outward and inward supply during the said period. Being aggrieved by the absence of a mechanism at the GSTN portal to allow rectification of such errors to pass on the ITC to the respondent, the present petition was filed.

HELD

The Hon’ble High Court observed that the petitioner’s rationale for his inability to rectify this error in absence of a mechanism under GST Law was valid and hence communication for such discrepancy could not be made. Also, the Court held that there was no loss to the Government as the tax was already deposited and the respondent was rightly eligible for the ITC. The Court further held that the respondent should be allowed to rectify the said mistake by amending the details electronically through the portal or manual mode if the same is not possible due to technical reasons. Accordingly, the writ was allowed.

72 Chromotolab and Biotech Solutions vs.
Union of India
2022 (67) G.S.T.L. 160 (Guj.)
Date of order: 21st October, 2022.

Refund cannot be denied when a refund application was submitted within the prescribed time limit on the common portal merely because CBIC Circular dated 15th November, 2017 required for physical submission of the application before the jurisdictional officer was done after the expiry of the time limit.

FACTS

The petitioner was engaged in trading of various goods used by pharmaceutical companies. During the period of August 2017 to October 2017, the petitioner made zero-rated supplies of goods to pharmaceutical companies located in the Special Economic Zones by issuing tax invoices. He filed a refund application as per section 54 of CGST Act read with Rule 89 of CGST Rules, for the invoices raised during the period of August 2017 to October 2017 on unutilised input tax credit electronically on 28th December, 2018 and acknowledgment for the same was generated. However, documents were submitted physically to the jurisdictional officer belatedly. The respondent rejected the refund claim on the grounds that the refund application was time-barred by passing an order dated 19th November, 2019 since submission of physical printout of the application as required by Circular No. 17/17/2017 dated 15th November, 2017. Being aggrieved by such rejection, the petitioner preferred a writ before this Hon’ble Court.

HELD

It was held that Circular No. 17/17/2017 dated 15th November, 2017 providing the procedure of filing an application cannot have an overriding or restrictive effect over the applicability of GST Act in a manner prejudicial to the appellant. Accordingly, the date of filing of refund application on the common portal shall be considered for adhering to the requirement of section 54 of CGST Act and Rule 89 CGST Rules. Thus, the refund application was allowed in favour of petitioner.

BCAJ Admin

Goods and Services Tax

I. NOTIFICATIONS

1. Notification No.26/2022-Central Tax dated 26th December, 2022

By above notification, the rules under CGST Rules, 2017 are amended. The amendments are regarding following aspects:

Changes in rules regarding registration namely, authentication and verification of application through separate onetime password.
Rule 37A is inserted providing reversal of input tax credit in case of non-payment of tax by the supplier and re-availment thereof.
Rule 46 is amended regarding mention of PIN in invoice issued for supplies made by or through electronic commerce or by supply of online information and database accesses or retrieval services.
Amendment in Rule 59 disallowing furnishing of details in GSTR-1 for non-compliance of intimation issued under Rule 88C.
Rule 88C is inserted to provide about the manner and method of payment of differential tax between Form GSTR-1 and GSTR-3B.
Rule 89 is inserted regarding requirements for refund to unregistered persons.
Rules 108, 109 & 109C, which are regarding appeal provisions, are substituted to make procedural changes.
In addition, there are various small and procedural changes in several other Rules and Forms.

2. Notification No.27/2022-Central Tax dated 26th December, 2022

By above notification Rule 8(4A) is made applicable to all States and Union Territories except the State of Gujarat.

3. Notification No.1/2023-Central Tax dated 1st January, 2023

By the above notification, powers of Superintendent of Central Tax are assigned to Additional Assistant Director in DGGI, DGGST and DG Audit.

II. NOTIFICATIONS – RELATING TO RATES

1. Notification No.12/2022- Central Tax (Rate) dated 30th December, 2022

By the above notification changes are affected in certain items mentioned in Schedule 1, Schedule 2 and Schedule 3 of the notification no.1 of 2017 – Central Tax (Rate) dated 28th June, 2017. The changes are in relation to items ethyl alcohol and fruit pulp etc. and the same are effective from 1st January, 2023.

2. Notification No.13/2022- Central Tax (Rate) dated 30th December, 2022

By the above notification changes are affected in certain items mentioned in notification no. 2 of 2017 – Central Tax (Rate) dated 28th June, 2017. The changes are in relation to items, aquatic food, husk, etc., effective from 1st January, 2023.

3. Notification No.14/2022- Central Tax (Rate) dated 30th December, 2022

By the above notification changes are affected in certain items mentioned in notification no.4 of 2017 – Central Tax (Rate) dated 28th June, 2017. The changes are relating to essential oils, effective from 1st January, 2023.

4. Notification No.15/2022- Central Tax (Rate) dated 30th December, 2022

By above notification changes are affected in certain items mentioned in notification no.12/2017-Central Tax (Rate) dated 28th June, 2017. The changes are relating to the renting of residential dwelling and others, effective from 1st January, 2023.

5. Similar changes are also affected under IGST Rates vide notification no.12/2022, 13/2022, 14/2022 and 15/2022 – Integrated Tax (Rate), all dated 30th December, 2022.

III. CIRCULARS

1.) Clarification to deal with difference in ITC availment – Circular no.183/15/2022-GST, dated 27th December, 2022

The CBIC has issued the above circular giving clarification about how to deal with the problem relating to difference in ITC availed through GSTR-3B as compared to GSTR-2A for past periods.

2.) Clarification on the Entitlement of Input Tax Credit – Circular no.184/16/2022-GST, dated 27th December, 2022

The CBIC has issued the above circular giving guidelines about availment of ITC in relation to Transportation services, where the place of supply is determined in terms of proviso to section 12(8) of IGST Act.

3.) Clarification about time limits for adjudication – Circular no.185/17/2022-GST, dated 27th December 2022.

Where the charge of section 74(1), about fraud, etc., is not upheld by appellate authority, then the proper officer can determine the tax payable by deeming if the notice is issued under section 73(1). The CBIC has given guidelines about determining the time limit in such cases.

4.) Clarification about Taxability of certain claims – Circular no.186/18/2022-GST, dated 27th December, 2022

The CBIC has issued the above circular giving clarification about taxability of “No-claim bonus offered by Insurance Companies” and also clarifications are given about applicability of E-invoicing.

5.) Clarification about dues vis-à-vis IBC – Circular no.187/19/2022-GST, dated 27th December, 2022

The CBIC has issued the above circular in which clarifications are given regarding the treatment of statutory dues under GST law in respect of Tax payer for whom the proceeding have been finalized under Insolvency and Bankruptcy Code,2016.

6.) Refund to unregistered persons – Circular no.188/20/2022-GST, dated 27th December, 2022

The CBIC has issued above circular in which manner of filing an application for refund by unregistered person is given.

IV. ADVANCE RULINGS

36 MEL Training and Assessment Ltd

AAR No. ADRG/02/2022

dated 2nd February, 2022 (UP)

Supply of Services to Education Institution

The applicant is engaged in the business of providing exam, certification and other allied services including various types of surveys, assessments and exam services to various clients including individuals, educational institutions, firms, corporate bodies, government undertakings, etc.

The present application was filed with respect to applicability of GST for services of examination conducted for ALL INDIA INSTITUTE OF MEDICAL SCIENCES (AIIMS).

The broad nature of services provided to AIIMS are as under-

(a) Recruitment Examination for recruiting various persons within the organization.

(b) Entrance Examination for granting admissions to students in different courses in AIIMS.

The fees charged were to be based on the number of candidates appearing for each examination.

The applicant made a claim that the services provided by them in respect to sl. No.(a) and (c) are liable for payment of GST and the issue for opinion of learned AAR is regarding services provided by them with respect to sl. No. (b), contemplated to be exempt from payment of GST as per entry 66(b)(iv) of Notification No. 12/2017-Central Tax (Rate) dated 28th June, 2017. Thus, the issue was:

“Whether the services provided by the applicant can be considered as exempted under Entry 66 of Notification 12/2017-Central Tax (Rate).”

The learned AAR referred to entry 66 of Notification No.12/2017-Central Tax (Rate) dated 28th June, 2017 as amended.

The learned AAR found that that the applicant is providing services in respect of (i) Recruitment Examination (ii) Entrance Examination and (iii) Semester/course Examination to the AIIMS. The services provided to an educational institution relating to admission to, or conduct of examination by, such institution is exempted as per entry 66(b)(iv) of the said notification. As the services by way of Recruitment Examination (for recruitment of employees) and Semester/Course examination are not mentioned in the said notification, the same are held as not exempt. As such these were not issues before the AAR. The issue for determination was regarding services provided in respect of Entrance examination. Ld. AAR referred to meaning of Educational Institution.

As per para 2(y) of the notification no.12/2017-Central Tax (Rate) dated 28th June, 2017, educational institution is clarified to mean an institution providing services by way of,

“(i) pre-school education and education up to higher secondary school or equivalent;

(ii) education as a part of a curriculum for obtaining a qualification recognized by any law for the time being in force;

(iii) education as a part of an approved vocational education course;”

Learned AAR observed about nature of AIIMS as under:

“We find that the All India Institute of Medical Sciences (AIIMS) was established in 1956 by an Act of Parliament. As per Section 5 of the All India Institute of Medical Sciences Act, 1956, the AIIMS has been declared as an institution of national Importance. As per Section 13 of the AIIMS Act, 1956, the objective of the AIIMS is to develop patterns of teaching in undergraduate and postgraduate medical education in all its branches so as to demonstrate a high standard of medical education to all medical colleges and other allied institutions in India; to bring together in one place educational facilities of the highest order for the training of personnel in all important branches of health activity and to attain self-sufficiency in postgraduate medical education. AIIMS conducts teaching programs in medical and para-medical courses both at the undergraduate and postgraduate levels and awards its own degrees.

As such, we are of the view that the AIIMS qualifies the definition of educational institution and accordingly services provided by the applicant to AIIMS by way of services relating to admission i.e. by way of entrance examination is exempt under entry no. 66(b)(iv) of the Notification No. 12/2017-ST dated 28.06.2012.”

Accordingly, the learned AAR gave a ruling that services towards entrance examination are exempt.

V. SCOPE OF ADVANCE RULING

37 Deputy Commissioner, CGST & C. Ex.

Division-II, Agra Commissionerate

Appeal order No. 01/AAAR/2021

dated-21st May, 2022(UP)

This was an appeal from an Advance Ruling given by UP AAR in order no.84/2021 dated 18th October, 2021. As per the appeal, the respondent (original applicant) is engaged in the business of manufacturing, marketing and distribution of cigarettes. The goods are manufactured outside the State and later transferred, on stock transfer basis, after payment of 28 per cent GST and Compensation Cess. In order to grow its business, the respondent has launched a new scheme wherein they will be supplying extra packs of cigarettes along with regular supply quantity without receiving any extra consideration for that additional supply.

With a view to know the correctness of taxability / ITC on the given transactions, an advance ruling application was filed.

The authority for Advance Ruling ruled as under:

“Q-1 – Whether the extra packs of cigarettes would again be leviable to GST?

Ans – Answered in negative, in view of the discussions made above.

Q-2 – If yes, the taxable value which can be attributed to such extra packs of cigarettes for levy of GST?

Ans – Not answered in view of answer to Question No. 1 above.

Q-3 – Whether extra packs of cigarettes would be considered as exempt supply or free samples and hence attracts provisions of Section 17(2) of the UPGST, Act 2017 read with Rule 42 of the UPGST Rules 2017, or clause (h) of Section 17(5) of the UPGST Act, 2017?

Ans – The extra packs of cigarettes will not be considered as exempt supplies or free samples and hence the provisions of 17(2) of the UPGST Act 2017 read with Rule 42 of the UPGST Rules, 2017 or clause (h) of Sec 17(5) of the UPGST Act, 2017 will not be applicable.”

The original respondent, i.e. revenue department has filed this appeal before AAAR taking following contentions:

“a. Cigarettes are subjected to ad-valorem taxation as well as specific taxation of quantity based system, therefore any ruling passed without considering all aspect of applicable is bad in law.

b. The Authority for Advance Ruling does not have authority to discuss about Central Excise Act, 1944, IGST Act, 2017 and GST (Compensation to State) Act, 2017.

c. Compensation Cess on cigarettes is applicable at specific rate (depending upon filter/non-filter and length of cigarette) hence calculation of tax on all 130 packs of cigarette on the basis of tax invoice issued showing taxable value only for 100 packs of cigarettes is misleading.

d. Buy one get one free clause in the Circular No. 92/11/2019-GST dated 07.03.2019 talks about only certain sections of trade and industry such as pharmaceutical companies etc. and not about evasion prone commodity like cigarette and pan masala.

e. The respondent did not inform the Authority that there are several alerts issued against the said firm by department and that they are indulged in claiming refund of accumulated ITC obtained through fraudulent means and many search operations have been conducted against the party”.

Regarding objection of maintainability of Advance Ruling the learned AAAR made reference to section 95(a) and 97(2). The learned AAAR observed as under:

“In light of above, we are of the opinion that advance ruling can be sought on the questions specified in the sub-section (2) of the Section 97 of the Act and there is no bar on the any specific commodity / entity, in the Act. Further, we also observe that the Authority for Advance Ruling can give its ruling, on the question specified under sub-section (2) of the Section 97 of the Act, with reference to the tax levied under the Act. If any particular commodity attracts tax/cess, levied under any other statutory Act/Rules then the advance ruling will be restricted to the tax portion levied under the CGST Act, 2017 only.”

Thus, the learned AAAR justified ruling about tax under GST and observed that cess is not covered by Advance Ruling order.

Regarding further objection about scope of circular no.92/11/2019-GST, the learned AAAR held that it does not relate to a particular industry but to the concept of ‘buy one get one free’. Thus, the said contention by revenue also was rejected by Ld. AAAR.

Regarding the objection of the Appellant that the respondent did not inform the Authority that there are several alerts issued against the said firm by department and that they are indulged in claiming refund of accumulated ITC obtained through fraudulent means and many search operations have been conducted against the party, the ld. AAAR observed that sub- section (2) of Section 98 of the Act provides as under:

“(2) The Authority may, after examining the application and the records called for and after hearing the applicant or his authorized representative and the concerned officer or his authorized representative, by order, either admit or reject the application:

PROVIDED that the Authority shall not admit the application where the question raised in the application is already pending or decided in any proceedings in the case of an applicant under any of the provisions of this Act.”

The learned AAAR observed that nothing is brought on record by the appellant department in respect of question decided in Advance Ruling. Therefore, the learned AAAR rejected the said contention also and dismissed the appeal.

VI. MIXED SUPPLY – SCOPE

38 Medha Servo Drives Pvt Ltd

AAAR order No. AAAR.Com/04/2021

dated 21st June, 2022 (Telangana)

The appellant had filed an Advance Ruling before the Telangana AAR regarding its supply contract with Indian Coach Factory (ICF), Chennai. The details of such supply as mentioned in appeal order are that it was a contract for design development, manufacture, supply, testing and commission of each set. Each set consisted of multiple items including goods and services. Individual prices of items are mentioned in annexure to contract and then totaled to arrive at total price, which is also mentioned in contract.

The appellant’s contention in advance ruling was that each supply of item in set is separately priced, having HSN Code and was separately invoiced and hence they are individual supplies and not mixed supply. Ruling of Karnataka AAR in case of M/s. Healersark Resources Pvt. Ltd., dated 06th December, 2021 was cited.

The learned AAR held that it is mixed supply.

Hence this appeal was filed before ld. AAAR and grounds raised above were reiterated.

The learned AAAR made reference to the subject contract and observed as under:

“In the present case, the applicant is involved in the supply of ‘design, development, manufacture, supply, testing and commissioning of 152 sets of 25 KV AC microprocessor controlled IGT based 3 phase propulsion system and equipment to rdso specification’.

As per the Purchase Order ‘PO No 08/17/1119/1101/F’ the price of each set was quoted to be Rs. 4,77,82,716-00. This price is for design, development, manufacture, supply, testing and commissioning of each set. Each set consists of multiple items including both goods and services which are made in conjunction with each other for a single price of Rs.4,77,82,716-00 per set. Some of the items are Main traction converter, TCMS /Multiplexing system, Pneumatic system comprising of main air compressor along with mounting frame, Set of MCBs, Contactors, relays, inter vehicle couplers, supervision of installation, training of personnel etc.”

Regarding price break up in annexures, the learned AAAR observed as under:

“The item wise price breakup is examined. The Annexure A-I, A-II, A-III contain the prices of 92 sets, 36 sets and 24 sets respectively. The price mentioned is of individual items used in all the 92 sets and it is not possible to arrive at the price of each item of a single set. Further, when the Purchase Order is seen as a whole, the applicant is obligated to design, develop, manufacture, supply, testing and commissioning of each set. The price agreed upon by the applicant and their client includes the cost of design, development, manufacture, supply, testing and commissioning of each set. In other words, though item wise pricing is adopted in their Annexures, but the price still remains for the whole gamut of supply of goods and supply of services entrusted to the applicant.

Price break up doesn’t necessarily imply that the items are being supplied separately for separate prices. Here, though the supplies are capable of being made individually, the essential concomitant of the present agreement is that they should be supplied in conjunction with each other to function as one complete rake set. The schedule of delivery mentions that the entire set is to be delivered at once but not the individual items separately. Even as per terms of payment, payment is done for the entire set and not individual items, implying the supply is being made for single price per unit. Further, this supply cannot be termed a composite supply because the supplies involved are not naturally bundled and only one of the supply cannot be determined as a principal supply.”

In view of above, the ld. AAAR upheld the advance ruling holding the supply as a mixed supply.

VII. MAINTAINABILITY OF ADVANCE RULING APPLICATION

39 Tata Advanced Systems Ltd

AAR order No. GUJ/GAAR/R/2022/27

dated11th May, 2022)(Guj)

The facts are that the applicant has filed application for an Advance Ruling before Gujarat AAR. The applicant intends to manufacture and supply 40 Air Crafts as per contract with Airbus Defence and Space, S. A. U., Spain under the C295 Air Craft Programme of Ministry of Defence. The applicant is registered in Bengaluru, Karnataka.

The applicant has submitted that it has identified three locations in Gujarat for manufacture of given air crafts. Under above facts, the applicant has posed following questions before learned AAR:

“2. Question on which Advance Ruling sought

(i) What is the nature of supply under the contract between the Applicant and Airbus (i.e., whether the same will qualify as ‘supply of goods’ or ‘supply of service’)?

(ii) Given the nature of the activities undertaken by the Applicant under the contract, what will be the appropriate classification and rate of tax of the said supply?

(iii) What is the value to be adopted for the purpose of payment of GST?

(iv) What will be the time of supply for payment of GST?”

The learned AAR noted that in contract, the place of execution is mentioned as Karnataka and if any change, it is to be conveyed to the contractee. Thus, having no finality of the execution place, the Ld. AAR denied to answer questions giving reasons as under:

“i. The Applicant has no locus standi to file said Advance Ruling Application, as per clause 2.2.1 of the said Contract 29-10-21, wherein the project execution unit is TASL Bengaluru GSTIN is 29AACCT5245K1ZZ.

ii. The Application by the applicant is premature and without locus standi, as no Intimation for change in place of project execution as per clause 2.2.1 has been made in the name of TASL Ahmedabad GSTIN 24AACCT5245K1Z9.

iii. In the eyes of GST scheme of law, GSTIN 24AACCT5245K1Z9 (TASL Ahmedabad), GSTIN 29AACCT5245K1ZZ (TASL Bengaluru) and GST registered Unit of TASL Hyderabad are distinct persons for the purposes of CGST Act, as per the provisions of Section 25(5) CGST Act, which reads as follows:

‘Section 25(5):

Where a person who has obtained or is required to obtain registration in a State or Union territory in respect of an establishment has an establishment in another State or Union territory, then such establishments shall be treated as establishments of distinct persons for the purposes of this Act.”

Thus, application is rejected as non-maintainable under Section 95(a) of CGST Act.

BCAJ Admin

Service Tax

TRIBUNAL

10 M/s Vodafone Idea Ltd vs. Commissioner of CGST and Central Excise
[2023-TIOL-354-CESTAT-KOL]
Date of order: 23rd February, 2023

Commission agent services used for collection of debts is allowable as CENVAT credit.

FACTS

The appellant has availed CENVAT credit on the services provided by the commission agent engaged in collection of debts from the various subscribers. The department placing reliance on the decision of the High Court of Gujarat in the case of Cadila Healthcare Ltd [2013 (30) STR 3 (Guj.)] has disallowed the said credit.

HELD

The Tribunal primarily noted that, in the present case, the commission agent is not rendering any service towards sale/sales promotion. He is engaged in the collection of debts from the subscribers. Therefore, the basis adopted for the issuance of the Notice relying on the decision in the case of Cadila Health Care is itself erroneous. Relying on the decisions in the case of Vodafone Essar Cellular Ltd [2018-TIOL-3889-CESTAT-MAD] and Bajaj Finance Ltd [2017-TIOL-4355-CESTAT-MUM] wherein charges paid to Bill Collection Agencies and Recovery Agents service was allowed, the Appeal is allowed.

11 M/s. Manashi Craft Pvt. Ltd vs. Commissioner of Service Tax
[2023-TIOL-400-CESTAT-KOL]
Date of order: 11th April, 2023

Interior Decorator service provided along with material is taxable as Works Contract service.

FACTS

The appellant is engaged in provision of interior decorator services. The services were provided along with materials. The Revenue is of the view that the entire activity is taxable under “Interior Decorator Service”.

HELD

Relying on the decision of the Hon’ble Supreme Court in the case of Larsen & Toubro Ltd 2015-TIOL-187-SC-ST and the decision of the Tribunal in the case of Spandrel vs. Commissioner of Central Excise, Hyderabad/Kochi 2010-TIOL-830-CESTAT-BANG, it was held that the appropriate classification of the said services is “Works Contract Service”. As there is no demand under “Works Contract Service” and the Appellant opted to pay service tax under composite scheme, the same has been taken on record. The Appeal is accordingly allowed.

12 The Commissioner of Central Excise and CGST, Udaipur vs. M/s Trinetra Cement Ltd [2023-TIOL-404-CESTAT-DEL]

Date of order: 18th April, 2023

Event management services used for award functions and programs for the dealers are eligible as CENVAT credit. Mandap Keeper services used for a business function are also allowable as CENVAT credit.

FACTS

The Assessee is a manufacturer of cement and clinker and availed CENVAT credit on inputs and input services including service tax passed by its head office through input service distributor invoices. CENVAT credit availed on advertising service, event management service, business auxiliary service, mandap keeper service and tour operator service is under dispute.

HELD

The Tribunal primarily noted that the CENVAT credit rules envisage recovery of irregularly availed credit from the one who has so availed it under Rule 14 and they have no mechanism to recover the same from the Input Service Distributor who merely passes the credit to its units. However, if the credit is availed on the strength of an excise invoice issued by the manufacturer who supplied the inputs or a service tax invoice issued by the provider of input service, the assessment of the excise duty or the service tax in such invoices cannot be examined or opened by the officers dealing with the CENVAT credit of the recipient of the input or input service as jurisdiction of the buyer is not the assessing officer of the supplier of the goods or services. With respect to advertising services it was noted that so long as the same is with respect to excisable goods sold the credit cannot be denied. It was also noted that there is no condition that the brand which is being advertised should be owned by the Assessee. With respect to business auxiliary service it was held that programs for gold distribution melas to marriage anniversary and food bills cannot be treated as sales promotion and therefore the credit is not allowable. Event management services availed for annual award functions and programs for dealers have a direct nexus to sales promotion and credit is admissible on such services. With respect to mandap keeper service it was noted that there is no evidence to justify that the food is for a private function and therefore the credit is allowable.

13 M/s Namakkal Agricultural producers Co-operative Marketing Society vs. Commissioner of Central Excise
Date of order: 25th April, 2023

There is a difference between ‘Auction’ and ‘Tender’. Marketing and other services provided to the farmers’ members through the tender process is not taxable under auctioneer service. The process of borrowing the money from the bank and lending to farmer members on interest is relatable only to its members and not to the bank therefore there is no service tax applicable under business support service. The Appellant is liable under goods transport agency services.

FACTS

The Appellant is a society created to provide services to the agriculturists who are members of the society for marketing of the agriculture produce, distribution of farm inputs, provision of produce pledge loans and processing and other value addition measures as possible. The society is involved in arranging facilities for storing, processing and marketing of the agricultural products. They provide marketing facilities such as auction yards, drying place and short-term storage facilities in the open yard and also rendering jewel loans to its members. The contention of the Department is that they are engaged in conducting auction of goods for monetary consideration, collecting appraising charges for sanction of jewel loans to its members and also making payment of freight for transport of goods thereby taxable under auctioneer’s service, GTA service and Business Support Service of the Finance Act, 1994.

HELD

The Tribunal noted that the marketing and other services rendered to farmer members in selling their agricultural produce through tender process would not be coming under “Auctioneer’s Service. The process of taking loans and utilising this money in providing jewel loans to their farmer members are relatable only to its members and not to the bank and the charges collected for appraising jewels before sanctioning of loans are in the nature of cost incurred for sanctioning of loans therefore, not taxable under business support service. Regarding Goods Transport Agency services it was noted that the Appellant has delivered the goods to the ration shops under the Public Distribution System and have failed to provide any evidence with respect to the value of the consignment to take the benefit of the exemption notification 34/2004-ST. Therefore, the same was held to be taxable.

BCAJ Admin

Goods And Services Tax

I. HIGH COURT

35 M/s M R Overseas vs. Union of India & Others
2023-TIOL-620-HC-DEL-GST
Date of order: 24th May, 2023

While rejecting the refund claim on the grounds of limitation, neither Adjudicating Authority nor Appellate Authority considered the COVID 19 period of 11th March, 2020 to 28th February, 2022 in terms of Notification 13/2022-Central Tax. Matter remanded.

FACTS

The petitioner claimed it was unable to upload / file the refund claim on account of technical glitches on supply of goods of Rs. 2.52 crore to SEZ without payment of IGST from 14th August, 2020 to 2nd April, 2021 and finally could upload it on 2nd April, 2021. The show cause notice proposed rejection on the grounds of time bar. The petitioner’s request for condonation for the outbreak of COVID 19 was not accepted. Similar fate was met in Appeal. According to the petitioner, if the time from 1st March, 2020 to 28th February, 2022 is excluded in terms of Notification 13/2022-Central Tax issued for exclusion of the said period during which COVID 19 restrictions prevailed, the above refund application was within the limitation period.

HELD

It is apparent that both the lower authorities have not considered the claim of delay for condonation. Hence, the orders are set aside and the matter is remanded back to the adjudicating authority for considering afresh the refund claim in light of the cited Notification No.13/2022 dated 5th July, 2022.

36 M/s Devi Traders vs. State of Andhra Pradesh
2023-TIOL-743-HC-AP-GST
Date of order: 19th June, 2023

Whether proceeding under section 74 of APGST Act can be independently initiated without recourse to scrutiny under section 61 of the said Act? Held: Not necessarily. Nevertheless time of three weeks provided to furnish explanation in the interest of justice.

FACTS

Petitioner, a trader in groundnuts, was registered under GST, and filed his returns till August 2019, after which, he wound up his business on account of losses, and hence his GST registration was cancelled from August 2019. He received a show cause notice dated 6th July, 2022 alleging that the petitioner fraudulently claimed input tax credit of IGST of Rs. 11.84 lakh for F. Y. 2018-19 on 16th July, 2022 which called upon him to furnish explanation by 13th July, 2022. Since the time provided had expired, he personally approached the Revenue Officer pleading that the transactions in question were genuine and covered by e-way bills with vehicle numbers and that purchasers were genuinely located in the State of Telangana and supplies made in the course of interstate supply, etc. However, this was not accepted on the grounds that the time for filing objections was over. Consequent thereupon, his salary account was attached, and out of the salary credited, the amount was deducted towards recovery of tax. The appellant’s grievance is that though the show cause notice was not yet adjudicated, the attachment was provisionally made. Further, the petitioner’s case was that without issuing ASMT-10 under section 61 of the APGST Act, scrutiny of the returns, a proceeding was initiated under section 74 of the APGST Act which is contrary to the scheme of the Act and hence the show cause notice is vitiated by law. The Revenue, in addition to countering on availability of alternate remedy, also made out a case that it is only one of the channels to conduct scrutiny proceeding under section 61 and culminate with section 74 but it is not sine qua not for initiating proceeding under section 74 whereas under exigent circumstances, section 74 could be invoked directly. Besides this, the issue before Hon’ble Court was whether the attachment of bank account of the petitioner was done legally.

HELD

After examining various relevant statutory provisions of the law in detail, the Hon’ble High Court held that section 74 is not guided by section 61 alone. Even without following section 61, an audit of accounts can be undertaken under section 65 and which being a wider exercise of verification of books of accounts and other documents, if found short payment or ITC being wrongly availed and utilised or initiation of action under section 73 or under section 74 can be made. Hence, it is clear that sections 73 and 74 are not controlled by section 61 as it starts with the clause “where it appears to the proper officer that any tax has not been paid.” These words not only subsume sections 61 and 65 but any other credible information from a different source and the Court did not find a specific reference to section 61 or section 65 in section 74 and observed that literal or strict interpretation is essential for fiscal tax and penal laws when the language employed is plain and unambiguous. As for the main allegation of fraudulent ITC without actual supply of goods/services, no conclusion was found reachable as petitioner’s objections/reply was found pending. Hence, while setting aside the writ petition for want of merits, it was noted that since the petitioner received the show cause notice only after the date by which he was given time to reply, he was permitted to submit his explanation with other material within three weeks in the interest of justice, and the adjudicating authority was directed to consider the same after affording opportunity of personal hearing to the petitioner and pass appropriate order in accordance with the law.

37 Santosh Traders vs. State of UP
2023 152 taxmann.com 413 (Allahabad)
Date of order: 19th June, 2023

The Hon’ble Court directed the Appellate Authority to decide the appeal which was filed belatedly after considering the peculiar facts of the case and the ill health of the petitioner which the Court considered a bona fide reason for the delay in filing of the appeal.

FACTS

The ASMT-10 for total demand of Rs.1.10 crores was issued to the Petitioner on 20th May, 2020. Due to the outbreak of the Corona Pandemic, the office of the Petitioner was not working in a routine manner and on account of this reason, he could not receive the said notice nor reply to it. Thereafter, the department issued a show cause notice and also issued ex-parte order in July 2021 demanding the said amount of tax along with interest and penalty. The petitioner, in July 2022, preferred an appeal under Section 107(1) of the CGST/SGST Act against the said order but the Appellate authority dismissed the said appeal vide order dated 26th December, 2022 on the grounds that the same was filed beyond the period of limitation. Hence, the petition.

HELD

The Hon’ble Court noted that as a part of the justification of delay in filing the appeal, the petitioner submitted that he fell seriously ill for which he was continuously under medical treatment from 5th February, 2021 to 19th July, 2022. He also produced the necessary evidence in support thereof. Further, he filed the appeal immediately after the recovery action was initiated. In these circumstances, the Hon’ble High Court held that although the appeal was filed beyond time, in the peculiar set of facts and circumstances, the reason for delay prima facie, appears to be bona fide. Hence, the Hon’ble Court hence set aside the appellate order and the petitioner was directed to file the appeal within two weeks, and the Appellate Authority was directed to consider the appeal filed on merits without raising any objection on the limitation.

38 Stallion Energy (P) Ltd vs. UOI
2023 152 taxmann.com 211 (Gujarat)
Date of order: 15th June, 2023

The Court dismissed the petition stating that where the department recovered the tax demand confirmed in the Adjudication Order after the expiry of the appeal period of three months, and the petitioner thereafter filed an appeal against the said Order by paying 10 per cent pre-deposit after the said period but within the extended period with prayer for condonation of delay, the prayer for a refund of the amount in excess of 10 per cent should be made before the appellant authority.

FACTS

The adjudication order confirming the tax demand of Rs.56 lakhs was passed against the assessee on 2nd March, 2022, and the order for provisional attachment was also passed on 16th June, 2022. Out of the total demand, an amount of Rs.46 lakhs was withdrawn by the respondents from the bank account of the petitioner. The petitioner filed the appeal on 4th July, 2022 along with a letter for condonation of delay and pre-deposited 10 per cent of the tax. The petitioner prayed that the respondents be directed to refund the remaining amount (i.e. the amount in excess of 10 per cent of the tax demand). On the other hand, the department contended that once the amount of Rs. 46 lakh is already recovered as per the provisions contained in the Act read with the Rules, it is not open for the petitioner to request for refund of the said amount merely because the petitioner has preferred an appeal under section 107 of the Act.

HELD

The Hon’ble Court dismissed the petition holding that if the appeal filed by the petitioner is allowed by the Appellate Authority, it is always open for the petitioner to make such request before the authority that direction be issued to the respondents to refund the amount.

39 Shree Ram Agrotech vs. State of Jharkhand
2023 152 taxmann.com 82 (Jharkhand)
Date of order: 15th June, 2023

The summary order passed without issuing a detailed show cause notice and recovery notices issued without detailed order in the original are liable to be quashed.

FACTS

The petitioner challenged the summary order in Form DRC-07, the appeal order dismissing the appeal preferred by the Appellant against the said DRC-07 and also the recovery notice issued based on the Summary Order in Form GST DRC-07. The petitioner requested the detailed order in terms of Section 73 of the JGST Act and the show cause notice, the petitioner vide its letter dated 1st September, 2021, requested the respondent authorities to provide a copy of the detailed order and the show cause notice as soon as possible. The respondent authorities expressed their inability to provide a copy of the detailed order and the show-cause notice to the petitioner as these documents were not available in the records of the respondent authorities as no copy of the detailed order and the show cause notice was provided to the petitioner

HELD

The Hon’ble Court held that as no detailed adjudication order is passed in terms of Section 73(9) of the JGST Act, 2017, the authorities have contravened the said provisions. The court also observed that no detailed show cause notice was issued to the Petitioner and the summary show cause notice in Form DRC-01 is of not much avail as it does not provide the specific alleged violations by the Petitioner and also does not specifically give the opportunity to the Petitioner to rebut the allegations of the Respondent. The Court further observed that the Appellate Authority has not considered any of the grounds taken by the petitioner herein and dismissed the appeal without discussing the same on merits though the grounds were on record. The Court, therefore, set aside the demand and quashed the summary order, appellate order and recovery notice with a liberty to the department to issue fresh show cause notice to the appellant in terms of provisions of the JGST Act.

40 Car Chassis Carriers (P.) Ltd vs. Assistant Commissioner
2023 152 taxmann.com 368 (Calcutta)
Date of order: 22nd March, 2023

Where the department did not give details of RC cancelled suppliers to the assessee as well as reasons for such cancellation and recovered the ITC from the assessee by issuing a direction to reverse such ITC by email, the Hon’ble Court set aside the said direction and directed refund.

FACTS

The issue before the Court was whether the respondent department could have directed the appellant/assessee to reverse the input tax credit against the supply on the grounds that they have purchased materials from a dealer whose registration has been cancelled.

HELD

The Court observed that the details of such cancellation were not furnished to the appellant and that, the appellant having availed the input tax credit against the inward supply, cannot be directed to reverse the input tax credit by way of an email communication without mentioning as to what was the basis of the cancellation of registration of the selling dealer. The court further held that the procedure adopted by the authority for directing the reversal of the input tax credit and thereafter compelling the appellants to pay the amount is not sustainable in the eyes of the law but is in violation of the principles of natural justice. The Court, therefore, allowed the writ petition and set aside the communication sent by the authority by email directing the authority to remit the amount of input tax credit which was reversed by the appellant on effecting payment without prejudice to their right by transmitting the same amount in the appellants’ electronic credit ledger.

BCAJ Admin

Recent Developments in GST

A. NOTIFICATIONS

1. Notification No.14/2023-Central Tax dated 19th June, 2023

The above notification seeks to extend the due date, for furnishing return in Form GSTR-1 for April, 2023, to 31st May, 2023 for registered persons whose principal place of business is in the State of Manipur.

2. Notification No.15/2023-Central Tax dated 19th June, 2023

The above notification seeks to extend the due date, for furnishing return in Form GSTR-3B for April, 2023, to 31st May, 2023 for registered persons whose principal place of business is in the State of Manipur.

3. Notification No.16/2023-Central Tax dated 19th June, 2023

The above notification seeks to extend the due date, for furnishing return in Form GSTR-7 for April, 2023, to 31st May, 2023 for registered persons whose principal place of business is in the State of Manipur.

4. Notification No.17/2023-Central Tax dated 27th June, 2023

The above notification seeks to extend the due date, for furnishing return in Form GSTR-3B for May, 2023, to 30th June, 2023 for registered persons whose principal place of business is in district of Kutch, Jamnagar, Morbi, Patan and Banaskantha in the State of Gujarat.

B. ADVANCE RULINGS

28 ITC vis-à-vis Co-op Society
Mahavir Nagar Shiv Shrushti Co.op Housing Society Ltd. (Order No.MAH/AAAR/AM-RM/10/2022-23 dated 30th September, 2022) (Mah)

The facts are that the Appellant is a co-operative housing society registered under the Maharashtra State Co-operative Societies Act, 1960.

The Appellant constructed a building on the plot allotted by MHADA.

In its bye Laws, amongst other things, following objects are covered.

“a) To manage, maintain and administer the property of the society;

b) To raise funds for achieving the objects of the society,

c) To undertake and provide for, on its own account or jointly with a cooperative institution, social, cultural or recreative activities.”

For achieving above objects, the appellant society raises funds by collecting contributions from the members of the society.

The said contributions are also called as charges in the bye laws of the appellant Society.

The charges to its members include property taxes, water charges, common electricity charges, contribution to repairs and maintenance funds, expenses on repairs and maintenance of the lifts of the society, including charges to run the lifts, contribution to sinking fund, service charges, car parking charges, interest on the defaulted charges, repayment of the installment of the loan and interest, non-occupancy charges, insurance charges, lease rent, nonagricultural tax, or any other charges.

The said charges are collected by the society on monthly or quarterly basis by issuing invoices.

The appellant Society has appointed M/s Unique Rehab Pvt Ltd (hereinafter referred to as the “contractor”) as the contractor for carrying out major repairs, renovations and rehabilitation works for the society. The said contractor is charging service charges along with GST for carrying out the works contract service.

The appellant Society had obtained registration under GST.

The appellant Society filed AR application dated 7th July, 2021 for determining following three questions:

“a) Whether the activities carried out by the applicant for its members qualify as “supply” under the definition of Section 7 of the CGST Act, 2017.

b) Whether the applicant is liable to obtain registration under the GST law?

c) If the activities of the applicant are treated as “supply” under the CGST Act, 2017 then whether the applicant is eligible to claim the ITC on input and inputs services for repairs, renovations & rehabilitation works carried out by the Applicant?”

The ld. AAR, vide its order No.GST-ARA-19/2021-22/B-94 dated 10th November, 2021 – 2021-VIL-418-AAR, determined question (c) of eligibility of ITC against the Appellant Society and held that Appellant Society is not eligible for ITC on repairs in view of the restrictions imposed under Section 17(5)(c) of the CGST Act, 2017.

Against above AR, this appeal was filed before Maharashtra AAAR.

Before AAAR the grounds were reiterated that appellant is entitled to get the ITC.

Amongst others, the non-application of restrictions of section 17(5)(c) was sought to be explained.

The ld. AAAR analysed position in view of relevant provisions. The ld. AAAR observed that the Appellant Society has been formed with an objective to facilitate or benefit their members by way of undertaking various activities, thereby, providing services to their members against charges in terms of their bye-laws. It is observed that Society levied 18 per cent GST on the taxable components of the charges collected by them from their members. The ld. AAAR observed that all the said underlying services provided by the appellant-society will be covered under the heading 9995 enumerated at Sl. No. 33 of the Notification No. 11/2017-C.T. (Rate) dated 28th June, 2017 having the description “services of membership organization”, and all the underlying services including the services related to building repair and renovation for which the appellant society is charging to their members, are nothing but services of membership organisation. Ld. AAAR held that their above view is also substantiated by the set of objectives and duties of the Society as prescribed under their bye-laws, which clearly state that the society’s core function is to manage, maintain and administer the society property. The ld. AAAR held that the argument that the Society is providing works contract services to their members while undertaking the task of repair, renovation, and rehabilitation of the society is not acceptable as the said services of repair, renovation, and rehabilitation of the society building would be covered under the aforesaid functions entrusted upon the appellant society in terms of the society’s bye-laws.

The ld. AAAR observed that the appellant is not supplying separate services like clearing services or repair services etc and does not recover the cost of such services under separate head specified for such services. Referring to section 17(5)(c), the ld. AAAR observed that the ITC for inward works contract services is eligible when it is for outward works contract service.

The ld. AAAR observed that the society itself is not works contract service provider, nor it is in the business of providing works contract services. Observing that the works contract services received by society, from appointed contractor, are for the common benefit of the members, and hence, the Society’s contention that they are providing works contract services to their members, is not acceptable and ld. AAAR rejected appeal and confirmed the order of AAR.

29 Registration – Permanent site office
Konkan Railway Corporation Ltd. (Order No.02/ODISHA-AAR/2022-23 dt.20.9.2022) (Odisha)

The facts are that the applicant, a Government Company having its principal place of business at Navi Mumbai, Thane, Maharashtra is engaged in providing works, contract service, transportation of gooods and passengers by railways, and project services to zonal railways and other agencies. The applicant has received a letter of acceptance (LOA) dated 15th February, 2022 for executing construction of major bridges, ROBs, supply of vehicle, site facilities and other allied works between km 143 to km 184 (172 (29 Route km + 12.108 Long chainage=41.1 km)) of Khurda Road- Bolangir new BG Rail line project of East Coast Railway (ECR) in Boudha District, Odisha. The total cost of the contract is R337.18 crore and the entire work is to be completed within 24 months from the date of issue of LOA. The applicant was required to carry out various functions like provision of vehicles, construction of viaduct, major bridge and ROBs, supply, fabrication, painting and erection of open web welded steel girders, supply, fabrication and fixing of steel sleepers for track on bridge as per tender documents and more such other functions.

The applicant submitted that it has no permanent /fixed establishment / premises in State of Odisha. However, the applicant will at its own expense, maintain sheds, storehouses, and yards in such situations and in such numbers as in the opinion of the engineer it required for carrying on the works.

The applicant contended that in absence of fixed establishment from where the supply is made, the “Location of Supplier of service” is the usual place of the supplier. It was its argument that since LOA is received by it at its address at Navi Mumbai, Maharashtra, where it has principal place of business and also registration there, the same will be the location of supplier.

The applicant also contended that in light of section 12(3)(a) of IGST Act, the place of supply is Odisha, as the contract is relating to immovable property.

Accordingly, it was submitted that the place of supply is Odisha and transaction is covered by IGST.

Applicant further submitted that the following three are the requirements to say that there is ‘fixed establishment’.

a) Having a sufficient degree of permanence;

b) Having a structure of human and technical resources; and

c) Other than a registered place of business.

It was submitted that a fixed establishment refers to a place of business which is not registered and one where the person undertakes supply of services or uses services for own needs in such place. Therefore, it was submitted that every temporary or interim location of a project site or transit-warehouse cannot become a fixed establishment. It was argued that project site or warehouse kept by applicant will not automatically become Fixed Establishment (FE). It was further argued that temporary presence of staff by way of a short visit does not make that place a fixed establishment. It was further contented that duration of site camp may not be criterion to determine Fixed Establishment by itself;

Explaining nature of activity at site the applicant submitted that site office can be used for accommodating office of project incharge and very few site engineers will be deployed in Odisha. The engineers may be staying nearby the site on their own.

It was submitted that most of the higher staff will travel from Maharashtra. The accommodation will be provided by ECR free, being part of the same Ministry.

It was further explained that most of the work will be executed through a sub-contractor located and registered in Odisha and they will bill to applicant under IGST and in turn applicant will bill to ECR under IGST. It was emphasised that there will not be any revenue loss to Odisha.

Based on the above facts, following questions were posed before the ld. AAR.

“(A). Whether separate registration is required in Odisha state? If yes, whether E-tender document/LOA would suffice as address proof since nothing else is with the Applicant and service recipient will not provide any other proof?

(B). If registration is not required in Odisha state and if we purchase goods from a supplier of Maharashtra and want to ship goods directly from the premises of a supplier of Maharashtra to Odisha state, then whether CGST & SGST would be charged from us or IGST by the supplier of Maharashtra?

(C). If registration is not required in Odisha state and if we purchase goods from a dealer of Odisha to use the goods in Odisha then whether IGST would be charged from us or CGST & SGST by the dealer of Odisha?”

The ld. AAR examined the facts and submission of applicant. The ld. AAR observed that the scope of the work mostly includes construction of bridge for the proposed new line, supply, fabrication, painting and erection of open web welded steel girders, open/pile/well foundations, setting of batching plant for production of controlled concrete and setting up of workshops for fabrication, painting, etc. of steel superstructure, which will be ‘Works Contract Service’.

The ld. AAR made reference to section 22(1) of CGST Act which provides for registration by taxpayer from where supply is made. The ld. AAR observed that for the purposes of obtaining registration, it is important to identify the ‘origin’ of supply even though GST is a ‘destination’ based tax. Though the tax goes to the destination State, the registration is required in the origin-State. The ld. AAR further observed that in case of “works contract” service, place of supply is where the immovable property is located and place of Supply (as determined under IGST Act) provides the ‘destination’ and this cannot decide place of registration. The ld. AAR held that the location of Supplier is relevant for registration. The ld. AAR made reference to Sec 2(71) which defines “location of the supplier of services” and reproduced the same as under:

“(a) where a supply is made from a place of business for which the registration has been obtained, the location of such place business;

(b) where a supply is made from a place other than the place of business for which registration has been obtained (a fixed establishment elsewhere), the location of such fixed establishment;

(c) where a supply is made from more than one establishment, whether the place of business or fixed establishment, the location of the establishment most directly concerned with the provision of the supply; and

(d) in absence of such places, the location of the usual place of residence of the supplier;”

The ld. AAR found that the contract is for Rs.337.18 crore and for the purpose of construction of bridge for the proposed new line, supply, fabrication, painting and erection of open web welded steel girders, open/pile/well foundations, setting of batching plant for production of controlled concrete and setting up of workshops for fabrication, painting, etc. of steel superstructure, huge quantity of steel, cement, sand, aggregates, other construction materials and engineers, technicians, labour force will be required. Therefore, the nature of supply is such that, it is not feasible to get it supplied from the State of Maharashtra, observed the ld. AAR. Accordingly, the ld. AAR opined that an establishment is definitely required in the state of Odisha, where the work is being carried out. It was further found that the applicant will at its own expense, provide itself with sheds, store houses and yards in such situation and in such numbers as felt necessary by an engineer for carrying on the works and the applicant will keep at each such sheds, storehouses and yards a sufficient quantity of materials.

From Tender it was also found that the applicant shall construct one site office for the Railway Engineer, with new furniture and equipments for the Engineer’s office at no extra payment by East Coast Railway. Further it was observed that applicant has to deploy a good number of site engineers and technical personnel in Odisha for supervision of the job at site and give report to applicant’s head quarter at Mumbai, Maharashtra.

The contention of applicant about no major storing of material by it was also found incorrect in terms of tender conditions.

The contract also involved a duration of 24 months, involving activity of its staff and material.

Having above facts, the ld. AAR observed that the applicant is required to maintain suitable structures in terms of human and technical resources with sufficient degree of permanence at the site of East Coast Railway, Odisha to effect supply of desired services as per the terms and conditions of the work order. The ld. AAR held that such site office is establishment as defined under section 2(7) of the IGST Act and the location of the supplier will be in Odisha in terms of section 2(15) of the IGST Act. The Karnataka AAR cited by applicant in case of T & D Electricals (No. KAR ADRG 18/2020 dated 31st March, 2020) distinguished by the ld. AAR.

Accordingly, the contention of the applicant that the location of the supplier is in state of Maharashtra and not in Odisha rejected by ld. AAR and it held that the applicant is required to be registered under GST in Odisha. The other questions held not required to be decided in view of above ruling.

30 Classification – ‘Paratha’
Vadilal Industries Ltd. (Order No.GUJ/GAAR/APPEAL/2022/20 (In Appl. No.AR/SGST & CGST/2021/AR/11 dated 15th September, 2022 (Guj)

Originally the appellant had raised following questions before ld. AAR.

“i). Whether the product viz. ‘Paratha’ i.e. various varieties of Paratha produced by the applicant merit classification under HSN Code 19059090?

ii). Whether the product, namely, ‘Paratha’ i.e. all varieties of Paratha produced by the applicant are chargeable to 5 per cent GST (i.e. 2.5 per cent SGST and 2.5 per cent CGST) under Sl. No. 99A of Schedule-I of Notification No. 01/2017-CT (Rate) and Notification No. 01/2017-IT (Rate) dated 28-6-17?’’

The ld. AAR in Advance Ruling No. GUJ/GAAR/R/20/2021 dated 30th June, 2021 – 2021-VIL-346- AAR, held that the appellant’s ‘Paratha’ are covered by HSN 21069099, liable to GST @ 18 per cent. This is an appeal filed by appellant before Gujarat AAAR against above AR.

In AR proceedings the appellant has given information about the products. The Ld. AAAR has referred to same as under:

“The main issue here is to decide the classification of the product viz. various types of paratha i.e. Malabar Paratha, Mixed Veg Paratha, Onion Paratha, Methi Paratha, Alu Paratha, Laccha Paratha, Mooli Paratha and Plain Paratha having common ingredient as wheat flour varying in composition from 36 per cent to 62 per cent and having other ingredients viz. Water, edible vegetable oil, salt, anti-oxidant etc. These Parathas are sold by appellantin packed and frozen condition and required to be cooked on pan or griddle for-3-4 minutes till the Paratha is golden brown on both sides. The detailed cooking instruction are provided on the packaging of respective Parathas.”

The appellant has submitted that the ld. AAR has erred in classifying product under HSN 2106. It was submitted that their products i.e. various types of Parathas are classifiable under Heading 1905 which covers “Bread, pastry, cakes, biscuits and other bakers’ wares, whether or not containing cocoa; communion wafers, empty cachets of a kind suitable for pharmaceutical use, sealing wafers, rice paper and similar products” and not under Heading 2106 which covers “Food preparations not elsewhere specified or included” as held by Ld. AAR, which is a residual entry.

The ld. AAAR held that the classification of goods under the GST regime has to be done in accordance with the Customs Tariff Act, 1975, which in turn is based on HSN. The rules of interpretation, section notes and chapter notes, as specified under the Customs Tariff Act, 1975, are applicable for interpretation. Therefore, the ld. AAR has held that various types of Parathas of appellant do not merit classification under Heading 1905.

The argument of appellant was that their products are akin to roti or chapatti which is classifiable under Heading 1905 and liable to 5 per cent GST by virtue of Entry at 99A of Schedule to Notification No. 01/2017 -Central Tax (Rate) 28th June, 2017.

It was found by the ld. AAAR that the composition of various types of parathas as provided by the appellant have one common ingredient wheat flour (36 per cent to 62 per cent depending upon the type of paratha) and other ingredients are water, edible vegetable oil, salt, anti-oxidant, alu (potato), vegetables, mooli (radish), onion, methi etc. whereas, in common parlance, plain roti or chapatti is basically made only from wheat flour apart from water. Therefore, on the basis of ingredients used in the appellant’s products and roti or chapatti, the ld. AAAR disagreed with contention of appellant about similarly of their products with Roti and rejected the said ground. The further controversy of appellant was that there is no need to refer to General Rules of Classification given in Custom Tariff Act.

The ld. AAAR reproduced the said Notes and held that Rules are required to be considered. Rejecting the contention of appellant that in their case Rule 3(b) is applicable for classifying Paratha under chapter heading 1905 as the component viz. wheat flour, which gives Paratha its essential character, is akin to Roti or Chapatti, the ld. AAAR observed that the said contention does not hold ground as appellant’s products i.e. different varieties of Parathas are different from Roti and Chapatti. The ld. AAAR observed that the only common thread between these items is usage of wheat flour; however, the percentage of usage of wheat flour used in Parathas manufactured by the appellant ranges from 36 per cent to 62 per cent whereas the ingredients of Plain Roti or Chapatti is wheat flour apart from water. Finding that there are various other ingredients used in Paratha, the ld. AAAR rejected argument of appellant and observed that Parathas supplied by the appellant will not fall under the category of Roti or Chapatti and will not be classifiable under Chapter heading 1905. The ld. AAAR held that the products supplied by the appellant are quite different from plain Roti or Chapatti and are therefore not eligible for the concessional rate of 5 per cent GST (applicable to Plain Chapatti or Roti), provided under Sl.No.99A of Schedule I to Notification No. 1/2017-CT (Rate) dated 28.06.2017 as amended. Regarding justification for classification in HSN 2106, the ld. AAAR reproduced the heading 2106 and particularly made reference to supplementary note 5 to Chapter 21 of the Customs Tariff which explains the scope of tariff heading 2106 as under:

“5. Heading 2106 (except tariff items 2106 90 20 and 2106 90 30), inter alia, includes:

a. protein concentrates and textured protein substances

b. preparations for use, either directly or after processing (such as cooking, dissolving or boiling in water, milk or other liquids), for human consumption;”

It was also noted by ld. AAAR that the explanatory notes to HSN Code 2106 similarly mentions that this heading covers “Preparations for use, either directly or after processing (such as cooking, dissolving or boiling in water, milk, etc.), for human consumption”.

The ld. AAAR also observed that among the headings 1905 and 2106, latter occurs last in the numerical order and hence heading 2106 would be more appropriate and right classification of appellant’s products, even from this angle.

The other argument of the appellant that heating the said Parathas for 3-4 minutes make no difference in product also rejected by ld. AAAR as on heating the colour of paratha changes and it becomes ready for consumption. The ld. AAAR distinguished the advance ruling by Maharashtra Authority of Advance Ruling in the case of M/s Signature International Foods India Pvt Ltd [2019 (20) GSTL 640 – 2018-VIL-312-AAR], on ground that the AR by any authority is binding on applicant and jurisdictional officer of applicant and not on others. The ld. AAAR concurred with Kerala AAR in the case of M/s Modern Food Enterprises Pvt Ltd, in which Parathas are classified as liable to tax @ 18 per cent.

Observing as above, the ld. AAAR confirmed the AR passed by AAR, rejecting appeal of the appellant.

BCAJ Admin

Service Tax

I HIGH COURT

14. Blackberry India Pvt Ltd vs. Asstt. Central Excise & CGST
2023-TIOL-967-HC-DEL-ST
Date of order: 3rd August, 2023

The relevant date for interest payment under section 11BB of Central Excise Act is three months after the submissions of claim of refund and not the date of letter requesting for refund.

FACTS
Petitioner challenged the order to the extent it was denied interest under section 11BB of CE Act read with section 83 of Finance Act, 1994 on the amount of refund sanctioned. Adjudicating authority contended that the refund was sanctioned within a period of three months as they considered the dates of applications for refund as 7th February, 2023 instead of the date on which the applications were first made.

HELD
Following a settled issue by Supreme Court in the case of Ranbaxy Laboratories Ltd. 2011-TIOL-105-SC-CX, adjudicating authority proceeded on the basis that interest under section 11BB of the Excise Act would be payable after expiry of three months from the date of application of refund. However, while considering the date of applications, he erred in holding the date of the letter as the date of application for refund whereas petitioner had filed its applications in March 2013, March 2014 and June 2014 respectively. Hence interest is required to be calculated from the expiry of these relevant dates. Thus, allowing the petition, the High Court directed the adjudicating authority to process claims of interest.

II TRIBUNAL

15. Commissioner of Service Tax vs. M/s Net 4 Communications
2023-TIOL-615-CESTAT-KOL
Date of order: 26th June, 2023

Service of merely setting up network without involving providing information or data did not amount to providing service of OIDAR.

FACTS
Appellant inter alia provided services of system networking which involved linking of two or more computing devices together for the purpose of sharing data. This is done using mixture of hardware and software. Revenue in the show cause notice contended that the said service was Online Information and Database Access or Retrieval (OIDAR) service as contained in section 65(105)(zh) of the Finance Act 1994. Adjudicating authority dropped the demand observing that it is not so classifiable as neither generation of data or information was involved nor it involved providing it to clients. They set up network for transfer of data not provided by them in the period prior to 1st July, 2012. Hence, Revenue filed the appeal.

HELD
Perusing the definition of the service, it was observed that in order to be covered by the definition of OIDAR, (a) service must relate to providing data or information and could be retrieval or otherwise: (b) services must be provided in electronic form and (c) services must be provided through a computer network. The activity described above neither involves data / information generation nor are they providing data to the clients. Hence, the service of OIDAR is not provided and hence, the order dropping the demand SUSTAINS & revenue’s appeal was thus rejected.

16. Commissioner of GST and / central Excise vs. Vedanta Ltd
2023-TIOL-690-CESTAT-MAD
Date of order: 26th May, 2023

Onus to prove liability of service tax under RCM on the department when the assessee placed on record all relevant details that foreign institution had Permanent Establishment in India.

FACTS
The issue in the appeal relates to whether appellant was liable to pay service tax under Reverse Charge Mechanism (RCM) on the fees paid to foreign banks for External Commercial Borrowings (ECB). Appellant provided construction engineering services, GTA services, etc. During EA-2000 audit, it was observed that a sum of over Rs. 33 crore was paid to foreign financial institutions.

However, there was no evidence of payment of service tax on the said amount. Hence, a show cause notice was served. Original authority dropped the demand observing that service providers had a fixed establishment in India. Hence, RCM does not apply to the recipient. The Revenue filed an appeal against such order holding that the Commissioner ought not to have dropped the demand entirely, as respondents had not furnished evidence as to whether the foreign service providers had office in India. According to Respondent, the onus was on the department to prove the short levy and that the banks did not have permanent establishment in India. Further, the Commissioner had gone through the details furnished to demonstrate that the institutions had permanent establishments in India and the entire situation was any way revenue neutral.

HELD
The detailed information furnished by respondents demonstrated that foreign institutions had permanent establishment in India. Also, the department failed to produce that the amount sought to be taxed was subject to service or that the institutions do not have permanent establishments in India. Hence, the interference with the order of the original authority and the appeal of revenue was thus dismissed.

17. M. P. Audyogik Kendra Vikas Nigam (Indore) Ltd. vs. Principal Commissioner of C. Ex. & CGST, Indore
2023(8) Centax 219 (Tri.-Del.)
Date of order: 26th May, 2023

Demand of Service Tax under RCM based on difference between balance sheet and ST-3 returns was not legally valid

FACTS
Appellant was engaged in providing various taxable services. A letter was issued by department to pay service tax under RCM for expenses incurred on legal, professional and consultancy services as well as security services, wherein it was contended by the revenue that there was mismatch between figures as per balance sheet and ST-3 returns. It was clarified by appellant that service tax was already paid by service provider on certain expenses. Appellant also pointed out service tax notifications on the basis of which liability under RCM was not required to be paid. Without considering the clarifications provided by appellant, a SCN was issued for period 2012-13 till 2015-16 invoking extended period of limitation. Further, second SCN was issued on same allegations for subsequent period up to June 2017 demanding service tax along with interest and penalty. Both SCNs were adjudicated vide Order In Original and demand along with interest and penalty was confirmed. Further, Commissioner (Appeals) dismissed the appeal upholding the Order In Original. Aggrieved, an appeal was filed before the Tribunal.

HELD
It was held that the SCN was issued after comparing difference between balance sheet and ST-3 returns, which was totally illegal. Tax was demanded under RCM despite the appellant pointing out that service tax was already paid by the service provider. There was no provision in service tax law to raise a demand on the difference in figure of expenses in balance sheet and ST-3 returns. There was no element of fraud or suppression of facts where returns were filed on timely basis. Hence, extended period of limitation was not available to department. Service tax demand should have been calculated transaction-wise and invoice-wise. Impugned order was set aside.

BCAJ Admin

Goods And Services Tax

I. HIGH COURT

41. Shree Renuka Sugars Ltd vs. State of Gujarat
2023 (8) Centax 235 (Guj.)
Date of order: 13th July, 2023

Refund application filed manually cannot be denied due to lacunae in the electronic system.

FACTS
Petitioner exports refined sugar under bond without payment of tax. Since the exports are zero-rated supply, ITC of input supply remains unutilised. Petitioner filed the refund application for such unutilized ITC under the category of “Refund of Unutilized ITC” on the portal. However, petitioner erroneously claimed for the lower amount. Respondent sanctioned and paid the lower amount claimed. As the portal and circular dated 3rd October, 2019 does not allow filing of second application for the same period under the same category, petitioner filed supplementary refund application for the remaining amount under the category “any other”, which was rejected on ground that it was not under a valid category. Hence, the petition.

HELD
The High Court held that when substantive conditions for claiming the benefit are fulfilled, the benefits cannot be denied on the sole ground of lacunae in the electronic system by relying upon the decision of Gujarat High Court in Bombardier Transportation India Pvt. Ltd. vs. DGFT2021 (377) ELT 489- Guj and various other judgments. Refund order passed for rejecting the refund application merely on technical ground without scrutiny was not sustainable. Accordingly, petitioner was allowed to file a manual application which was open for respondent to scrutinize.

42. Savita Oil Technologies Ltd vs. Union of India
2023 (8) Centax 241 (Bom.)
Date of order: 18th July, 2023

Appeal filed manually against intimation issued in Form DRC-05 permitted in absence of facility available electronically.

FACTS
Petitioner aggrieved by intimation issued in Form DRC-05 intended to file an appeal electronically. Disputed tax amount was deposited under protest and challans were issued to petitioner. Attempt was made to file appeal on electronic portal but since there was no provision to file the appeal electronically, petitioner approached respondent seeking permission for filing appeal manually. However, respondent rejected the request of manually filing appeal on the ground that appeals are required to be filed by using electronic portal. Being aggrieved, petition was filed before Hon’ble High Court wherein petitioner contended that intimation issued by adjudicating authority was an appealable order as per section 107 of CGST Act and filing of appeal manually should be permitted where same is not allowed by portal.

HELD
The High Court held that simply because there was no provision on portal for filing appeal against intimation issued in Form DRC-05, respondent cannot decline statutory right of petitioner for filing appeal due to technical reasons. Manual filing of appeal is permitted till an appropriate provision was made for acceptance of appeal electronically. Petitioner to file appeal within two weeks and same should be entertained by respondent.

43 Tagros Chemicals India Pvt Ltd vs. Union of India
2023 (8) Centax 239 (Guj.)
Date of order: 13th July, 2023

Refund claimed for tax deposited mistakenly could not be rejected merely on technical grounds.

FACTS
Petitioner received purchase order from a registered exporter to supply goods at concessional rate of IGST at 0.1 per cent in terms of Notification No. 41/2017-IGST Rate dated 23rd October, 2017, instead of 18 per cent. Petitioner mistakenly supplied goods to exporter at the rate of 18 per cent instead of 0.1 per cent. Tax invoice was issued on 30th June, 2019 and goods were subsequently exported by buyer on 6th July, 2019. Thereafter, petitioner found that they had paid full rate of GST instead of concessional rate and a credit note was issued by petitioner to the exporter. Details of credit note were mentioned in GSTR -1 of relevant month. However, petitioner could not reduce GST liability since there was no outward supply for relevant and subsequent month. Hence, a refund was filed which was rejected by issuing a SCN. Explanation submitted by petitioner was rejected on the grounds of non-submission of documents as per relevant notification and order in original was passed. Aggrieved, petition was filed before Hon’ble High Court.

HELD
The Hon’ble High Court relied on the decision of Hon’ble Supreme Court in case of Bonanzo Engineering & Chemical Pvt Ltd vs. Commissioner of Central Excise 2012-TIOL-25-SC-CX and Share Medical Care vs. Union of India 2007-TIOL-26-SC-CUS held that even if petitioner did not take benefit of notification initially, he would not be debarred from claiming the benefit at a later stage. Condition (ii) of Notification No.41/2017-IGST Rate which states that recipient shall export goods within 90 days from date of issue of tax invoice was fulfilled. Refund claim cannot be rejected merely on the basis of technical grounds and revenue authority should refund the amount along with interest. Petition allowed in favour of petitioner.

44. Mayel Steels Pvt Ltd vs. Union of India
2023 (9) Centax 25 (Bom.)
Date of order: 19th June, 2023

Show Cause Notice and order cancelling registration to be set aside where same was uploaded on portal but copy not provided by e-mail or hand delivery.

FACTS
Petitioner was asked to remain present on 2nd August, 2022 by issuing SCN which was uploaded on portal on 1st August, 2022. SCN was neither mailed nor hand delivered to petitioner. A reply to SCN was submitted a week later after petitioner became aware of the notice being uploaded on the portal. In the meantime, order for provisional attachment of bank account/property was issued by department under section 83 of CGST Act in Form GST DRC-22. Aggrieved, petitioner approached Hon’ble High Court on 24th November, 2022 with a contention that SCN issued was in violation of principles of natural justice, and order passed was without granting opportunity of being heard. Thereafter, an order for cancelling petitioner’s registration was issued on 2nd January, 2023 by the respondent.

HELD
It was held that SCN should not be merely uploaded on web portal but a copy of the same should be forwarded to petitioner by e-mail and/or by hand delivery. Respondent acted in an arbitrary manner by passing impugned order breaching principles of natural justice. Order for cancellation of registration was passed even though petition was filed before Hon’ble High Court. Further, the issues raised in impugned order were not in the ambit of SCN. The impugned order cancelling the GST registration of petitioner and SCN was set aside. Furthermore, respondent was allowed to issue a fresh SCN wherein an opportunity to reply was directed to be given to petitioner in accordance with the law.

45. State Tax Officer vs. Shabu George
[2023] 153 taxmann.com 138 (SC)
Date of order: 31st July, 2018

Revenue’s appeal dismissed against order of the High Court holding that cash cannot be seized when it does not form part of stock-in-trade.

Hon’ble Supreme Court dismissed the SLP filed against the order of the High Court wherein it was held that in an investigation aimed at detecting tax evasion under the GST Act, cash cannot be seized, especially when cash does not form part of the stock-in-trade of business.

46. Arhaan Ferrous and Non-Ferrous Solutions (P) Ltd and Ors vs. Deputy Assistant Commissioner-1(ST) and Ors
[2023] 153 taxmann.com 325 (AP)
Date of order: 3rd August, 2023

Authorities cannot confiscate the goods under section 130 without first issuing notice under section 129 against the purchasing dealer of the goods, if it is found that the vendor from whom such goods were purchased by him, was under investigation by the department for fake registration. The responsibility of the purchasing dealer would be limited to the extent of establishing that he bonafide purchased goods from the vendor for valuable consideration by verifying the GST registration of the seller available on the official web portal.

FACTS
The first petitioner purchased goods from one supplier and in turn sold them to a customer under a valid tax invoice. The goods were transported in the vehicle of the second petitioner and the consignment was accompanied by valid documents such as invoice, way bill, weighment slip etc. While goods were in transit the department detained the vehicles along with the goods on the alleged ground that the vendor of the 1st petitioner has no place of business at Vijayawada (i.e. no business is being conducted from the said address in Vijayawada given by the vendor), and accordingly initiated impugned proceedings in the name of the said vendor by deliberately ignoring the documents produced by the drivers at the time of check. The petitioners challenged the action of the department. It was also submitted that no confiscation under section 130 of the CGST Act can be done without issuing notice under section 129 to the first petitioner.

HELD
The Court held that since proceedings under section 129 and section 130 are mutually exclusive, it is open for the department to initiate confiscation proceedings against the vendor in view of his absence at the given address and not holding any business premises at Vijayawada, however, he cannot confiscate the goods of the 1st petitioner merely on the ground that the 1st petitioner purchased goods from such vendor. The Court further held that even if the inquiry is initiated against the first petitioner, his responsibility will be limited to the extent of establishing that he bonafide purchased goods from such vendor for valuable consideration by verifying the GST registration of the said vendor available on the official web portal and he was not aware of the credentials of the said vendor. Further, he has to establish the mode of payment of consideration and the mode of receiving goods from the said vendor through authenticated documents. Except that he cannot be expected to speak about the business activities of the said vendor and also whether he obtained GST registration by producing fake documents. In essence, the petitioners have to establish their own credentials but not of the said vendor. The Court, thus held that the GST department is not correct in roping the petitioners in the proceedings initiated against the vendor without initiating independent proceedings under section 129 of CGST/APGST Act against the petitioners and disposed of the case giving liberty to the department to initiate proceedings against the petitioners under section 129 of CGST/APGST Act, 2017 and directed to release the goods and conveyance on petitioners executing a bond and 25 per cent of the value of the goods.

47. M/s Ambey Mining Pvt Ltd vs. Commissioner of State Tax
2023-TIOL-864-HC-Jharkhand-GST
Date of order: 17th July, 2023

When the order of the First Appellate Authority is not challenged or revised by the revenue authority, the same has attained finality and the same cannot be re-adjudicated.

FACTS
The case of petitioner is that two show-cause notices were issued and both are for the same period for same cause of action (except March, 2020) issued by two different authorities i.e., Deputy Commissioner of State Tax and Assistant Commissioner of State Tax. The notices attempted to start a fresh adjudication proceeding which has already attained finality by First Appellate Order as the revenue has not appealed against the said order. Therefore, the notice issued is contrary to the settled proposition of law. For March 2020, demand of interest is made for late filing of GST returns.

HELD
The Court primarily noted that the first appellate order is accepted by the department and no further appeal is filed or any revision is carried out. Thus, the revenue cannot re-agitate a matter afresh which has already come to an end by due process of law. The Court also noted that the first appellate authority cannot remand the matter to initiate a denovo proceeding. Therefore, the impugned show-cause notices are wholly without jurisdiction, without authority of law and also barred by principles of res-judicata. With respect to the interest on late filing of returns, it was noted that there was extension of due dates on account of COVID and therefore a lower interest amount is confirmed.

48. Britannia Industries Ltd vs. Union of India
2023-TIOL-953-HC-AHM-GST
Date of order: 7th August, 2023

In absence of uploading the order on the GST portal, the date of communication of the order through email is to be considered for the purpose of filing the appeal.

FACTS
The issue before the Court is whether in absence of uploading the order on the portal, the petitioners were handicapped to file the appeal through electronic mode even though the same was communicated to them manually.

HELD
The Court noted that Rule 108 of the GST Rules prescribes that the appeal has to be filed electronically, but it nowhere prescribes that the same is to be filed only after the order is uploaded on the GST portal. The Court held that the date of communication of the order by email is to be taken as the date of communication of the order for the purpose of limitation.

49. C P Pandey and Company vs. Commissioner of State Tax
2023-TIOL-960-HC-MUM-GST
Date of order: 31st July, 2023

Cancellation of GST registration on a ground which is outside the scope of the show-cause notice is illegal and deserves to be quashed.

FACTS
The petitioner contends that the cancellation of the GST registration is not on the ground contained in the show cause notice. No opportunity is provided to meet such grounds which emerged for the first time in the orders passed. Therefore, the cancellation is illegal and should be set aside.

HELD
The Court noted that there is substance in the contention as the cancellation is completely outside the scope of the show cause notice. Since no opportunity was granted, there is a breach of the principles of natural justice and therefore the order is required to be set aside. The Court, however gave a liberty to issue a fresh show cause notice in accordance with the provisions of law.

50. Thirumalakonda Plywoods vs. The Assistant Commissioner of State Tax
2023-TIOL-908-HC-AP-GST
Date of order: 18th July, 2023

Imposing of time limit for availing input tax credit is neither violative of section 16(2) prescribing the eligibility conditions for availing credit nor violative of the Constitution. Also, mere late filing of returns will not make the Assessee eligible for input tax credit for the extended period.

FACTS
Petitioner prays for writ of mandamus declaring section 16(4) of the Central Goods and Services Act, 2017 (The Act) providing time limit to avail input tax credit as violative of Article 14, 19(1)(g) and section 300-A of Constitution of India. Section 16(2) prescribing the conditions for availment of credit would prevail over section 16(4). It was also argued that sufficient opportunity was not granted to the petitioner under section 74(5) of the Act.

HELD
The Court noted that section 16(2) does not appear to be a provision which allows input tax credit, rather the enabling provision is section 16(1). On the other hand, section 16(2) restricts the credit which is otherwise allowed to only such cases where conditions prescribed in it are satisfied. Therefore, section 16(2) in terms only overrides the provision which enables the credit i.e. section 16(1). The non-obstante clause in section 16(2) is followed by a negative sentence “no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless”. This negative sentence clearly conveys that unless the conditions mentioned in section 16(2) are satisfied, no credit is eligible. Therefore, section 16(2) is not an enabling provision but a restricting provision. Unless clear inconsistency is established, overriding effect cannot be given over other provisions. In the present case, both sections 16(2) and (4) are two different restricting provisions, the former providing eligibility conditions and the later imposing time limit. However, both these provisions have no inconsistency between them. Conditions stipulated in sections 16(2) and (4) are mutually different and both will operate independently. Therefore, mere filing of the return with a delay fee will not act as a springboard for claiming credit. Such a statutory limitation cannot be stifled by collecting late fee.

BCAJ Admin

Recent Developments in GST

A. NOTIFICATIONS

1. Notification No.18/2023-Central Tax dated 17th July, 2023
The above notification seeks to extend the due date for furnishing return in Form GSTR-1 for April 2023 to June 2023 to 31st July, 2023 for registered persons whose principal place of business is in the State of Manipur.

2. Notification No.19/2023-Central Tax dated 17th July, 2023
The above notification seeks to extend the due date, for furnishing return in Form GSTR-3B for April 2023, to 31st May, 2023 for registered persons whose principal place of business is in the State of Manipur.

The above notification seeks to extend the due date for furnishing return in Form GSTR-3B for the months of April, May and June 2023 to 31st July, 2023, for registered persons whose principal place of business is in the State of Manipur.

3. Notification No.20/2023-Central Tax dated 17th July, 2023
The above notification seeks to extend the due date for furnishing return in Form GSTR-3B for Quarter ending June 2023 to 31st July, 2023 for registered persons whose principal place of business is in the State of Manipur.

4. Notification No.21/2023-Central Tax dated 17th July, 2023
The above notification seeks to extend the due date for furnishing return in Form GSTR-7 for April 2023 to June 2023 to 31st July, 2023 for registered persons whose principal place of business is in the State of Manipur.

5. Notification No.22/2023-Central Tax dated 17th July, 2023
By above notification, the date for filing GSTR 4 for the financial years 2017–18 to 2021–22 which was extended up to 30th June, 2023 is now further extended up to 31st August, 2023, with no other change.

6. Notification No.23/2023-Central Tax dated 17th July, 2023
A facility is provided to the Registered Person whose registration has been cancelled on or before 31st December, 2022 for non-filing of returns to file returns up to effective date of cancellation with applicable interest and late fees up to 30th June, 2023. The same is now further extended to 31st August, 2023. If such returns are filed then they can apply for revocation of cancellation of registration.

7.    Notification No.24/2023-Central Tax dated 17th July, 2023
A facility given to registered person who failed to file valid return within the period of 30 days from the service of best judgment assessment order under section 62(1) of CGST Act and issued before 28th February, 2023, to file return before 30th June, 2023, is further extended up to 31st August, 2023. Upon filing the same, order can get cancelled.

8.    Notification No.25/2023-Central Tax dated 17th July, 2023
A facility given to the defaulter of filing annual return in form 9 for the years 2017–18 to 2021–22 till 30th June, 2023 is extended up to 31st August, 2023. If such return is so filed, then the late fees will be a maximum R10,000 instead of higher late fees as per normal provisions

9.    Notification No.26/2023-Central Tax dated 17th July, 2023
Waiver of late fees is provided in case of return in Form GSTR-10. The return was to be filed up to 30th June, 2023 and date is now further extended up to 31st August, 2023.

10. Notification No.27/2023-Central Tax dated 31st July, 2023
By above notification, Central Government has notified 1st October, 2023 as the date for coming into force of provisions of section 123 of the Finance Act, 2021 (13 of 2021). The provisions of section 123 pertains to amendment in section 16 of IGST Act.

11. Notification No.28/2023-Central Tax dated 31st July, 2023

By above notification, Central Government has notified that the provisions of sections 137 to 148 and 155 to 162 of the Finance Act, 2023 (8 of 2023) shall come into force from 1st October, 2023 and section 149 to 154 shall come into force from 1st August, 2023. The amendments are in various sections of CGST Act vide Budget 2023.

12. Notification No.29/2023-Central Tax dated 31st July, 2023
By above notification, Central Government has notified Special procedure to be followed by a registered person in case of dispute out of directions of Hon. Supreme Court in Filco Trade Centre Private Limited read with Circular No. 182/14/2022-GST, dated 10th November, 2022 relating to TRAN-1.

13. Notification No.30/2023-Central Tax dated 31st July, 2023
By above notification, Central Government has notified specific forms seeking information on various issues in relation to notified items in said notification. The items are mainly Tobacco and its products.

14. Notification No.31/2023-Central Tax dated 31st July, 2023
By notification no.27/2022–Central Tax dt. 26th December, 2022, Rule 8(4A) was made applicable to all States except Gujarat. Now by above notification, State of Pondicherry is also excluded.

15. Notification No.32/2023-Central Tax dated 31st July, 2023
By above notification, Central Government has exempted the registered person from filing annual return whose aggregate turnover in the financial year 2022–23 is up to two crore rupees.

16. Notification No.33/2023-Central Tax dated 31st July, 2023
By above notification, Central Government has provided ‘Account Aggregator’ as system with which information may be shared by common portal under section 158A of CGST Act.

17. Notification No.34/2023-Central Tax dated 31st July, 2023
By above notification, Central Government seeks to waive requirement of mandatory registration under section 24(ix) of CGST Act for person supplying goods through ECO, subject to conditions.

18. Notification No.35/2023-Central Tax dated 31st July, 2023
By above notification, common adjudication authority is sought to be appointed in respect of show cause notice for taxpayers mentioned in said notification.

19. Notification No.36/2023-Central Tax dated 4th August, 2023
By above notification, special procedure to be followed by the Electronic Commerce Operators in respect of supplies of goods through them by composition taxpayers is provided. The notification to apply from 1st October, 2023.

20. Notification No.37/2023-Central Tax dated 4th August, 2023
By above notification, special procedure to be followed by the Electronic Commerce Operators in respect of supplies of goods through them by unregistered persons is provided. The notification to apply from 1st October, 2023.

21. Notification No.38/2023-Central Tax dated 4th August, 2023
By above notification, amendments are made in various Rules. The indicative list of changes is as under:

Rules

Pertaining to:

9(1)

Verification
of registration application.

10A

Furnishing
of bank account details.

21A

Suspension
of registration.

23 (w.e.f.
1^st October, 2023)

Revocation
of cancellation of registration

Physical
verification of business premises in certain cases.

(w.e.f.
1^st October, 2023)

Manner
of determination of ITC in respect of capital goods and reversal thereof.

Tax
Invoice.

Form
and manner of furnishing details of outward supplies.

(w.e.f.
1^st October, 2023)

Form
and manner of submission of returns by person providing OIDAR services.

(w.e.f.
1^st October, 2023)

Form
and manner of submission of statement of supplies through E-com operator.

88D
(new)

Manner
of dealing with difference in input tax credit available in auto-generated
statement containing the details of input tax credit and that availed in
return.

Application
for refund of tax etc.

(w.e.f.
1^st October, 2023)

Credit
of amount of rejected refund claim.

Refund
of IGST paid on goods or services exported out of India.

108

Appeal
to Appellate Authority.

109

Application
to Appellate Authority.

138F
(new)

Information
to be furnished in case of intra state movement of gold, precious stones,
etc., and generation of e-way bills thereof.

142B
(new)

Intimation
of certain amounts liable to be recovered under Section 79 of the Act.

162

(w.e.f.
1^st October, 2023)

Procedure
for compounding of offences.

163
(new)

(w.e.f.
1^st October, 2023)

Consent
based sharing of information.

Notifications relating to Rate of Tax

22. Notification No.6/2023-Central Tax (Rate) dated 26th July, 2023
The above notification seeks to amend notification No. 11/2017- Central Tax (Rate) so as to notify change in GST with regards to services as recommended by GST Council in its 50th meeting held on 11th July, 2023. The changes are mainly relating to procedure regarding GTA services.

23. Notification No.7/2023-Central Tax (Rate) dated 26th July, 2023
The above notification seeks to amend notification No.12/2017- Central Tax (Rate) so as to notify change in GST with regards to services as recommended by GST Council in its 50th meeting held on 11th July, 2023. “Satellite launch services” is added by substitution.

24. Notification No.8/2023-Central Tax (Rate) dated 26th July, 2023
The above notification seeks to amend notification No. 13/2017- Central Tax (Rate) so as to notify change in GST with regards to services as recommended by GST Council in its 50th meeting held on 11th July, 2023.

25. Notification No.9/2023-Central Tax (Rate) dated 26th July, 2023
The above notification seeks to amend notification No. 01/2017- Central Tax (Rate) to implement the decisions regarding change of rates in the 50th GST Council.

26. Notification No.10/2023-Central Tax (Rate) dated 26th July, 2023
The above notification seeks to amend notification No. 26/2018- Central Tax (Rate) to implement the decisions of 50th GST Council. This notification is relating to supply of gold through nominated agencies.

Similar changes are made in IGST by issue of separate notifications under IGST Act.

B. ADVISORY

There is advisory dated 24th July, 2023, by which the availability of E-invoice exemption declaration functionality on GSTN is informed.

C. CIRCULARS

a) Clarification about charging of interest u/s. 50(3) of CGST Act -Circular no.192/04/2023-GST, dated 17th July, 2023
The CBIC has issued above circular giving clarification regarding charging of interest under section 50(3) of CGST Act in the cases where IGST credit has been wrongly availed by a registered person.

b) Clarification about ITC in Form GSTR-3B -Circular no.193/05/2023-GST, dated 17th July, 2023
The CBIC has issued above circular giving various clarifications to deal with difference in Input Tax Credit (ITC) availed in FORM GSTR-3B as compared to that detailed in FORM GSTR-2A vis-a-vis Rule 36(4) for the period from 1st April, 2019 to 31st December, 2021.

c) Clarification about TCS liability u/s. 52 of CGST Act – Circular no.194/06/2023-GST, dated 17th July, 2023
The CBIC has issued above circular giving clarifications on TCS liability under section 52 of the CGST Act, 2017 in case of multiple E-commerce Operators in one transaction.

d) Clarification about availability of ITC in respect of warranty replacement – Circular no.195/07/2023-GST, dated 17th July, 2023
The CBIC has issued above circular giving clarification on liability under GST and availability of ITC in respect of warranty replacement of parts and repair services during warranty period.

e) Clarification about holding shares in Subsidiary Company – Circular no.196/08/2023-GST, dated 17th July, 2023
The CBIC has issued above circular giving clarification whether holding of shares in a subsidiary company by holding company will be treated as ‘supply of service’ or not.

f) Clarification about refund related issues – Circular no.197/09/2023-GST, dated 17th July, 2023
The CBIC has issued above circular giving clarification on various issues relating to refunds under GST.

g) Clarification about issues pertaining to E-invoice – Circular no.198/10/2023-GST, dated 17th July, 2023
The CBIC has issued above circular giving clarification on issues in respect of applicability of e-invoice under rule 48(4) of Central Goods and Services Tax Rules, 2017 in given situations.

h) Clarification about liability in case of distinct persons – Circular no.199/11/2023-GST, dated 17th July, 2023
The CBIC has issued above circular giving clarification regarding taxability of services provided by an office of an organisation in one State to the office of that organisation in another State, both being distinct persons.

i) Clarifications pursuant to 50th GST Council Meeting-Circular no.200/12/2023-GST, dated 1st August, 2023
The CBIC has issued above circular, in which the clarifications are given in light of recommendations in 50th GST Council meeting held on 11th July, 2023.

j) Clarification about tax on certain services – Circular no.201/13/2023-GST, dated 1st August, 2023
The CBIC has issued above circular in which clarifications regarding applicability of GST on certain services like director service, restaurant services etc., are given.

D. ADVANCE RULINGS

ITC vis-à-vis CSR

31. Bambino Pasta Food Industries Pvt Ltd (Order No.: A R Com/17/2022 dt. 20th October, 2022 (TSAAR Order No. 52/2022) (Telangana)

The applicant, Bambino Pasta Food Industries, is a manufacturer of Vermicelli and pasta Products. The Applicant filed advance ruling application to know the admissibility of ITC on the Corporate Social Responsibility (shortly known as CSR) expenditure spent by it.

The applicant informed that during the covid time, when oxygen was scarce in the country, Applicant has donated oxygen plant to AIIMS hospital Bibinagar, Yadadri Bhongir District, for the benefit of patients who were suffering with low oxygen levels. For this purpose, the applicant had purchased PSA oxygen plant and spare parts for that oxygen plant for Rs.62,74,200 which included IGST paid of Rs.9,16,200. The applicant opined that the expenditure made by them comes under the CSR provisions as per Section 135 of the Companies Act, 2013 and hence, it is not as gift.

It was submitted that CSR activity is to be considered as “used or intended to be used in the course or furtherance of business” because any company, which meets the criteria for CSR, is mandatorily required to incur expenditure in CSR activities, so as to be compliant with the Companies Act, 2013.

It was explained that as per Section 17(5)(h) of the CGST Act, 2017, input tax credit shall not be available in respect of “goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples.”

Reliance placed upon the Judgment of the Hon’ble Supreme Court of India, in the case of Ku. Sonia Bhatia vs. State of UP (1981-VIL-06-SC), wherein Hon’ble Court has cited the definition of ‘gift’ from Corpus Juris Secundum, Volume 38 in the following words: “A ‘gift’ is commonly defined as a voluntary transfer of property by one to another, without any consideration or compensation there for.

That a ‘gift’ is a gratuity and an act of generosity and not only does not require a consideration, but there can be none.” Citing the definition, it has been observed by the Hon’ble Court that “The concept of gift is diametrically opposed to the presence of any consideration or compensation. A gift has aptly been described as a gratuity and an act of generosity and stress has been laid on the fact that if there is any consideration then the transaction ceases to be a gift.”

It was thus insisted that the CSR is not gift but under compulsion.

The judgment of Hon. CESTAT Mumbai, in the case of M/s Essel Propack Ltd vs. Commissioner of CGST, Bhiwandi {2018 (362) E.L.T. 833 (Tri.-Mumbai) – 2018-VIL-621-CESTAT-MUM-ST} was cited in which similar ITC is allowed.

The different penal provisions under Companies Act, 2013 were also shown to further state that it is to save business from such actions and hence, expending duly covered by scope of expenditure for business.

The learned AAR referred to statutory provisions of the Companies Act, 2013 and observed that the running of the business of a company will be substantially impaired if they do not incur the said expenditure. Therefore, the expenditure made towards corporate social responsibility under section 135 of the Companies Act, 2013, is expenditure made in the furtherance of the business, and hence the tax paid on purchases made to meet the obligations under corporate social responsibility will be eligible for input tax credit under CGST and SGST Acts, held the learned AAR. Accordingly, the matter allowed in favour of applicant.

(Note: By amendment by Finance Act 2023, section 17(5) (fa) is inserted to block ITC on CSR expenses.)

32. RCM / liability on Compensation received Continental Engineering Corporation (Order No.: AAARCom/05/2022 dt. 19th October, 2022 (Order No. AAAR/11/2022) (Telangana)

This is an appeal against AR bearing no. TSAAR/13/2021 dt. 8th October, 2021. The facts are that M/s Continental Engineering Corporation, Telangana is engaged in the construction of highway, tunnel, bridge, mass rapid transit and high-speed rail projects.

The appellant (original applicant) has sought clarification from the AAR in respect of taxability of certain receipts under GST. Out of various items decided by AAR, the appellant filed appeal against two issues before the ld. AAAR. The issues raised before the ld. AAAR are as under:

“a) Whether GST is payable on the claim of R22,00,000 [sic] for the HGCL share of sitting fees and other expenses paid by the applicant on the directions of the Arbitrators for an amount.

b) Whether GST is payable on the claim of R1,15,80,62,000 [sic] (including interest amount) on account of compensation of additional cost incurred due to delay in issue of drawings and failure of HGCL to handover site on time and refusal to issue the taking over certificate.

c) If the answer to questions (a) and (b) are in affirmative, then under what HSN Code and GST rate the liability is to be discharged by the Appellant, and at what time?”

In respect of issue about amount paid as sitting fees for arbitration, the ld. AAR observed that the lower authority had held that Arbitration service was supplied independently after the introduction of GST i.e., the arbitration tribunal was constituted conclusively on 20th November, 2017 and rendered its orders on 9th May, 2019 and therefore this supply is liable to tax on reverse charge basis under GST.

The appellant was arguing that it has made payment of money as per award. It was the contention that money is not goods or services. However, the ld. AAAR observed that the Government vide Sl.No.3 of Notification No.13/2017. dt. 28th June, 2017 has levied tax in respect of services provided by the Arbitration Tribunals to be paid by any business entity located in the taxable territory, under reverse charge mechanism. The ld. AAAR also observed that the relevant tariff is also provided like SAC code of 998215 for such services taxable @ 9 per cent each under CGST and SGST.

Therefore, the ld. AAAR confirmed order of AAR on the above count. In respect of amount received as compensation for delay in issue of drawing and failure to hand over site on time, the ld. AAAR observed that these damages are claimed by the appellant from the contractee due to the delays in making available possession of site, drawings & other schedules by the contractee beyond the milestones fixed for completion of project. The ld. AAR has considered these damages for tolerating an act or a situation arising out of the contractual obligation. The Ld. AAAR noted that as per the issues mentioned in the arbitration award, clauses 6.4 and 42.2 of the General Conditions of Contract (GCC) specifically state that in case of any delay in issuance of drawings or failure to give possession of site the engineer shall determine the extension of time and amount of cost that the contractor may suffer due to such delays in consultation with the employer and the contractor.

The appellant was contending that these receipts are towards reimbursement of additional costs incurred during extended period while performing the work. It was contended that this is not a consideration towards the supply of goods and services.

The ld. AAAR justified the AAR order observing as under:
“As per the claim documents submitted before the lower authority, not disputed by the applicant, the amount was towards compensation for delay in execution of the works and prolongation costs. When a subjective meaning is deciphered from the phase used by the applicant themselves, the amounts were recovered as compensation for delay in execution of the works. That is to say that the applicant had received the amount to agreeing to the obligation to refrain from an act, or tolerating an act or a situation that arose due to delay in execution or protraction or elongation of work. This is nothing but compensation for refraining to do an act or tolerating to do an act. The consideration received for such act is taxable @ 9 per cent each under CGST and SGST and falls under Ch Head 9997 at Sl. No. 35 of Notfn No. 11/2017-CT (rate).”

Thus, in appeal, AR confirmed on both the issues.

33. Scope of AR – State wise
Comsat Systems P Ltd (Order No.: A R Com/11/2022 dt. 20th October, 2022 (TSAAR Order No. 51/2022) (Telangana)

The applicant, Comsat Systems Private Limited, is engaged in manufacture, supply, install, testing and commissioning of satellite communication antenna systems. They submitted that the antennas manufactured at their factory (Hyderabad, Telangana) are required to be installed at various locations in different states of India, including Andaman, Nicobar, Dweep Islands.

They submitted that they have to install 19 Nos., antenna systems at various locations/states in India and that M/s Bharat Electronics Ltd, Bangalore Karnataka, their recipient is insisting them to have separate temporary GST number for each location / state.

Based on above facts following questions were raised before the ld. AAR:

“1. Is it necessary to have temporary GST Registration at various locations/States for each location to claim GST tax installation, testing & commissioning of antennas?

2. How far Sec.22 of the CGST Act is applicable?”
The ld. AAR examined scope of section 96 of GST Act. The ld. AAR ruled as under:

“The applicant is having his place of business in the state of Telangana and is seeking a ruling on his liability to obtain a registration in other states where he is executing to contracts including installation, testing and commissioning of antennas. In this connection it is inform that under Section 96 of the CGST Act, the authority for advance ruling constituted under the provisions of a state goods and services Act shall be deemed to be the authority for advance ruling of that state. As seen from this provision there is a territorial nexus between the authority for advance ruling of a state and its geographical boundary. Therefore, this advance ruling authority constituted under the Telangana State Goods and Services Act cannot give a ruling on the liability arising under the CGST Act or SGST Act in a different state. Therefore, the application is Rejected.”

Thus, it is clear that the scope of AAR is limited to particular state and cannot rule for liability in other states.

Valuation – Reimbursement of diesel cost

Tara Genset Engineers (Regd) (Ruling No.11/2022-23 in Appl. No.08/2022-23 dt. 13th October, 2022 (Uttarakhand) The applicant submitted that they are a partnership firm in the business of renting of DG Set to various customers in different Districts of Uttarakhand and they have entered into agreements with them to install diesel Generator on hire basis for rent with reimbursement of diesel cost. They are discharging the Tax @ 18 per cent (CGST @ 9 per cent + SGST @ 9 per cent) on DG Set hiring charges plus on reimbursement of diesel cost incurred for running DG Set.

It is further submitted that now one of the recipients of service is of the opinion that the taxes charged and collected by them on the component of the reimbursement of diesel charges for running the Diesel Generator is erroneous, as the said commodity i.e., the diesel does not come under the purview of GST. It was the opinion of said recipient that since diesel is a non-GST goods as per section 9 of CGST/SGST Act, 2007 it is not liable to GST and he has requested the applicant to reimburse the wrongly collected tax.

In view of the above, the applicant has raised above question before AAR about GST applicability on cost of the diesel reimbursed by recipient for running DG Set in the Course of Providing DG Rental Service.

The ld. AAR held that the issue is about valuation of the supply and hence made reference to section 15 of the CGST Act, 2017 and as reproduced the said section in AR. The ld. AAR observed that section 15 provides that the value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.

The ld. AAR observed that section 15 of the CGST Act, 2017, mandates that the value of supply shall include among other things, any other amount that the supplier is liable to pay in relation to such supply but which has been incurred by the recipient of the supply and not included in the price actually paid or payable for the good or services or both. The Ld. AAR observed that the provisions of the section 15 are very clear and in unambiguous terms it has been mandated that any amount that the supplier is liable to pay in relation to such supply but which has been incurred by the recipient of the supply and not included in the price actually paid or payable for the goods or services or both, is part of value of supply.

The ld. AAR made reference to section 7 and section 2(31) defining ‘Consideration’. The ld. AAR observed that consideration includes any payment whether in money terms or otherwise. Ld.

AAR observed that the usage of the terms “or otherwise” and “or forbearance for the inducement of the supply of goods or services or both, whether by the recipient”, in definition leaves no doubt about the spirit and essence of the Act.

On facts, the ld. AAR found without the fuel, the Diesel Generator Set cannot be operated to generate/ produce “Electricity”, i.e., intended purpose of installing DG set on hire cannot be achieved. The ld. AAR observed that the rental service of Diesel Generator Set has the integral component of running the Diesel Generator and for this, “Diesel” is required. It further observed that the running condition of Diesel Generator (DG) Set cannot be achieved without the fuel i.e., the “Diesel”.

The ld. AAR observed that contract entered between the applicant and the recipient is for the hiring of DG Set and is a comprehensive contract with the consideration having fixed component and a variable component. The fixed component is the monthly fixed rent charged in the invoice for the DG Set and the variable charge (Running Charge) is the charge for the diesel used. Both are parts of the same consideration and are for the contract of supplying DG Set on hire.

It is observed that there is no separate contract for supply of diesel and single invoice is issued for the supply of rental service of DG Set although both the components are shown separately. The ld. AAR also observed that the reimbursement of expenses as cost of the diesel, for running of the DG Set is nothing but the additional consideration for the renting of DG Set and attracts GST @18 per cent.

The ld. AAR referred to Advance Ruling in case of Goodwill Autos (KAR ADRG 44/2021 – 2021-VIL-282-AAR dated 30th July, 2021) by Karnataka AAR in which also similar position is upheld.

In view of above, the ld. AAR ruled that GST @18 per cent is applicable on the cost of the diesel incurred for running DG Set in the Course of Providing DG Rental Service as per section 15 of the Central Goods and Services Tax Act, 2017 / Uttarakhand Goods and Service Tax Act, 2017.

BCAJ Admin

GOODS AND SERVICES TAX (GST)

I. SUPREME COURT

1 Paresh Nathalal Chauhan vs. State of Gujarat

[2022 (57) GSTL 353 (SC)]

Date of order: 1st February, 2022

Bail cannot be denied where accused was already in custody for 25 months which was almost 50% of the period for which he could have been sentenced

FACTS
Appellant was taken into custody for indulging in evasion of GST. A search operation was conducted by the officers, who had occupied the house for over a week, where female members were also present. This was adversely commented by the Hon. Gujarat High Court in its judgement dated 24th December, 2019. The appellant had been in custody for over 25 months out of a total period of 5 years for which he can be sentenced. The investigation was still pending even though the complaint was filed. The endeavour of officers was only to teach a lesson to the appellant, which had resulted in adverse order against him. Counter argument by Respondent was that appellant should not be enlarged on bail as he was a habitual offender who has been engaged in violation of law previously as well. The root problem of evasion of duty of Rs.64 crores can be detected only if the accused is taken into custody. Being aggrieved, the appeal was filed for grant of bail.

HELD
It was held that the appellant could not be detained indefinitely where he had already been under custody for approximately 25 months which is almost half of the maximum total sentence of 5 years. Bail was granted to the appellant subject to terms and conditions to the satisfaction of the Trial Court. Also, the appellant was warned not to indulge in any criminal activities in future.

II. HIGH COURT

2 Om Shanti Construction vs. State of Bihar

[2022 (57) GSTL 374 (Pat.)]

Date of order: 1st September, 2021

Writ Petition can be entertained even when there is alternative remedy available where the adjudication order has been passed ex-parte without specifying reasons and in violation of the principle of natural justice

FACTS
The Petitioner is engaged in carrying out construction activities. Respondent No. 3, i.e. Asst. Comm. of State Tax, East Circle, Muzaffarpur had passed an ex-parte order dated 11th January, 2021 and imposed tax, interest and penalty without assigning any reasons.

HELD
It was held that notwithstanding the statutory remedy, High Court is not precluded from interfering if the order is prima facie bad in law. The order was treated bad in law for two reasons: (i) violation of the principle of natural justice, i.e. fair opportunity to present the case was not given to the petitioner, and (ii) order was passed ex-parte without assigning sufficient reasons. Consequently, the writ petition was disposed off.

3 Radheshyam Spinning Pvt. Ltd. vs. Union of India

[2022 (57) GSTL 8 (Guj.)]

Date of order: 29th January, 2021

Exemption from payment of IGST on import of capital goods is applicable for the period from 01.07.2017 to 13.10.2017

FACTS
Petitioner paid IGST on import of capital goods from 01.07.2017 to 13.10.2017. In respect of Export Promotion Capital Goods (EPCG) Scheme, an amendment to Notification No. 16/2015-Cus. had exempted IGST paid on import of capital goods made from 01.07.2017 to 13.10.2017. The refund of ITC of IGST paid towards the import of capital goods was admissible only if the electronic credit ledger was debited by the IGST balance. Petitioner was unable to debit the electronic credit ledger with IGST on account of provisions of section 49A and section 49B of CGST Act, 2017, which required utilization of IGST balance first for payment of IGST, CGST or SGST. Therefore, the balance of IGST started getting utilized automatically during the pendency of petition and ITC of CGST and SGST started accumulating correspondingly. Seeing no alternative, the petitioner preferred the present writ.

HELD
It was held that the present issue was covered by the judgement of Hon’ble Gujarat High Court in M/s. Prince Spintex Pvt. Ltd. vs. Union of India 2020 (35) GSTL 261 wherein it was decided that amendment made by Notification No. 79/2017 dated 13th October, 2017 applied to imports made during the period 01.07.2017 to 13.10.2017. Further, the amendment to section 49, sections 49A and 49B read with Rule 88A specifying the manner of utilization of input tax credit on account of IGST had artificially inflated the balance of CGST and SGST. The writ petition was allowed with a direction to grant the refund subject to reversal of credit by debiting the electronic credit ledger from CGST and SGST balance.

4 Best Crop Science LLP vs. State of U.P.

[2022 (57) GSTL 373 (All.)]

Date of order: 14th September, 2021

Order for blocking input tax credit available in electronic credit ledger automatically comes to an end after one year

FACTS
Respondent had issued an order for blocking the Input Tax Credit of the petitioner. The direction for blocking input tax credit is confined for one year. However, the same was not unblocked even after the expiry of one year. Hence the writ.

HELD
It was held that order blocking input tax credit available in the electronic credit ledger came to an end after one year on its own by the operation of law.

5 Taghar Vasudeva Ambrish vs. Appellate Authority for Advance Ruling, Karnataka (AAAR)

[2022 135 taxmann.com 287 (Karnataka)]

Date of order: 7th February, 2022

Letting residential premises to a company to use it as a hostel for providing long-term accommodation to students and working professionals qualifies for exemption under Entry 13 of Notification No. 9/2017 dated 28th September, 2017, namely ‘services by way of renting of residential dwelling for use as a residence’

FACTS
The petitioner, the owner of residential property having 42 rooms, entered into a lease agreement with a company to let out the said property as a hostel for providing long-term accommodation to students and working professionals with the duration of stay ranging from 3 months to 12 months. The issue before Hon’ble Court was whether the services of leasing of the said residential premises were eligible for exemption as ‘services by way of renting of residential dwelling for use as a residence’. The Revenue pointed out that the activity of the lessee requires a trade license from Mahanagar Palika, and in the license issued to the lessee, the trade name has been described as boarding and lodging to which public are admitted without consumption of food or drink. It was also pointed out that the lessee is registered as a commercial establishment under the Karnataka Shops and Establishment Act, 1961.

HELD
Hon’ble Court referring to various judicial pronouncements, held that the expression ‘residential dwelling’ must be understood according to its popular sense. While referring to the decision of residential dwelling provided in para 4.13.1 of Educational Guide issued under service tax regime, held that in normal trade parlance residential dwelling means any residential accommodation and is different from hotel, motel, inn, guest house etc. which is meant for a temporary stay. The Court also noted that the accommodation which is used for the purposes of the hostel of students and working women is classified as a residential building in the Revised Master Plan of Bangalore City. Referring to certain judicial pronouncements, the Court held that the hostel is used by the students for the purpose of residence wherein the duration of stay is longer as compared to a hotel, guest house, club, etc. The Court held that in the present case the premises are residential and also used for residential purposes. Hence exemption would be applicable. It also held that the notification does not require the lessee itself to use the premises as a residence, and hence denial of exemption is incorrect. It further held finding by the AAAR that the hostel accommodation is akin to social accommodation is unintelligible and that the lessee is a commercial establishment requiring trade license is not relevant for the purpose of determining the eligibility.

6 NKAS Services (P.) Ltd. vs. State of Jharkhand

[2022 136 taxmann.com 138 (Jharkhand)]

Date of order: 9th February, 2022

A show-cause notice which is completely silent as regards the grounds of demand and is issued in a format without even striking out any irrelevant portions and without stating the contraventions committed by the petitioner is liable to be quashed. The summary of demand in DRC-01, cannot act as a substitute for a show-cause notice

FACTS
The assessee challenged the show cause notice (SCN) issued u/s 73 of the Jharkhand Goods and Services Tax (JGST) Act and summary to show cause notice in Form DRC-01 on the ground that the said SCN lacks very ingredients of a proper SCN. He further submitted that the summary of show cause notice in FORM-GST-DRC- 01 is to be issued in an electronic form along with the notice for the purpose of intimating the assessee, and the same by its very nomenclature cannot be a substitute for the show cause notice lacking essential ingredients of a proper show cause notice. He further submitted that State Tax Authorities are fixated on the notion that since the SCN has to be issued in a format on the GSTN Portal, the ingredients of the SCN containing the detailed facts and the charges cannot be uploaded or inserted by them and instead a summary of show-cause notice would suffice.

HELD
The Hon’ble Court held that the SCN in the present case is a notice issued in a format without even striking out any irrelevant portions and without stating the contraventions committed by the petitioner. The Court further noticed that although in DRC-01 some reasoning has been mentioned, it does not disclose the information as received from the headquarter / government treasury as to against which works contract service completed or partly completed, the petitioner has not disclosed its liability in the returns filed under GSTR-3B. The Court reiterated that a summary of show cause notice issued in Form GST DRC-01 in terms of Rule 142(1) of the JGST Rule, 2017 cannot substitute the requirement of proper show-cause notice. Referring to certain judicial pronouncements, it held that the requirement of principles of natural justice could only be met if: (i) a show-cause notice contains the materials/grounds, which according to the Department necessitate an action; and (ii) the particular penalty/ action which is proposed to be taken. Even if it is not specifically mentioned in the show cause notice but it can be clearly and safely discerned from the reading thereof that would be sufficient to meet this requirement. Referring to section 75(7), the Court held that if a SCN does not specify the grounds for proceeding against a person, no amount of tax, interest, or penalty can be imposed in excess of the amount specified in the notice or on grounds other than the grounds specified in the notice as per section 75(7) of the JGST Act. Resultantly, the SCN was quashed along with DRC-01 with liberty given to the Department to initiate fresh proceedings from the same stage in accordance with the law.

7 Filatex India Ltd. vs. Union of India

[2022 136 taxmann.com 36 (Gujarat)]

Date of order: 18th February, 2022

The refund claim under Rule 89(4B) is to be filed under the ‘other category’ and in the absence of any formula in the said rule, it is to be determined on the principles of input/output ratio of the inputs/raw materials. Having regard to the fact that the assessee had already applied for the refund, the fresh refund claim pursuant to the order of Commissioner (Appeals) shall not be treated as time-barred

FACTS
The assessee claimed a refund for accumulated ITC applying the formula prescribed in Rule 89(4). The said claim was rejected by the Refund Officer on the ground that the assessee was supposed to file its claim for refund of the unutilized credit under Rule 89(4B) of the CGST Rules and not based on the formula of Rule 89(4) of the Rules. In other words, he held that the assessee filed the claim under the category ‘refund for unutilised ITC on account of export without payment of tax’ as per Rule 89(4), instead of ‘any other category’ as per Rule 89(4B). This was emphasised on the ground that filing of refund under such ‘any other category’ would enable the assessee to quantify the refund as per the principles laid down in Rule 89(4B). The assessee challenged the said order before the First Appellate Authority, who remitted the matter by recording a finding that the assessee is eligible for a refund of the accumulated credit, not under Rule 89(4) of the CGST Rules, 2017 as claimed, but under Rule 89(4B) of the Rules. The assessee submitted that Rule 89(4B) does not prescribe any formula, and hence formula prescribed in Rule 89(4) becomes applicable.

HELD
The Court noted that the stand taken by the GST Department that it is not correct on the part of the assessee to say that if Sub Rule (4B) of Rule 89 is to be applied, then it is difficult for the assessee to establish the quantum of ITC availed in respect of inputs or input services to the extent used in exporting the goods. The assessee submitted before the Court that if the input/output ratio of the inputs / raw materials is to be looked into, then it is feasible for the assessee to determine its claim and seek an appropriate refund. For this reason, the Court remanded the matter back to the Assistant Commissioner to proceed further in accordance with the directions issued by the Joint Commissioner (Appeals) and adjudicate the claim of the assessee in accordance with Sub Rule (4B) of Rule 89 of the CGST Rules but keeping in mind the formula of input/output ratio of the inputs / raw materials used in the manufacturing of the exported goods. The Court further clarified that the assessee has already furnished the necessary refund claim, but in view of the fact that the refund adjudication is to be undertaken afresh, it should not be considered time-barred.

8 Union of India and Ors. vs. Bundl Technologies Pvt. Ltd. and Ors.

[2022 136 taxmann.com 112 (Karnataka)]

Date of order: 3rd March, 2022

Amounts paid by the assessee during the investigation and reserving its right of refund shall be treated as an involuntary payment. Since the said payments are not made in accordance with the provisions of GST law and consequently as per Article 265, would amount to a collection of tax without the authority of law and would infringe rights of the person under Article 300-A of the Constitution. Hence, any amount so recovered pending investigation is liable to be refunded back to the assessee. The question as to whether there was a threat or coercion made or whether the officers acted in a high handed and arbitrary manner being the question of facts cannot be decided in summary proceedings under Article 226

FACTS
The DGGI visited the premises of the respondent-assessee on 28th November, 2019 at 10.30 a.m. The investigation was carried out from 28th November, 2019 to 30th November, 2019 during which DGGI issued spot summons to Directors and employees of the Company and their statements were recorded. On 30th November, 2019 at about 4:00 a.m., a sum of Rs.15 crores was deposited by the Company under the GST cash ledger and on the same day, the Company handed over the documents to DGGI officers. Thereafter summons was issued after a month and directors were called to the DGGI office. The assessee averred that the directors were present till late hours on 26th December, 2019 in the DGGI office and were locked in the DGGI office and threats of arrest were held out to them during the investigation, and they were not allowed to leave till early hours of 27th December, 2019. The officers of the Company, therefore, made a further sum of about 12 crores at about 1:00 a.m. to secure the release of three directors of the Company. The assessee, therefore, contended that all the payments were illegally collected from them during the course of an investigation under threat and coercion without following the procedure prescribed. It was further contended that despite a lapse of about ten months no SCN was issued to the assessee, and hence the assessee filed a refund application to DGGI and also before the jurisdictional officer. As there was no response a writ application was filed. The Ld. Single Judge held that the payment of the amounts made by the company during the course of the investigation was involuntary and disposed off the petition with a direction to consider and pass suitable orders for refund. Aggrieved by the same, the Department filed an appeal before the Division Bench.

HELD
The Court held that there is no evidence to suggest that the amounts paid by the Company were paid on the admission of the Company about their liability. Further, the Company communicated to the Department that it reserves the right to claim a refund of the amount and the same should not be treated as an admission of its liability. In these facts of the case, the Court held that the payment made during the investigation cannot be said to be made voluntarily u/s 74(5) of the CGST Act.

As regards the other grounds, namely whether the amounts were recovered from the Company under coercion and threat of arrest and whether the officers acted in a high handed and arbitrary manner, the Court held that although it’s clear that the payments were involuntarily made by the Company, there is no material on record to hold that any threats of arrest were extended, etc. to officers of the Company. The Court held that the said question being the question of fact, cannot be decided in summary proceedings under Article 226. The Court disposed of this ground accordingly with liberty to parties to agitate the issue of threat and coercion at appropriate proceedings. The Court, however reiterated that a statutory power should not be exercised in a manner so as to instill fear in the mind of a person.

As regards the refund of the amounts paid by the assessee during the course of the investigation, the Court held that the issue as to whether the Company has availed input tax credit correctly or not is pending investigation. Article 265 mandates that the collection of tax has to be by the authority of law. If the tax is collected without authority of law, the same would amount to depriving a person of his property without any authority of law and would infringe his rights under Article 300A. The only provision that permits deposit of amount during the pendency of an investigation is section 74(5) of the CGST Act, which is not attracted to the facts of the present case. Hence, as the said amounts are collected from the Company in violation of Articles 265 and 300A of the Constitution, the contention of the Department that the amount under deposit is made subject to the outcome of the pending investigation was not accepted by the Court. The Court, therefore, held that the Department is liable to refund the said amounts to the Company.

BCAJ Admin

RECENT DEVELOPMENTS IN GST

I. CIRCULAR

(a) Amendment to Circular No. 31/05/2018-GST, dated 9th February, 2018 to further clarify ‘Proper officer under sections 73 and 74 under CGST Act and IGST Act’- The Circular provides various clarifications regarding the adjudication of show-cause notices issued by the Directorate General of Goods and Services Tax Intelligence officers.[Circular No. 169/01/2022-GST dated 12th March, 2022.]

II. ADVANCE RULINGS

1 M/s. Aishwarya Earth Movers
[Advance Ruling No. KAR ADRG 43/2021
dated 30th July, 2021]

Revised Contract Price received after appointed date

The Applicant is a proprietary concern registered under the provisions of the GST Act. The Applicant sought an advance ruling in respect of the following questions:

“i. Whether the applicant is liable to collect and pay goods and services tax on amount received from the PWD Department as per revised estimate in respect of work namely “Construction of bridge across Kumaradhara river on Kudmar Shanthimogru Sharavoor Alankar Road at KM 1.20 in Shanthimogaru of Puttur taluk”?

ii. Whether the applicant is liable to collect and pay goods and services tax on amount received from the Executive Engineer, Public Works, Inland Water Transport Department, Mangalore Division, or

iii. whether the PWD Department is liable to pay Goods and Service Tax under the GST Act or VAT Tax under Karnataka Value Added Tax Act?”

The applicant is a PWD Contractor, Class-I and registered under the provisions of the GST Act. During 2015-16, the applicant’s tender bid was accepted for the construction of a bridge across Kumaradhara in Dakshina Kannada District.

The applicant stated that, up to 30th June, 2017, the PWD Department was disbursing the tender contract bill amounts by deducting tax amounts at 4% under the KVAT Act. After completing the construction of the bridge and approach road as per the tender contract agreement, the same was handed over to the PWD Department, and it was accepted and taken over by them. After handing over the said Bridge, the PWD Department approved the revised estimate vide its letters dated 15th June, 2020 and 11th June, 2020. Consequently, the applicant also executed supplementary agreements on 15th June, 2020. Subsequently, the PWD Department paid part of the contract amounts of Rs. 5,56,285 and Rs. 1,48,26,658 on 29th December, 2018 (There appears to be some mistake in date/s in the AR). The applicant further submitted that for the said contract amount at Rs. 1,48,26,658, the PWD Department has deducted TDS at 1% under CGST Act and 1% under SGST Act. In view of the fact that the PWD Department is liable to pay the tax at 12% (6% CGST and 6% SGST), the applicant states that he had rejected the said TDS certificate.

The Ld. AAR relying on s.142(2)(a) of the GST Act, 2017 held that the Applicant had issued invoices for the above transactions after the appointed date, and the above invoices should be deemed to have been issued in respect of an “outward supply made under the GST Act”. Hence the turnovers on which the Applicant has raised the question are deemed to be the turnovers under the GST Act and not under the KVAT Act. The TDS amount deducted by the Department could be utilized by the Applicant while making the payment of the liability but that does not preclude him from paying the tax. Regarding the time of supply, it was held that s.142(2)(a) of the CGST Act requires the Applicant to issue a tax invoice within 30 days from the date of price revision, and if the tax invoice is issued within the said stipulated time limit, then the date of issue of the invoice would be the time of supply for the revised price, and in case the tax invoice is not issued within the stipulated time, then the time of supply would be the date of price revision.

Accordingly, the learned AAR held that the Applicant is liable to pay GST at the rate of 12 % (CGST @ 6% and KGST @ 6%) as per s.142(2)(a) of the GST Act on the amount received from the Public Works Department as per the revised estimate in respect of the construction of the bridge and the Applicant is eligible to collect the same from the recipient.

2 M/s. Vijayavahini Charitable Foundation
[AAR No. 14/AP/GST/2021
dated 20th March, 2021]

Classification – Purified water and Distribution service – Composite supply

The Applicant is a charitable foundation registered under the Companies Act, 2013, which undertakes, encourages, supports and aids charitable activities in relation to the poor in medical relief, education, health, vocation, livelihood, etc. The Applicant has proposed to undertake the activity of providing pure and safe drinking water at an affordable cost for the underprivileged people in villages in the state of Andhra Pradesh. The Applicant has sought an advance ruling in respect of the following question:

“Whether supply of drinking water to general public in unpacked/ unsealed manner through dispensers/ mobile tankers by a charitable organisation at a concessional rate is covered under exemption of GST as per Sl. No. 99 of Notification 02/2017 – Central Tax (Rate) dated 28.06.2017?”

The Ld. AAR examined the entry at Sr. No. 99 of Notification 02/2017 – Central Tax (Rate) dated 28th June, 2017, and held that the exemption entry excludes aerated, mineral, purified, distilled, medicinal, ionic, battery, demineralized water, and water sold in a sealed container. The supply in the instant case is ‘purified’ water, which is purified through a reverse osmosis (RO) process in the plants established by the applicant. Therefore, the learned AAR held that being purified water is covered under the exclusion clause in the above exemption entry and liable to tax @ 18%.

It was further held that the principal supply in the present case is of purified water, whereas the distribution through mobile units is the ancillary service. The service component of water distribution through mobile units is covered under Sr. No. 13 of Heading 9969- Electricity, gas, water and other distribution services vide Notification No. 11/2017-Central Tax (rate) dated 28th June, 2017 and taxable @ 18%. The Ld. AAR has held the supplies as composite supply liable to tax @ 18%.

3 M/s. Saddles International Automotive & Aviation Interiors Pvt. Ltd.
[AAR No. 15/AP/GST/2021
dated 21st June, 2021]

Classification – ‘Car Seat covers’

The Applicant is engaged mainly in the business of production and manufacture of car seat covers and other allied accessories, which are necessary for car seats. The Applicant was paying tax @ 28%, classifying the same under HSN 8708 at Sr. no. 170 under Schedule IV of Notification No. 1/2007-CT (Rules) dated 28th June, 2017.

Now the Applicant has approached AAR to know whether the product in question, namely, ‘seat covers’ would fall under HSN 9401 and whether liable to 18% under entry 435A in Schedule III read with HSN 9401 as effective on 14th November, 2017 as per notification no. 14/2017-CT (Rates) dated 14th November, 2017.

The HSN 8708 / 9401 are reproduced in the AR as under:

*Sr. No.*	Chapter / Heading / Sub-heading / Tariff Item	*Description of Goods*	*Rate*
170	8708	Parts and accessories of the motor vehicles of headings 8701 to 8705 (other than specified parts of tractors)	14
211	9401	Seats (other than those of heading 9402), whether or not convertible into beds, and parts thereof	14

The Ld. AAR examined the meaning of both the terms, i.e. ‘parts’ and ‘accessories’. The Ld. AAR referred to various precedents to know the meaning of parts and accessories. If it is ‘part’, it can fall under HSN 9401. If it is ‘accessory’, it can fall under 8708. In the instance case, the Ld. AAR held that car seat covers could not be a part of seats by any means. They are meant for the protection of the seats, and the functional value of seat covers is the comfort and convenience it extends to the driver and the passengers. Thus, the ‘seat covers’ are not essential parts of the seats but accessories that enhance their functional value. It is observed that even in general trade parlance, a ‘seat cover’ provide a new look to the interior of the car and also make it more comfortable for passengers.

The Ld. AAR also observed that seat covers were also covered under ‘accessories’ in the pre-GST regime. As per the clarificatory circular issued by CBEC vide circular No. 541/37 /2000-CX dated 16th August, 2000, it was clearly mentioned that car seat covers were classifiable under heading 87.08 as accessories of car seats.

The Ld. AAR held that under GST period, the entry under HSN 8708 at Sr. No.170 under Schedule IV of Notification No. 01/2017-Central Tax (Rate) dated 28th June, 2017 is continued to be applicable. Hence, seat covers attract tax rate of CGST+SGST (l4% + l4%) @ 28%.

4 M/s. Bangalore Street Lighting Pvt. Ltd.
[AAR No. KAR ADRG 48/2021
dated 30th July, 2021]

Supply – Installation and operation and maintenance – composite supply

The Applicant is a Private Limited company registered under the provisions of CGST Act, 2017 and the Karnataka Goods and Services Tax Act, 2017. The ‘Applicant ESCO’ is a special purpose vehicle incorporated by a select consortium to implement and execute an energy performance contract dated 1st March, 2019 for the supply and installation of LED luminaries; feeder panels; switch gears; cables and other equipment; installation, operation and maintenance of the public lighting network.

The Ld. AAR, on examination of the contract, observed that the LED luminaries, feeder panels, switch gears etc., are not handed over to the Bruhat Bengaluru Mahanagara Palike (BBMP) but the Applicant installs, operates and maintains the same for energy saving. The Applicant receives consideration based on energy saving. The Applicant also receives fixed payments of Rs. 500 per switch point light towards O & M of switch point light. It is observed that these fixed payments are not relevant to the energy savings but for the O & M services of switching point lights.

The Ld. AAR relied on the order of the Appellate Authority for Advance Ruling in the case of M/s Karnataka State Electronics Development Corporation Ltd., (KEONICS), wherein it is mainly held as under:

a) The street lighting activity under the energy performance contract is considered as a composite supply of goods & services with the supply of service being the predominant supply. The service is classified under heading 999112.

b) The rate of tax applicable on the above supply is 18% (9% CGST & 9% KGST) as per entry Sl.No.29 of Notification No. 11/2017-Central Tax (Rate) dated 28th June, 2017. The appellant is not eligible for the benefit of exemption under entry 3 or 3A of exemption Notification No. 12/2017-Central Tax (Rate) dated 28th June, 2017.

In view of the foregoing, the Ld. AAR held that the Applicant is not entitled to the benefit of exemption under Entry 3A of Notification No. 12/2017-Central Tax (Rate) dated 28th June, 2017, as amended, since goods value is higher than 25%. The street lighting activity undertaken under the Energy Performance Contract dated 1st March, 2019 is to be considered as a composite supply under the CGST Act, 2017 where the O & M of the installation equipment is principal service classifiable under SAC 999112. The applicable rate of GST on a supply made under this contract is 18% (9% CGST & 9% KGST) as per entry Sr.No. 29 of Notification No. 11/2017-Central Tax (Rate) dated 28th June, 2017, and that value will include all amounts received from BBMP.

III. MAHARASHTRA SETTLEMENT OF ARREARS SCHEME-2022

The Maharashtra Government has recently announced a scheme to settle old arrears under various sales tax and VAT related laws through the Maharashtra Settlement of Arrears of Tax, Interest, Penalty or Late Fee Act, 2022.

BCAJ Admin

Development Agreements under GST and Tax Implications

INTRODUCTION

It is now commonplace to undertake real estate development by entering into development agreements. Such development agreements typically involve multiple stakeholders, two typical stakeholders being the landowner and the developer. A popular manner of entering into a development agreement is a scenario where the land-owner grants development rights to the Developer in return for monetary consideration. At times, the monetary consideration is fixed and lumpsum, whereas, at times, the monetary consideration can be variable based on the final selling price of the developed property by the Developer. At times, the consideration for the grant of development rights is non-monetary in nature, in the sense that the Developer allots certain developed property back to the Owner for either self-consumption or further sale. In many cases, the development agreement may provide for a combination of both monetary as well as non-monetary considerations. In such a scenario, the development agreement is generally understood to be a barter agreement whereby:

a. The developer pays a monetary consideration for a grant of development potential to the owner.

b. The developer further allots some flats / units in the new building to the owner. The owner may further sell the units allotted either during construction or post-construction.

c. The developer generally sells / allots balance flats / units to prospective new purchasers who join in or become members of the proposed society during construction. Some flats/units may remain unsold at the time of receipt of the completion certificate and may be sold thereafter.

Therefore, the entire business arrangement can be summarised as under:

Transaction 1: Transactions between Developer and Owner
Transaction Set 2: Transactions between Developer and New Buyers
Transaction Set 3: Transactions between Owner and New Buyers

TRANSACTIONS BETWEEN DEVELOPERS AND BUYERS

In view of Entry 5(b) of Schedule II of the CGST Act, 2017, it is evident that the said transactions constitute services to the extent that some consideration is received prior to the completion certificate. However, in view of the retrospective amendment to Section 7 of the CGST Act, 2017, Schedule II has been relegated to merely a classification schedule rather than a deeming provision. It could, therefore, be argued that the said transactions would constitute transactions of the sale of immovable property and, therefore, not liable for GST. However, such a position could be litigated. Based on the settled industry position of conservatism, the applicable GST may be discharged on such transactions.

Depending on the nature of the units being developed, the transactions could be taxable under the different sub-clauses specified in Entry 3 of Notification No. 11/2017 — CT (Rate). Further, abatement in the value on account of land would be available. However, each of the tax rates mentioned in Entry 3 is conditional (except sub-clause (if) dealing with the construction of commercial apartments in a REP other than an RREP and construction of residential apartments in an ongoing project), and therefore, the following conditions need to be fulfilled:

No Input Tax Credit is available for inputs and input services.
The tax has to be paid through electronic cash ledger only.
80 per cent of the value of inputs and input services are procured from registered suppliers only, and in case of a shortfall, the tax @ 18 per cent is discharged on such shortfall under the reverse charge mechanism.

It is a settled proposition that if no consideration is received prior to the receipt of the completion certificate, the transaction does not constitute a provision of service but is that of the sale of the building and therefore, no GST is payable if the residential unit is sold and the entire consideration is received after issuance of completion certificate.

TRANSACTIONS WITH LAND OWNER

At this juncture, it may be relevant to examine the tax implications of Transaction 1 i.e., the entering into the development agreement by the landowner with the developer. As far as Transaction 1 is concerned, it may be noted that there are two separate deliverables where the GST implications need to be analysed separately:

a. Deliverable by the Owner to the Developer — Here, the owner grants the development rights to the developer and, in turn, is compensated in the form of monetary consideration as well as constructed units. Essentially person to be tested as a supplier in these cases is the owner. One needs to examine whether the owner can be said to have supplied service in the nature of the transfer of the development rights and whether such service can be taxable in the hands of the promoter developer as a recipient of such service under the reverse charge mechanism in view of the specific recitals of Entry 5B of Notification 5/2019 — CT(Rate).

b. Deliverable by the Developer to the Owner — Here, to the extent of the area allotted to the Owner, the developer undertakes the activity of constructing the units for the Owner. The consideration received by the developer is in the form of development rights being granted to the developer. In the case of this leg of the transaction, the suspected supplier is the promoter developer himself, and the issue which needs examination is whether the Developer can be said to have provided services to the Owner warranting payment of GST.

TAXABILITY OF DEVELOPMENT RIGHTS

Section 9 of the CGST Act, 2017 provides for a levy of CGST on all intra-state supplies of goods or services or both. In general, the tax is required to be paid by the taxable person being the supplier of the goods or services or both. However, Sections 9(3) and 9(4) empower the Government to notify cases where the recipient will pay the tax on a ‘reverse charge’ basis. It may be important to note that the provisions of Section 9(3) & 9(4) can operate only in a scenario where there is a levy created by Section 9(1) and in that sense, the provisions of Section 9(3) & 9(4) are subservient to the provisions of Section 9(1). At the cost of repetition, the levy is imposed under section 9(1) only on supplies of goods or services or both. It is therefore important to understand the scope of the terms “goods” and “services” and check whether the transactions contemplated fit within any of the said terms.

The term “goods” is defined under section 2(52) to mean every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply. Since, in the instant case, the subject matter of the transaction is an immovable property, it is evident that there is no supply of goods.

The term “service” is defined under section 2(102) to mean anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination to another form, currency or denomination for which a separate consideration is charged.

On going through the above definition of service, it is evident that the term service has been very loosely defined under GST. A literal reading of the definition indicates that anything which is not classifiable as goods would be a service. However, the context requires that a purposive interpretation rather than a literal interpretation of the definition should be adopted. The purposive interpretation would suggest that the transaction should bear an essential character of service.

Prior to the introduction of GST, the term service was defined under section 65B(44) of the Finance Act, 1994 to mean any activity carried out by a person for another for consideration. It thereafter included declared services and excluded certain transactions. The basic meaning attributed to the concept of service as being any activity carried out by a person for another for a consideration provides the essence of the general understanding of the word service and a similar context should be applicable in the GST law as well especially considering the fact that the GST Legislation in effect is consolidating many erstwhile indirect taxes rather than imposing a tax on some activities/sectors which were not taxable earlier.

One can also read the definition of service as being anything other than goods in the context of the Supreme Court decision in the case of Tata Consultancy Services Limited vs. State of Andhra Pradesh [2004 (178) ELT (022) SC] where the fundamental attributes of goods were listed. In the said case, the Hon’ble Court held that any property becomes goods if it satisfies the three conditions, namely utility, capability of being bought and sold and capability of being transmitted, transferred, delivered, stored and possessed.

As rightly held in the above decision, any property, whether tangible or intangible, is classifiable as goods if it has the following attributes, namely:

The item should have a utility,
The item should be capable of being bought and sold,
The item should be capable of being transmitted, transferred, delivered, stored and possessed.

In fact, the concept of transferability provides the attribute of anything becoming property. Such properties can be further classified into moveable properties, immovable properties, tangible or intangible. Some of these may constitute goods while some may not. When the concept of service is examined, it has to be examined vis-à-vis this aspect of transferability. If there is a possibility of transferability, it would not amount to a service.

In the instant case, since the transaction is one related to the transfer of rights in an immovable property, it can be contended that the same cannot amount to the supply of service. Therefore, the transaction does not qualify to be either a supply of goods or a supply of services and therefore, the levy under section 9(1) is not attracted. Accordingly, it can be argued that the moment the levy is not attracted, the further question of reverse charge mechanism does not apply.

It may further be noted that Section 7(2) of the CGST Act, 2017 stipulates that the activities or transactions specified in Schedule III shall be treated neither as the supply of goods nor a supply of services, thus excluding such transactions from the levy of CGST under section 9 of the Act. Schedule III Entry 5 specifies that the sale of land and sale of buildings as transactions which shall be treated as neither a supply of goods nor a supply of services. It can be argued that the purposive interpretation would further suggest that the exclusion provided vide Schedule III Entry 5 should be applicable in the instant case.

Further support can be drawn from Entry 1(b) of Schedule II, which classifies any transfer of right in goods or of undivided share in goods without the transfer of title thereof is a supply of services. It, however, falls short of specifically classifying the transfer of right in immovable property without the transfer of title within the scope of services.

At this point, it may be essential to elaborate on the fact that the taxability of every transaction has to be seen with reference to the dominant intention of the parties entering into the contract. To analyse any transaction, it may be of utmost importance to look at the intention of the parties to the contract. Section 8 of the CGST Act does provide that the tax implications of the principal supply will govern the tax implications of a composite contract. Therefore, the essence of the transaction, along with the dominant intention, has to be looked into before determining the taxability of any transaction.

In general understanding, a development right is a right to develop the land for agricultural, residential and commercial use. Essentially, land, like any other asset, is a bundle of several rights that accrue to it. Several rights one may identify with land are development rights, possession rights, cultivation rights etc.

By granting the development rights, one can argue that it shall not result in the transfer of ownership of the land in totality but only the aspectual right to develop the land has been transferred. Therefore, the moot question to be answered is whether the grant of development rights would amount to the transfer of title in an immovable property. If the said transfer amounts to a transfer in title, whether it is equivalent to either a sale of land or a transaction which cannot qualify as a service.

Blackstone defines the term “Title” to be “the means whereby the owner of lands has the just possession of his property. “Title” is the means whereby a person’s right to property is established. In Canbank Financial Services vs. Custodian, 2004 (8) SCC 355 – 2004 (7) SC 507, it was held by the apex court that the word “Title” generally used in the context to the property means a right in the property. The title of a property connotes a bundle of rights. The ‘Title’ in an immovable property is the means whereby a person’s right to such property in praesenti is established and does not include a bare expectancy to get such right in due course of time i.e., title means a present right or interest in an immovable property capable of being transferred. The expression Title conveys different forms of a right to a property, which can include a right to possess such property.

In Syndicate Bank vs. Estate Officer (AIR 2007 SC 3169), it was held by Supreme Court that:

“A jurisprudential title to a property may not be a title of an owner. A title which is subordinate to an owner and which need not be created by reason of a registered deed of conveyance may at times create title. The title which is created in a person may be a limited one, although conferment of full title may be governed upon fulfilment of certain conditions. Whether all such conditions have been fulfilled or not would essentially be a question of fact in each case”.

Based on the above arguments, it is possible to contend that the development rights granted by the owner to the Developer are not covered in the definition of service and accordingly cannot be subjected to GST.

Having said that on first principles and based on the legislative framework, a transaction of the grant of development rights by the owner to the developer does not amount to a rendition of service and therefore not liable for GST at all, it will be important to recognize the existence of the following notifications:

a) Notification No. 4/2019 — CT(Rate) amending exemption Notification No. 12/2017 — CT(Rate) to introduce an Entry 41A in the list of exempted services whereby services by way of transfer of development rights (herein refer TDR) or Floor Space Index (FSI) (including additional FSI) on or after 1st April, 2019 are exempted conditionally. Effectively the condition stipulates that the promoter-developer shall pay tax proportionate to the unsold units at the time of receipt of the completion certificate.

b) Notification No. 5/2019 — CT(Rate) which prescribes the reverse charge mechanism in this regard.

It is very likely that the Department may use a reverse analogy to contend that Notification No. 4/2019 — CT(Rate) grants conditional exemption and therefore to the extent of unsold units on the date of the completion certificate, the levy is attracted on a proportionate basis. It can be argued that such a contention of the Department would be incorrect due to various reasons.

It is a settled legal proposition that the existence of an exemption / reverse charge notification cannot by itself infer or presume the existence of a levy. In a particular case, the conduct of musical programs was excluded from the levy provisions of the Entertainment Tax Act. A notification issued under the said Act also granted an exemption, however, subject to certain conditions. When the authorities attempted to demand the entertainment tax citing non-compliance with the conditions mentioned in the notification, the Supreme Court held that if the transaction is excluded from the levy itself, the exemption actually becomes redundant and the conditions mentioned in the said exemption notification have no relevance. One may refer to the Supreme Court decision in the case of Gypsy Pegasus Limited vs. State of Gujarat 2018 (15) GSTL 305 (SC).

Even for a moment, if it is assumed that the scope of ‘service’ is wide enough to include a grant of development rights, it would be important to analyse whether the said ‘supply’ is covered under section 7(1) of the CGST Act. This is important because the scope of supply for the purposes of GST is restricted only to the supplies of goods or services made in the course or furtherance of business. In the instant case, the alleged supply of service is made by the owner. Based on the specific facts of each case, it may be possible for the owner to argue that he is not in the business of development of the real estate, but merely holds the land as an investment or capital asset and therefore the grant of the development right is more in the nature of a transfer of capital asset rather than business activity.

In the context of service tax, the Chandigarh CESTAT was examining the applicability of service tax on transferable development rights. Relying on various judicial precedents, the Tribunal held that there is no element of service in a transaction of transfer of development rights since the same pertains to immovable properties. (DLF Commercial Projects Corporation vs. Commissioner of Service Tax 2019 (27) GSTL 712 (Chandigarh Tribunal)). The said decision is pending before the Supreme Court.

Therefore, a view that no GST is payable by the developer on the development right granted to him is legally possible. However, the position will be litigative and will not be free from doubt. If the developer chooses to adopt a conservative stand and does not like to challenge the vires of the notifications issued in this regard, the tax liability would be determined based on the discussions in the subsequent paragraphs.

Having accepted a position that due to the specific notifications issued in this regard, the grant of development right through the development agreement constitutes a service, the immediate next questions would be the value of the development rights and the effective rate of tax applicable on the same.

Rule 27 of the CGST Rules, 2017 specifies that where the supply of goods or services is for a consideration not wholly in money, the value of the supply shall be the open market value of such supply. The execution of the development agreement attracts stamp duty. For the said purpose, the development right is valued by the respective authorities. The said value can be adopted for the purposes of GST. At this point, it may also be noted that para 2A of Notification No. 11/2017 — CT(Rate) prescribes a value for construction service and not the value for development rights and is therefore not applicable in the current case. The said para is analysed separately later.

Since there is no specific entry in the rate schedule dealing with the transfer of development rights, the same would get covered under the residuary entry for real estate services (HSN 9972) and be liable for GST @ 18 per cent.

Entry 41A of Notification No. 12/2017 — CT(Rate) provides for a conditional exemption in this regard. The said entry exempts service by way of transfer of development rights for construction of residential apartments by a promoter in a project, intended for sale to a buyer. The amount of GST exemption available for construction of the residential apartments in the project under this notification shall be calculated as under:

GST payable on TDR or FSI (including additional FSI) or both for construction of the project] x (carpet area of the residential apartments in the project ÷ Total carpet area of the residential and commercial apartments in the project)

The abovementioned exemption is subject to the condition that the promoter shall be liable to pay tax at the applicable rate, on a reverse charge basis, on such proportion of the value of development rights as is attributable to the residential apartments, which remain un-booked on the date of issuance of the completion certificate, or first occupation of the project, as the case may be, in the following manner:

GST payable on TDR or FSI (including additional FSI) or both for construction of the residential apartments in the project but for the exemption contained herein] x (carpet area of the residential apartments in the project which remain un-booked on the date of issuance of completion certificate or first occupation ÷ Total carpet area of the residential apartments in the project)

It is further provided that the tax payable shall not effectively exceed 1 per cent of the value in case of affordable residential apartments and 5 per cent of the value in case of residential apartments other than affordable residential apartments remaining un-booked on the date of issuance of completion certificate or first occupation.

Interestingly, the entry provides for an exemption for the development rights attributable to the residential apartments, but through a condition, imposes a tax to the extent of the unbooked apartments on the date of the completion certificate. This approach may again seem circumspect and could be challenged legally. However, the intention is clearly evident — to require payment of GST on the unsold apartments on the date of the completion certificate.

Entry 5B of Notification No. 13/2017 — CT(Rate) prescribes a reverse charge mechanism in the case of services supplied by way of transfer of development rights and accordingly, the promoter is made liable for payment of GST. In the instant case, the developer would be registered as a promoter under RERA and would become liable for payment of GST under the reverse charge mechanism.

Further, Notification No. 6/2019 — CT(Rate) prescribes that the liability to pay the tax shall arise on the date of issuance of the completion certificate for the project, where required, by the competent authority or on its first occupation, whichever is earlier.

The GST Implications on the development rights transferred under the development agreement are accordingly summarized below:

a) There is a school of thought to argue that no GST is attracted to the transfer of development rights under the development agreement. However, the said position would be litigative.

b) The value of the development rights is to be determined under Rule 27 as the open market value. Accordingly, the value adopted for stamp duty purposes can be considered to be the value.

c) The service would get classified under HSN 9972 and be liable for GST @ 18 per cent.

d) The tax is to be paid under the reverse charge mechanism by the developer.

e) The tax has to be paid on the date of issuance of the completion certificate for the project.

f) In view of a partial conditional exemption, GST is payable on a proportionate basis to the extent of the un-booked area as of the date of the completion certificate. For example, if 20 per cent of the developed area remains un-booked as of the date of the completion certificate, GST will be payable only to the extent of 20 per cent of the GST calculated amount.

TAXABILITY OF FLATS ALLOTTED TO OWNER

That brings us to the second leg of the question — as to whether GST is payable on the constructed units provided to the owner? In the instant case, it is evident that there is a supply of service of construction by the developer to the owner for a non-monetary consideration and therefore, the transaction does qualify as a supply liable for GST. This view was also followed by the Hon’ble Tribunal in the case of LCS City Makers vs. Commissioner [2013 (30) S.T.R. 33 (Tri. — Chennai)].

Notification No. 6/2019 — CT(Rate) prescribes that the promoter-developer will pay GST on the construction service provided by him against the consideration in the form of development rights at the time when the completion certificate is received. Further, para 2A of Notification No. 11/2017 — CT(Rate) specifies that the value of construction service in respect of such apartments shall be deemed to be equal to the total amount charged for similar apartments in the project from the independent buyers nearest to the date on which such development right is transferred to the promoter. Considering the ad hoc deduction provided towards the land value, effectively GST @ 5 per cent becomes payable on the date of the receipt of the completion certificate in the case of residential apartments, again without any input tax credit.

Further, when the construction is underway, the owner could enter into a further agreement for the sale of the under-construction unit with a third party on which the issue of taxability may arise. As far as the owner is concerned, there are multiple reasons to suggest that no GST liability is attracted. Clearly, the agreement is for the transfer of a title in an immovable property under construction. Even if full effect has to be given to Schedule II Entry 5(b), the said entry requires ‘construction’ as well as ‘sale’. In the instant case, admittedly, no construction activity is carried out by the owner, but by the Developer. Having said so, a doubt is created due to the fourth condition of the rate notification prescribed for the developers. The said condition reads as under:

Provided also that where a registered person (landowner-promoter) who transfers development right or FSI (including additional FSI) to a promoter (developer-promoter) against consideration, wholly or partly, in the form of construction of apartments, —

(i) the developer-promoter shall pay tax on the supply of construction of apartments to the landowner-promoter, and

(ii) such landowner-promoter shall be eligible for a credit of taxes charged from him by the developer-promoter towards the supply of construction of apartments by developer-promoter to him, provided the landowner-promoter further supplies such apartments to his buyers before issuance of completion certificate or first occupation, whichever is earlier, and pays tax on the same which is not less than the amount of tax charged from him on the construction of such apartments by the developer-promoter.

In view of the above condition, a presumption is sought to be created that the landowner would also be liable for payment of GST if he resells the property under construction. Since the landowner would also be entitled to input tax credit of the taxes charged by the developer, in the interests of conservatism, it may be preferable to adopt this position rather than litigate on the same. Therefore, in such a scenario, the owner can discharge GST @ 5 per cent on the consideration actually received by him. He would be eligible for the input tax credit of the GST @ 5 per cent charged by the developer on the notional value (i.e., as per the first sale agreement) and would be liable to pay the differential tax. It may be noted that as per the above condition, the output tax payable by the landowner cannot be less than the input tax credit.

While in general, the developer is entitled to defer the tax till the date of completion certificate, in the above instance, such deferment can result in blockage of credit since the said facility of deferment of tax is not available to the owner selling the flat. Therefore, in such a situation, it may be advisable for the developer to discharge the tax beforehand and issue a valid tax invoice to the landowner enabling him to claim the input tax credit.

The tax implications on the owner’s share can be summarised as under:

a) If not registered, the Owner should register himself with the GST Authorities.

b) The Developer should prepone the tax liability and discharge GST @ 5 per cent based on the first sale agreement value and issue a valid tax invoice to the owner.

c) The Owner should claim the input tax credit of the tax charged by the Developer to him.

d) The Owner should collect GST @ 5 per cent of the agreement value when he sells the under-construction unit to a third party.

e) The Owner should discharge the GST collected by utilizing the input tax credit charged by the Developer and balance in cash.

CONCLUSION

This Article deals with the basic provisions applicable to a development agreement and touches upon some of the controversial areas relating to GST. The Article has specifically avoided coverage of specific types of transactions like redevelopment projects, slum rehabilitation schemes and redevelopment of tenanted properties. Also, as could be seen from the article, the law has undergone a substantial change w.e.f. 1st April, 2019, and this article has also avoided discussion on the tax implications of ongoing projects. We intend to discuss these aspects in subsequent issues.

BCAJ Admin

Input Tax Credit – Disputed Propositions W.R.T. Section 16(4) Of The CGST Act

INTRODUCTION

Goods
and Services Tax (GST) being a value-added tax, Input Tax Credit (ITC)
is a very pivotal link in its design. Any denial in respect of Input Tax
Credit results in tax on tax and affect the product pricing and
operating cash flow. Going by the justification provided in the First
Discussion Paper on GST in India published by the Empowered Committee of
State Financial Ministers on 10th November, 2009, regarding the
introduction of GST1, there is no dispute that the essence of GST law
lies in improvising ways to reduce the cascading effect of taxes by
increasing the possibility of set-off by maintaining a continuous chain
of set-off from the point of origination to the point of final sale to
the customer. Therefore, the set-off or ITC-related provisions are to be
interpreted keeping the said remedy in mind.The GST laws put
various restrictions on the entitlement of input tax credits. One such
restriction is the time limit within which the ITC can be taken. This
article deals with the possible interpretational disputes regarding
section 16(4) of the CGST Act.

OVERVIEW OF THE ITC PROVISIONS IN GENERAL

Chapter V of the CGST Act deals with Input Tax Credits. Section 16 of the CGST Act deals with the eligibility and conditions for taking input tax credits. Section 16(1) reads as under:(1) Every
registered person shall, subject to such conditions and restrictions as
may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax
charged on any supply of goods or services or both to him which are
used or intended to be used in the course or furtherance of his business
and the said amount shall be credited to the electronic credit ledger
of such person.

Sections 16(2), 16(3) and 16(4) put certain conditions on entitlement of the ITC.

1 Para
1.13 and 1.14 of Introduction Chapter

Section 16(4) provides for the time limit to take the credit (as one of the conditions) and reads as under:

(4) A registered person shall not be entitled to take input tax credit in
respect of any invoice or debit note for supply of goods or services or
both after the [thirtieth day of November] following the end of
financial year to which such invoice or [* * *] debit note pertains or
furnishing of the relevant annual return, whichever is earlier:

[Provided that the registered person shall be entitled to take input tax credit after
the due date of furnishing of the return under section 39 for the month
of September, 2018 till the due date of furnishing of the return under
the said section for the month of March, 2019 in respect of any invoice
or invoice relating to such debit note for supply of goods or services
or both made during the financial year 2017-18, the details of which
have been uploaded by the supplier under sub-section (1) of section 37
till the due date for furnishing the details under sub-section (1) of
said section for the month of March, 2019.]

It’s interesting to see that section 16(1) and section 16(4) use the expression ‘taking of the credit’.

Section 16(2) specifies the conditions for entitlement of the credit. The provisos below section 16(2) read as under:

Provided that where the goods against an invoice are received in lots or instalments, the registered person shall be entitled to take credit upon receipt of the last lot or instalment:

Provided further
that where a recipient fails to pay to the supplier of goods or
services or both, other than the supplies on which tax is payable on
reverse charge basis, the amount towards the value of supply along with
tax payable thereon within a period of one hundred and eighty days from
the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be [paid by him along with interest payable under section 50], in such manner as may be prescribed:

Provided also that the recipient shall be entitled to avail of the credit of input tax
on payment made by him [to the supplier] of the amount towards the
value of supply of goods or services or both along with tax payable
thereon.

The first proviso uses the expression ‘taking of the
credit’ whereas the second and third proviso uses the expression
‘availing of the credit’.

Section 17 also deals with the dis-entitlement of the credit (Apportionment of credit and blocked credits). Section 17(1) & (2) provide as under:

(1)
Where the goods or services or both are used by the registered person
partly for the purpose of any business and partly for other purposes, the amount of credit shall be restricted to so much of the input tax as is attributable to the purposes of his business.

(2)
Where the goods or services or both are used by the registered person
partly for effecting taxable supplies including zero-rated supplies
under this Act or under the Integrated Goods and Services Tax Act and
partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.

Section
17(1) & (2) are, therefore, essentially quantification-related
provisions and do not use the expression ‘taking of the credit’.
However, section 17(4) uses the expression ‘availment of the credit as
under:

(4) A banking company or a financial institution
including a non-banking financial company, engaged in supplying services
by way of accepting deposits, extending loans or advances shall have
the option to either comply with the provisions of sub-section (2), or avail of, every month, an amount equal to fifty per cent of the eligible input tax credit on inputs, capital goods and input services in that month and the rest shall lapse.

Section 17(5) speaks about blocked credit (i.e. the cases where the credit is not available).

Section
18 speaks about eligibility of credit under special circumstances. The
said section also uses the expression ‘shall be entitled to take
credit…’ at various places and in particular in sections 18(1) (a), (b),
(c), (d) and section 18(2).

Section 18(2) also provides for the time limit to take credit in cases covered under section 18(1) and reads as under.

(2) A registered person shall not be entitled to take input tax credit
under sub-section (1) in respect of any supply of goods or services or
both to him after the expiry of one year from the date of issue of tax
invoice relating to such supply.Section 18(4) on the other hand, uses the expression ‘availment’ as under:

(4) Where any registered person who has availed of input tax credit opts to pay tax under section 10 or, where the goods or services or both supplied by him become wholly exempt, he shall pay an amount,
by way of debit in the electronic credit ledger or electronic cash
ledger, equivalent to the credit of input tax in respect of inputs held
in stock and inputs contained in semi-finished or finished goods held in
stock and on capital goods, reduced by such percentage points as may be
prescribed, on the day immediately preceding the date of exercising of
such option or, as the case may be, the date of such exemption.

Section
19 deals with taking input tax credit in respect of inputs and capital
goods sent for job work and thus uses the expression ‘taking of the
credit’. Section 20 and 21 deal with the ‘distribution of credit’ by
‘input service distributor’ (ISD) and does not use the expression
‘taking of the credit’.

The aforesaid overview of Chapter V of the CGST Act clearly suggests that the legislature has used the expression ‘taking
of the credit’ and ‘availing of the credit’ not in the same sense.
Taking of the credit decides the entitlement of the credit at a
threshold. It’s a benefit given to the taxpayer in the design of the
GST Act. Once the said threshold is crossed, the next question is the
determination of the quantum of benefit and how the actual realisation
of the said benefit be effected in terms of reporting and utilisation. The
author is of the view that ‘availment of the ITC’ signifies the
determination of the quantum of the benefit and its reporting in what we
know as an ‘electronic credit ledger’ through GST returns.

The
time limit prescribed in section 16(4) or as the case may be section
18(2) of the CGST Act is therefore qua the entitlement of the credit at
the threshold. A credit that is otherwise eligible in terms of section
16(1) or as the case may be section 18(1) and which fulfils the
conditions of section 16(2) of the CGST Act is regarded as eligible
credit only if it is taken within the statutory timeframe given in Act.
However, once the said credit is taken, there appears no time
restriction on its reporting and subsequent utilisation (i.e on its
availment) although there may be other restrictions on its availment
such as those mentioned in clauses (aa), (ba), (c), (d) or second
proviso to section 16(2), section 41(2) etc.

PROVISIONS SUPPORTING THE ABOVE INTERPRETATIONS

The
intention of the legislature in making a distinction between ‘taking of
the credit’ and ‘availment of the credit’ can also be inferred from the
subsequent amendments made to the Act, namely, the introduction of
section 43A2 and an amendment to section 41(1) of the CGST Act3 by
Finance Act 2022.Section 43A was incorporated to provide the
procedure for furnishing of return and availing of the input tax credit.
This was subsequently omitted by Finance Act 2022 w.e.f. 1-10-2022.
However, section 41 was simultaneously amended. The comparison of the
pre-amended and post-amended provisions is given below:

Section 41 before Amendment	Section 41 After amendment
41. Claim of input tax credit and provisional acceptance thereof.— (1) Every registered person shall, subject to such conditions and restrictions as may be prescribed, be entitled to take the credit of eligible input tax, as self-assessed, in his return and such amount shall be credited on a provisional basis to his electronic credit ledger.	41. Availment of input tax credit† (1) Every registered person shall, subject to such conditions and restrictions as may be prescribed, be entitled to avail the credit of eligible input tax, as self-assessed, in his return and such amount shall be credited to his electronic credit ledger.

Section 41 before
Amendment

Section 41 After
amendment

41. Claim of input
tax credit and provisional acceptance thereof.—

(1) Every registered
person shall, subject to such conditions and restrictions as may be
prescribed, be entitled to take the credit of eligible input tax, as
self-assessed, in his return and such amount shall be credited on a
provisional basis to his electronic credit ledger.

41. Availment of
input tax credit†

(1) Every registered
person shall, subject to such conditions and restrictions as may be
prescribed, be entitled to avail the credit of eligible input tax, as
self-assessed, in his return and such amount shall be credited to his
electronic credit ledger.

In the amended Section 41(1), changes are made in three places viz.

(i)
The heading of the section is amended – ‘Claim of ITC’ is replaced by
‘Availment of ITC’, and the expression ‘provisional acceptance thereof’
is omitted.

(ii) The word ‘to take’ is replaced by the word ‘to avail’.
(iii) The expression ‘on a provisional basis’ has been omitted.

2 Section 43A inserted by Central Goods & Services Tax (Amendment) Act 2018 dated,30-08-2018 w.e.f. 01-02-2019

3 Section 41 was amended by section 106 of the Finance Act 2022 w.e.f. 01-10-2022.

The concept of
‘provisional ITC’ was attributable to the matching concept provided in
sections 42, 43, and 43A of the CGST Act. By Finance Act 2022, the said
sections were omitted, and consequently, the reference to provisional
ITC in section 41 was also omitted. However, the author is of the view
that the substitution of the word ‘to take’ by the word ‘to avail’ was
done to cure the drafting error and bring section 41 more in line with
the design of the set-off mechanism designed in the GST law. To take
this further, as stated in section 16(1), the ITC is to be taken in the
manner specified in section 49. Section 49 deals with the payment of
tax, interest, penalty and other amounts.

The relevant provisions of section 49 read as under:(2) The input tax credit as self-assessed in the return of a registered person shall be credited to his electronic credit ledger, in accordance with section 41 to be maintained in such manner as may be prescribed.

(4) The amount available in the electronic credit ledger may be used for making any payment towards output tax under this Act
or under the Integrated Goods and Services Tax Act in such manner and
subject to such conditions and within such time as may be prescribed.

From
above, it’s clear that the process of declaring the input tax credit
after its quantification on the self-assessment basis in the GST return
is regarded as ‘availment of ITC’ and it should not be confused with the
‘taking of the credit’. The change in the heading by replacing the word
‘claim of ITC’ with ‘availment of ITC’ is also thus consistent with the
above interpretation and has been carried out to bring more clarity to
the provision.

The author is thereof of the view, that amendment
in the section by replacing the words ‘to claim’ or ‘to take’ ITC with
the words ‘to avail’ the ITC is more of a clarificatory nature. The
present scheme of law recognises a difference between taking credit and
availment of credit. The time limit stated in section 16(4) or, as the
case may be, section 18(2) of the CGST Act is merely qua the taking of
the credit and not the availment of the credit. Both section 49 and
section 41 speak about the declaration of the self-assessed input tax
credit in the returns for the purpose of crediting such amount to the
electronic credit ledger (i.e. availment of credit). They do not speak about ‘taking of the credit’.
The taking of the credit precedes the availment of the credit. The
author is of the view that as per section 16(1) of the CGST Act, a
registered taxpayer is entitled to take the credit the moment the goods
and/or services are supplied to him as evidenced by the issue of a valid
invoice by the supplier of such goods or services. When such invoice
and receipt of goods and services is accounted for in the books of
accounts of the assessee maintained under section 35 of the CGST Act, it
would amount to the taking of the input tax credit. The ITC is accrued
to the taxpayer immediately when credit is accounted in books of
accounts after receipt of goods and underlying tax-paying documents.
After taking of the credit, the assessee is required to additionally
declare the said credit in his returns for the purpose of availment of
such credit in his electronic credit ledger. Only so much of the credit
which is availed by declaring the same in returns gets credited to the
electronic credit ledger of the taxpayer. The credit so availed (i.e.
credited to the electronic credit ledger) is allowed to be utilised for
the purposes of payment in terms of section 49(4) of the CGST Act. When
such credit is utilised for the purposes of payment of liability, the
electronic credit ledger of the assessee is debited. In this regard,
attention is also invited to Rule 86 of the CGST Rules which reads as
under:

“86. Electronic Credit Ledger

(1) The
electronic credit ledger shall be maintained in FORM GST PMT-02 for each
registered person eligible for input tax credit under the Act on the
common portal and every claim of input tax credit under the Act shall be
credited to the said ledger.

(2) The electronic credit ledger
shall be debited to the extent of discharge of any liability in
accordance with the provisions of section 49
…”

It’s in
the above sense, section 16(1) of the CGST Act presupposes two phases
viz (i) taking the credit and (ii) availment of the credit – i.e.
crediting in the electronic credit ledger. It’s true that to make the
payment of tax under section 49(4) of the CGST Act, it’s necessary to
avail the credit in GST returns. However, in the opinion of the author,
to take credit, there is no such requirement of declaring the same in
returns. The only requirement is that the assessee should account for
the same in the books of accounts required to be maintained under
section 35 of the CGST Act within the time frame given in section 16(4)
of the CGST Act.

JUDICIAL PRECEDENTS

Hon’ble Supreme Court in the case of UOI vs. Bharati Airtel Ltd. 2021 (54) GSTL 257 (SC)
held that the supply of goods and services becomes taxable in respect
of which the registered person is obliged to maintain agreement,
invoices/challans and books of account, which can be maintained
manually/electronically. The common portal is only a facilitator to feed
or retrieve such information and need not be the primary source for
doing self-assessment. The primary source is in the form of agreements,
invoices/challans, receipts of the goods and services and books of
account, which are maintained by the assessee manually/electronically.
The Hon’ble Court further held that this was the arrangement even in the
pre-GST regime whilst discharging the obligation under the concerned
legislation(s) and that the position is no different in the post-GST
regime, both in the matter of doing self-assessment and regarding
dealing with eligibility to ITC and Output tax liability (OTL).The
Apex court, in the above decision, has categorically highlighted that
registered persons are under a legal obligation to maintain books of
account and records as per the provisions of the 2017 Act and Chapter
VII of the 2017 Rules regarding the transactions in respect of which the
output tax liability would occur.

Further, the following
observations of the Apex Court in Para 34 and 35 of the CGST Act,
dealing with the scheme of input tax credit under GST regime are also of
relevance.

“34. Section 16 of the 2017 Act deals
with eligibility of the registered person to take credit of input tax
charged on any supply of goods or services or both to him which are used
or intended to be used in the course or furtherance of his business. The input tax credit is additionally recorded in the electronic credit ledger of such person under the Act.
The “electronic credit ledger” is defined in Section 2(46) and is
referred to in Section 49(2) of the 2017 Act, which provides for the
manner in which ITC may be availed. Section 41(1) envisages that every
registered person shall be entitled to take credit of eligible input
tax, as self-assessed, in his return and such amount shall be credited
on a provisional basis to his electronic credit ledger.

35.
As aforesaid, every assessee is under obligation to self-assess the
eligible ITC under Section 16(1) and 16(2) and “credit the same in the
electronic credit ledger” defined in Section 2(46) read with Section
49(2) of the 2017 Act. Only thereafter, Section 59 steps in,
whereunder the registered person is obliged to self-assess the taxes
payable under the Act and furnish a return for each tax period as
specified under Section 39 of the Act. To put it differently, for
submitting return under Section 59, it is the registered person who has
to undertake necessary measures including of maintaining books of
account for the relevant period either manually or electronically. On
the basis of such primary material, self-assessment can be and ought to
be done by the assessee about the eligibility and availing of ITC and of
OTL, which is reflected in the periodical return to be filed under
Section 59 of the Act.”

The difference between taking
the credit in the books of accounts and the additional requirement of
availing the credit in an electronic credit ledger based on
self-assessment can be clearly borne out from the aforesaid observations
of the Hon’ble Apex Court.

In Osram Surya (P) Ltd vs. CCEx 2002 (142) ELT 5 (SC), the
issue before the Supreme Court was whether, after the introduction of
the second proviso to Rule 57G of the Central Excise Rules, 1944, a
manufacturer cannot take the Modvat credit after six months from the
date of the documents specified in the first proviso to Rule 57G of the
Rules. The said proviso read as under:

“Provided further that
the manufacturer shall not take credit after six months of the date of
issue of any of the documents specified in first proviso to this
sub-rule”.

The Hon’ble Court held that by introducing the
limitation in the said proviso to the rule, the statute has not taken
away any of the vested rights which had accrued to the manufacturers
under the Scheme of Modvat. That vested right continues to be in
existence and what is restricted is the time within which the
manufacturer has to enforce that right.

The restriction of the
time limit imposed under the statute for the purpose of ITC is,
therefore, not a new thing in the GST but was prevailing since the
Central Excise/ MODVAT regime. In the excise regime, in various cases,
the courts faced issues where the assessee availed ITC in RG-23A Part – I
on receipt of the goods but failed to avail the same in RG-23, Part- II
within a period of six months. Hon’ble Tribunal, in such circumstances,
has consistently held that the time limit of six months from the date
of issuance of duty-paying documents is applicable on receipt of the
goods in the factory and not to the process of taking the credit. Taking
credit starts with the receipt of goods in the factory, and the
subsequent procedure is only the process of availing the credit. If the
credit in the Part-1 register is taken, only entries remain to be made
in Part-II, which can be done after a gap of six months. As such, the
provisions requiring the assessee to avail the credit within a period of
six months from the date of issuance of the duty-paid documents are
connected with the movement and receipt of the goods, and once it is
established that an assessee receives the goods, he gets the vested
rights to avail the credit. If, for removing some lacunae in papers or
for the satisfaction of some procedural aspects, a period of more than
six months is taken, the same should not be made the basis for denial of
credit. For arriving at such a conclusion, Hon’ble Tribunal observed
that Title to RG-23A Part I read as — “Stock account of inputs used in or in relation to the manufacture of the final products”.
The said proforma reflects upon the description of the inputs, quantity
received, particulars of the documents under which the inputs stand
received and all other substantive requirements of the CENVAT Credit
Rules. The title of RG-23A Part II is — “Entry book of duty credit”. As
such, it is clear that RG-23A Part-II is only for the purpose of
reflecting upon the quantum of credit taken, utilised and balance of the
same. RG-23A Part II does not confer substantive right to the assessee
for availment of credit. It was further held that the limit of six
months in availing the credit has been introduced with the sole
objective of avoiding the evil of taking the credit in respect of inputs
which has been cleared by the input manufacturer more than six months
back. The said provision cannot be pressed into service to deny the
otherwise available substantive benefit of credit, to an assessee who
had received the goods within the period of six months from the date of
clearance from the input manufacturer’s factory and has duly made
entries in RG-23A Part-I record.

Various tribunals have thus
held that a manufacturer becomes entitled to take credit immediately on
receipt of the inputs without any further formality. The amount of
credit is to be simpliciter written in the records. It also noted that
provisions of sub-rule (7) of Rule 57G required a manufacturer to
maintain an account in form RG- 23A, Part I and Part II, and once the
assessee makes entries of inputs in RG-23A Part I, in terms of sub-rule
(2) of Rule 57G, they become entitled to take the credit. Only the
quantum of credit is required to be entered in RG-23A Part II. Inasmuch
as RG-23A Part I and RG-23A Part II are required to be maintained in
terms of sub-rule (7) of Rule 57G are two parts of the same register,
i.e., Form RG-23A, entries in RG-23A Part I itself would entitle an
assessee to avail the credit and the entries in RG-23A Part II is only
for accounting purposes.

Some of the decisions are cited below:

– BRAKES INDIA LTD. Vs. COMMISSIONER OF CENTRAL EXCISE, CHENNAI-II 2003 (162) E.L.T. 904 (Tri. – Chennai).

– Banner Pharma Caps Pvt Ltd vs. CCEx 2009 (246) ELT 364 (Tri- Ahd) [ Para 8 ].

– CRYSTAL CABLE INDUSTRIES LTD vs. COMMR. OF C. EX., KOLKATA-II – 2003 (159) E.L.T. 465 (Tri. – Kolkata) [ Para 4].

– COMMISSIONER OF CENTRAL EXCISE, CHENNAI-III vs. FORD India Ltd. 2012 (284) E.L.T. 202 (Tri. – Chennai) [ Para 6 to 11].

Besides
above, the Hon’ble MP High Court in the case of BHARAT HEAVY
ELECTRICALS LTD vs. COMMISSIONER OF C. EX., BHOPAL 2016 (332) E.L.T. 411
(M.P.) also affirmed that the right to the credit under the Modvat
Scheme accrued to the assessee on the date when they paid the tax on the
raw material or inputs and when such a right gets crystallized in their
favour once the input is received in the factory on the basis of the
existing scheme. It was further held that the act of the assessee in
making such receipt of input in Part-I of a single comprehensive RG-23A
action is evidence enough with regard to the crystallization of the
right to Modvat credit and merely because in the second accounting entry
of Part-II, there is some inconsistency, the right accrued already to
receive the credit cannot be taken away (para 10 to 14).

In the
GST regime, provisions relating to the statutory books of accounts are
contained in Chapter VIII. Section 35 provides for Accounts and Other
records. As per Section 35 (1) of the CGST Act, Every registered person
shall keep and maintain, at his principal place of business, as
mentioned in the certificate of registration, a true and correct account
of —

(a) Production or manufacture of goods;

(b) Inward and outward supply of goods or services or both;
(c) Stock of goods;

(d) Input tax credit availed;

(e) Output tax payable and paid;

(f) Such other particulars as may be prescribed

Based
on the above discussion and judicial pronouncement, the author is of
the view that it is possible to take the view that the entries in
respect of ITC in the books of accounts would be relevant in deciding
when the taxpayer takes the ITC.

HOW TO RECKON THE TIME LIMIT PRESCRIBED UNDER SECTION 16(4) OF THE CGST ACT?

In
the case of section 18(2) of the CGST Act, the time limit of one year
for the purposes of taking credit commences from the date of issue of tax invoice.
However, under section 16(4) no ITC can be taken after the 30th
November following the end of the financial year to which such invoice
or debit note pertains or furnishing of the relevant annual return,
whichever is earlier. In this regard, the CBIC press release
dated.04-10-2022 gave the following clarification:

“4. In
this regard, it is clarified that the extended timelines for compliances
listed in para 2 are applicable to the compliances for FY 2021-22
onwards. It is further clarified that the said compliances in respect of
a financial year can be carried out in the relevant return or the statement filed/furnished upto 30th November of the next financial year, or the date of furnishing annual return for the said financial year, whichever is earlier.”

If
the taking of the credit is linked to the date of entry in the books of
accounts as discussed earlier, then irrespective of the fact that the
GST returns are filed after 30th November, the credit may not be
considered as beyond the statutory time period if it’s otherwise duly
accounted for in the books of accounts on or before 30th November.
Hence, to that extent, the author’s view is different from the said
clarification.

As regards ITC pertaining to FY 2017-18, the
original date beyond which the taking of ITC was not permitted was the
due date of furnishing the return under section 39 for the month of
September 2018. However, later on, a proviso was inserted to permit the
taking of ITC after the said date till the due date of furnishing of the
return under the said section for the month of March, 2019 in respect
of any invoice or invoice relating to such debit note for the supply of
goods or services or both made during the financial year 2017-18, the
details of which have been uploaded by the supplier under sub-section
(1) of section 37 till the due date for furnishing the details under
sub-section (1) of said section for the month of March, 2019.

CONCLUSION

The
author is, therefore, of the view that the time limit specified in
section 16(4) of the CGST Act for allowing ITC is to be observed qua
‘taking of the said credit’. So long as the ITC is reported in the books
of accounts maintained u/s 35 based on receipt of goods/ services and
taxpaying documents accompanying the said goods/ services before 30th
November following the end of the financial year to which such invoice
or debit note pertains or furnishing of the relevant annual return,
whichever is earlier, the actual claiming of the said ITC in the returns
after the said time limit may not disentitle the said claim as
time-barred.Before parting, the author, without expressing any
view, also wishes to point out that section 20 of the CGST Act, dealing
with the distribution of ITC by the Input Service Distributor (ISD),
does not contain any specific provision as to the time restriction for
taking the ITC by ISD. The applicability of section 16(4) in the hands
of ISD, is also, therefore, a disputable proposition that the readers
may examine.

shailesh.kwebmaker

Novel 80-20 Rule for Residential Real Estate Projects (RREP)

Real estate development sector was criticised over the non-percolation of input tax credit benefit to end consumers as well as the prevalence of low cash output. The GST council took cognizance and devised a Composition scheme for residential and mixeduse projects in 2019. Though the legal process for implementing the scheme was complex, the math behind the introduction of this scheme was to augment taxes by restricting input tax credit and collecting output taxes in cash. All aspects of taxation (classification, valuation, input tax credit, reverse charge provisions, tax payment methodology, etc.) were meticulously taken up and a series of notifications were introduced. There was a concoction of multiple provisions integrated into a single notification. Among the various tax aspects introduced into the said scheme, was the novel 80-20 rule which restricted the source of procurements by real estate developers from persons not registered under GST. The said rule mandates the minimum ratio of procurements to be maintained by developers from registered (RPs) and unregistered (URPs) persons. In cases where the procurement from RPs falls short of the 80 per cent ratio (or URPs exceeds 20 per cent), a shortfall value is ascertained and tax is payable on such amounts under reverse charge basis by the Developer (can be termed as excess URP tax). Naturally, this rule was aimed to encourage procurements from RPs so that the net tax collections from residential development do not fall below the 18 per cent threshold.

ELABORATION OF RELEVANT NOTIFICATIONS

Real estate developers/ promoters (RE Promoters) engaged in the construction of residential / commercial apartments in real estate projects (RE project) were directed to comply with a composition scheme devised through a series of rate / exemption notifications¹. The list of the relevant rate notifications introduced in 2019 and their specification of the 80/20 rule has been tabulated:

The difference between a rate and exemption notification seems to be obscure since the Central Government is currently empowered with both the powers (i.e. rate specification and exemptions) and has issued notifications combining both the powers.

RCM Notification (N-7/2019) has been issued under section 9(4) imposing a liability on procurement of goods and services from specified categories of persons to the extent of excess URP procurements. The said notification has been linked to the RE construction services notifications (discussed below) which specifies the 80/20 rule as a condition for availing the benefit of lower rate. Though the liability is fixed under this notification, the manner of computation is with reference to RE Construction Services Notification.

RE Construction services rate/exemption Notification (11/2017 r/w 3/2019) is the master notification which specifies the rates for construction services of residential apartments. Different rates have been prescribed based on the nature of the residential project and its affordability (size and value). Five taxing entries have been introduced with the rate being subjected to certain conditions – in the current context the 80/20 rule. As tabulated above, the RCM obligation has been introduced as a ‘condition’ to the rate/ exemption entry i.e. RE promoter is required to comply with the 80/20 while availing the benefit of the lower rate of 5 per cent / 1 per cent on residential apartments. The source of this notification assumes some significance. It can be observed that the notification derives powers from multiple provisions:

Section	Nature of Delegated prescription
Section-9(1)	Power of fixation of rate of goods/ services (absolute power)
Section-9(3)	Power to prescribe RCM tax on ‘specified categories’ of goods or services
Section-9(4)	Power to prescribe a ‘class of registered persons’ who would be liable to pay RCM tax on ‘specified categories’ of goods or services
Section-11(1)	Power to grant absolute or conditional exemptions
Section-15(5)	Power w.r.t. determination of value of supply
Section-16(1)	Power to impose conditions and restrictions for availment of input tax credit
Section-148	Special procedures for certain class of registered persons

The subject notification has derived powers from multiple statutory provisions including the provisions of section 9(3)/ 9(4) which impose RCM tax on taxable persons. While the said notification appears to have comprehensive provisions for RCM assessment (identification, valuation and rate of tax) on excess URP procurements, it should be appreciated that the RE construction services notification by itself does not impose RCM liability on URP procurements. The said notification merely provides the mechanism to comply with the RCM liability, while the liability is fastened only by virtue of the RCM notification (7/2019).

Goods Rate Notification (N-1/2017 r/w 3/2019) – A new entry 452P has been inserted specifying a 18 per cent rate for all goods (other than capital goods and cement) excessively procured from URPs. An explanation has been appended to entry 452P which attempts to override other entries and fixes the rate of 18 per cent on all goods excessively procured from URPs even though they may be covered by a more specific description or HSN heading. The purpose of this notification is to specify a standard rate of 18 per cent for the entire excessive procurement irrespective of the nature/ HSN of goods. An imposition of a default rate of 18 per cent for all goods on excess procurements obviates the requirement of identification of the HSN of goods which comprise the URP basket under the 80/20 rule.

Services Rate/Exemption Notification (N-11/2017 r/w 8/2019) – The services rate notification has also been amended with a new entry 39 specifying 18 per cent rate for all services excessively procured from URPs irrespective of their classification under the SAC schedule. Like the goods rate notification, an explanation has been appended to Entry 39 which imposes tax on excess procurement even though they may be covered by a more specific description or HSN heading. Again, the purpose of this notification is to specify a standard rate of 18 per cent irrespective of the nature/ HSN of services.

SUMMARY OF 80-20 RULE (EXCESS URP TAX)

A summary of the notifications leads to the following conclusions:

– RE promoters availing the benefit of lower rate are permitted to procure their inputs and input services from URPs subject to a threshold cap of 20 per cent;

– Any excess procurements from URPs (or shortfall procurements from RPs) would result in an RCM tax liability on the RE promoter to the extent of the excess/ shortfall i.e. minimum ratio of 80-20 (RP:URP) is to be maintained;

– Any input or input service on which tax is already paid on RCM basis would be treated as part of the 80 per cent basket from registered persons;

– Goods & Services rate notifications carve out a special entry pegging the rate at 18 per cent on the value of excess procurement;

– Computation would have to be performed on a ‘project level’ for each financial year from commencement until the completion of the project;

– Prescribed form (DRC-03) on the common portal would be available for reporting the shortfall of 80-20 rule tax;

– Capital Goods and Cements must necessarily be procured from RPs and any procurement from URPs would be liable at the rate of 18 per cent / 28 per cent respectively;

– The excess procurement tax would be payable in the month of June following the relevant financial year(s) – RCM tax on cement and capital goods would be payable on the month of receipt itself;

– Value of input or input services in the form of grant of development rights, long term lease of land, floor space index, or the value of electricity, high speed diesel, motor spirit and natural gas used in construction of residential apartments in a project shall be excluded.

PROCEDURE FOR 80/20 RULE COMPUTATION

The 80/20 Rule specified in the construction services entry has provided for certain enumerations for imposition of RCM liability. The following flowchart provides the manner of computation of the value which would be subjected to RCM:

Step 1 – Identification of inputs and input services

The first step in the said process would be ascertain the inputs and input services. The said terms are well defined as follows:

“(59) “input” means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business;

(60) “input service” means any service used or intended to be used by a supplier in the course or furtherance of business;

Therefore, all goods (other than capitalised items) purchased by the RE promoter in respect of the business activity would be inputs. Even though cement procurements would be considered as inputs, they have been delineated for URP-RCM calculation in view of the higher rate applicable at 28 per cent. Capital goods (being goods which are capitalised) would be excluded from the calculation and liable to RCM irrespective of the quantum. Similarly, all services (irrespective of being capitalised or not) availed by the RE promoter would qualify as input services.

The scope of the term’s inputs and input service needs consideration. The definition seems to be very simple to include all goods and services used in the business activity to be included in the 80/20 formula. The definition of goods (under section 2(52)) and services (under section 2(102) would be applicable to this formula. Consequently, items which are neither goods nor services would fall outside the phrase inputs/ input service. Take for example salary and wages paid to URPs by the RE promoter in respect of the construction of the project. In terms of Schedule III, the said costs are neither supply or goods or services in view of the ‘employee-employer’ relationship. Cases which are outside the defined scope of good/ services would not fall for consideration in the 80/20 rule. The Government FAQ on this aspect also affirms this conceptual understanding –

FAQ – 15. The condition in Notification No. 3/2019 specifies that 80% of inputs and input services should be procured from registered person. What about expenditure such as salaries, wages, etc. These are not supplies under GST [Sl. 1 of Schedule III]. Now, my question is, whether such services will be included under input services for considering 80% criteria?

Services by an employee to the employer in the course of or in relation to his employment are neither a goods nor a service as per clause 1 of the Schedule III of CGST Act, 2017. Therefore, salaries and wages paid by promoter to his employees will not be relevant for the minimum purchase requirement of 80%.

Step 2 – Identification of supplier of such inputs / input services

This step requires identification of the registration status of the supplier of inputs / input services. A supplier could be unregistered under GST on account of (a) turnover falling below the taxable threshold (b) not engaged in any supply/ business activity (c) exclusively engaged in exempt activity (d) exclusively engaged in RCM activity where recipient is liable to pay tax (e) compulsory de-registration on account of non-compliance or fraudulent activity. All such suppliers would qualify as unregistered persons and supplies therefrom would fall within the 20 per cent basket. Certain challenges arise while identifying the registration status of a supplier.

Retrospective Cancellation – Logically speaking, the status of registration of a supplier would have to be ascertained on the date of the transaction. Now, let’s take a case where a RE promoter avails supplies from a supplier having valid registration but is subjected to retrospective cancellation under section 29(2). The RE promoter would have naturally aggregated the supplies from such person(s) in the RP basket and established compliance with the 80/20 rule. After the computation and payment of the RCM, it has come to the knowledge of the RP that the registration of the supplier has been retrospectively cancelled. Generally, the RP would have also charged taxes on such inputs/ input services.

One of the objectives of imposing the URP-RCM is to augment revenue by balancing the tax on inputs as well as output taxes. URPs would have not levied tax on their supplies and hence an obligation has been placed on the RE promoter as a recipient of URP supplies to discharge tax and balance the loss of revenue under the reduced rate. Where the cancelled RPs have charged the tax on their supplies (having registration at the relevant point of time), a view can be adopted that retrospective cancellation does not alter the tax status of the transaction and hence the condition of the notification has stands complied. Moreover, the notification lacks any provision to perform a ‘true-up adjustment’ akin to Rule 42 based on change in registration status. In the absence of any specific provision for consequential reworking of retrospective cancellation, it appears that retrospective cancellation may not warrant a re-working of the 80/20 rule.

Filtration of supplies which are from RPs and URPs – The recent experience from revenue audits suggest that officers have the tendency to take gross expenditure reported in the Profit & Loss account of the RE promoter (exclude the salary costs and depreciation) and compare the composition of RPs and URPs with reference to the input/ input services reported in GSTR-2A. Take for example the table below:

Particular	Amount	Ratio
Total Expense in P&L a/c	100
Less: Payroll Cost	(20)
Less: Depreciation	(10)
Less: Non-supply costs/ accounting provisions	(20)
Input/ Input services of project	50	100 per cent
GSTR-2A inputs/ input services	30	60 per cent
Balance deemed as URPs	20	40 per cent

The revenue authorities are adopting a summary approach to ascertain the compliance with 80/20 rule. They believe that the only a credible source of information for RP procurements is the GSTR-2A. The balance is deemed to be obtained from URPs. This approach fails to appreciate that in many cases the suppliers report their invoices in B2C column and hence they do not reflect in the GSTR-2A. There is a burden placed on the RE promoter to prepare the expense register with corresponding GSTINs of suppliers involved. Since the burden of proof to establish compliance with an exemption notification is on the tax-payer, the cumbersome process would necessarily have to be followed by the tax-payers.

Step 3 – Identification of inputs or input services ‘used for supplying the service’

This is the most critical step and ambiguous leg in ascertainment of the GST liability under RCM. The said provision states that RCM liability would be imposed only on such inputs or input services which are ‘used for supplying the service’. This phrase is relatively ambiguous and leaves us with the question of whether RCM is imposable on the entire gamut of input or input services which are received the RE promoter. The specific questions in this regard are (a) whether all business related inputs/ input services are amenable to RCM or only such inputs/ input services which are having a nexus with the construction services of flats amenable to RCM (Nexus vis-à-vis construction activity or business activity); (b) what is the extent of nexus required with construction activity, whether indirect costs / apportioned costs would fall into consideration (Direct and/ or indirect nexus with construction activity); (c) whether there should also be a nexus with the exemption entry itself (Nexus with exemption entry);

Issue A – Nexus Issue vis-à-vis entire business activity: The rule provides for imposition of RCM on inputs/ input services used in supplying the service. On the other hand, the terms input and input services have been defined with reference to the ‘overall business activity’ of a taxable person. The business activity of a taxable person is wide enough to include all streams of supplies (construction services, other taxable or non-leviable supplies, etc.). Take for example a promoter who is engaged in construction activity of residential flats as well as engaged in sale of residential plots (which is a non-leviable activity) and residential project maintenance activity (a completely taxable activity). Though all business costs would form part of the definition of inputs/input services, only those inputs/ input services which are used for supplying the construction services
would fall into the 80/20 pool. To reiterate, only those inputs and input services which are ‘used in supplying the construction service of residential flats’ are to be considered. In the said example, inputs/ input services exclusively pertaining to the plotted development and the maintenance activity would fall outside consideration. Reference can also be made to the explanation to the proviso which mandates the promoter to maintain ‘project wise accounts’ for the RE project and RCM is to be discharge on a yearly basis for the relevant project only.

Issue B – Direct or indirect nexus with Construction costs – The RCM notification, which is the primary notification imposing RCM liability, makes a reference to the excess procurements from URPs for the purpose of ‘construction of the project’. Thus, reading the rate/ exemption notification and the RCM notification in tandem appears to lead to the conclusion that RCM liability is imposable only on such costs which meet both the criteria’s – i.e.

– Used for supplying the construction services; and

– Used for construction of the project.

Therefore, the expenses should not only be used for providing the construction service, it shall also be related to the cost of construction of the RE project. Inputs and input services exclusively related to other business activities or undertaken at the management or corporate level operations may not fall into the 80/20 pool. A tabulation of certain typical costs incurred
by a Promoter during his business activity may be analysed:

Nature of Costs	Extent of Nexus	Includability
CONSTRUCTION SERVICE RELATED COSTS
Civil construction costs	Direct Nexus – exclusive to Construction costs	Yes
Common amenities costs	Direct nexus – exclusive to construction costs	Yes
Goodwill for land	Direct Nexus – Debate on being input services	Debatable if in nature of development rights
Post OC Finishing costs	Direct Nexus – exclusive to construction services	Debatable since RCM is imposable only upto Project OC date
Marketing costs	Having indirect nexus with construction costs but used for construction services	May be
Government related costs	Direct nexus with construction costs	Yes
Rental accommodation for existing redevelopment projects	Direct nexus with construction services but strictly not a construction cost	May be
CORPORATE BUSINESS/ ENTITY LEVEL COSTS
Director Sitting Fees	Common	Excludible
Interest costs	Common	Excludible
Corporate office Rentals	Common	Excludible
Corporate administrative Costs	Common	Excludible
Brand promotion/ Marketing	Common	Debatable

The criteria for inclusion of the procurements are its linkage to the construction services and the ascertainment of whether they are ‘construction costs’. Evidently, the notification does not specify whether such nexus should be direct or indirect and exclusive or common. Moreover, where common costs are incurred for multiple projects/ business segments, the notification does not provide for an apportionment mechanism for such costs. The Government FAQ (extracted below) indicates that common costs should be apportioned among the various projects on a carpet area basis.

“FAQ – 5. In case of a Real Estate Project, comprising of Residential as well as Commercial portion (more than 15%), how is the minimum procurement limit of 80% to be tested, evaluated and complied with where the Project has single RERA Registration and a single GST Registration and it is not practically feasible to get separate registrations due to peculiar nature of building(s)?

The promoter shall apportion and account for the procurements for residential and commercial portion on the basis of the ratio of the carpet area of the residential and commercial apartments in the project.”

It is here where a decisive tax position may have to be taken by promoters to implement the rule. A conservative view would be to identify all direct project-related costs in terms of commercial principles (cost centre accounting). To this direct cost a reasonable apportionment of common costs (either based on carpet area or turnover etc.) may be adopted and such costs may be loaded onto the direct project costs. In the above table, if a RE promoter incurs common marketing costs for multiple projects, it may apportion the yearly marketing costs to each project on carpet area basis and then apply the rule against each project independently.

Issue C –Nexus Issue vis-à-vis construction services activity: One may recall that the 80/20 rule has been introduced as a condition to an exemption entry w.r.t construction services rendered by a promoter in a residential real estate project. The RCM notification parallelly imposes the tax liability on the promoter who avails the benefit of the exemption entry under the rate notification. This leads to a pressing conclusion that 80/20 rule is applicable only to such supplies which are availing the benefit of the exemption entry. Therefore, the question which may require consideration is whether the input and input service must have a nexus with the supply of construction service. Can one infer that only such supply activities taxable under the construction service entry of the rate/ exemption notification would be subjected to the 80/20 rule?

We are all aware that only under-construction booked flats are liable to tax by virtue of Schedule II – on the converse, flats which are un-booked/ in stock until issuance of OC and / or are sold after issuance of the OC are not considered as supply in terms of Schedule II read with Schedule III. Accordingly, these flats do not require the cover of an exemption entry.

The RE promoter would incur common costs for all flats comprised in the RE project. The exemption entry would operate only once the levy is attracted i.e. receipt of sums of money for under-construction flats. Consequently, the 80/20 rule should operate only to the limited extent of the residential flats which were booked/ sold by the RE promoter prior to OC date. If the exemption entry is said to operate only to the extent the project is booked, then inputs and input services pertaining to the flats which were lying unbooked or sold after OC would stand excluded from the RCM liability. Let’s understand this by way of an example – the progression of the flats booked by the end-customer in the RE project and the implication of the 80/20 Rule could be interpreted as follows:

Year	% of flats booked	Applicability of Exemption entry & 80/20 rule	Remarks
Y1	Project Launch – 10 per cent	On 10 per cent	10 per cent flats taxable
Y2	Under construction – 40 per cent	On 40 per cent	40 per cent flats are taxable
Y3	Upto Occupancy Certificate – 80 per cent	On 70 per cent	70 per cent flats are taxable
Y4	Post OC Sale/ Unbooked Flats – 20 per cent	On 70 per cent	Balance 30 per cent flats are not supplied

The above table depicts that the Company would be incurring common costs (in form of inputs and input services) for the entire project tenure from Y1 to Y4 for all the residential flats comprising the project. The simple reading of the proviso to the exemption entry implies that the 80/20 rule operates on the entire project costs. But one should also not lose sight of the fact that the 80/20 rule is a condition for an exemption entry. The RCM entry is also linked to such exemption entry. Therefore, in Y1 it appears that only 10 per cent of the project cost would be amenable to the 80/20 Rule; in Y2 only 40 per cent of the project cost would be amenable to the said rule and in Y3 70 per cent of the project cost would be subjected to this rule. Flats which remain unbooked or sold post OC do not require the shelter of the exemption entry and hence need not be subjected to the 80/20 rule.

Though this interpretation and its consequential apportionment is not explicit in the proviso or RCM notification, the fact that the RCM liability is tagged to the exemption entry gives legal credibility to this interpretation. A reasonable / rational approach would be to compute the RCM liability for the entire project under the 80/20 rule and then apportion them to the extent of the percentage of flats booked in the project. This approach would certainly face resistance from the revenue authorities who believe that RCM is an independent / stand-alone provision for taxation and hence the entire project is subjected to 80/20 rule.

Similar issue arises where certain RE promoters are offering the land owner’s share of flats as a works contract service rather than construction service and discharging tax at the head line rate of 18 per cent instead of 5 per cent. While RE promoters have a legal rationale for fixing the tax at 18 per cent, a connected complication emerges on the front of the 80/20 rule. Re-iterating the principle stated above, the RE promoter is discharging tax to the extent of land owner’s share as a contractor under works contract service category and is not availing the benefit of the exemption entry. Therefore, the 80/20 rule cannot be said to extend its domain of operations on other taxing/ exemption entries. 80/20 rule would have to be trimmed to this extent in such scenarios. The Government FAQ in this context may be relied for this purpose. It clearly excludes the applicability of 80/20 rule where the tax is being paid under a different entry of the rate/ exemption notification.

FAQ 17. – Whether the condition of receiving 80% of inputs and input services from the registered person shall be applicable if the developer opts to continue to pay tax at the old rates of 12%/8% in respect of an ongoing project?

No, if the developer opts to continue to pay tax at the old rates of 12%/8% in respect of an ongoing project, the condition of receiving 80% of inputs and input services from the registered person doesn’t apply.

POST OC COSTS/ COMPUTATION OF 80-20 RULE

RE promoters incur costs even after issuance of occupancy certificate. The said costs could be in the nature finishing costs (housekeeping, fittings, etc.), post OC receipt of invoices from contractor, etc. 80/20 rule provides that the RE promoter would have to compute the RCM liability for each financial year until the issuance of the OC. The literal wordings limit the operation of the rule only for inputs and input services received upto to OC. This is despite that the RE promoter is in the process of handing over possession/ registration of pre-booked flats during the construction stage and is yet to offer the said dues for taxation under the construction services entry. We reach a situation where the RE promoter would be availing the benefit of the exemption entry for Post OC receipts of under-construction pre-booked flats but is not under the obligation to discharge the RCM under the 80/20 rule. This is primarily because the time frame of applicability of the 80/20 rule is from the date of commencement of the project until issuance of the occupancy certificate. We may recall that the provisions of 13(3) which fix the time of supply on RCM activity at the time of making payments or sixty days from the date of issuance of the invoice by the supplier. Going by the time of supply provisions, all payments made to URPs after the OC would be outside the scope of the 80/20 rule.

Step 4 – Discharge of Tax / Rate and Value

Exemption entry under Exemption Notification vis-à-vis Rate notification

The other aspect is the inclusion of taxable and exempt supplies of goods and/or services. By taxable supplies we refer to those supplies which are leviable to specific rate under the rate/ exemption notification (say 5 per cent, 12 per cent, etc.). Exempt supplies are those which are wholly exempt under the exemption notification (NIL rate). The current structure of the notifications is framed as follows:

– Rates for goods are notified in N-1/2017

– Wholly exempt goods are notified in N-2/2017

– Rate for services / partially exempt services are notified in N-11/2017

– Wholly exempt services are notified in N-12/2017

The point for consideration is whether the RCM liability can be fixed at the headline rate of 18 per cent on all goods/ services including those which are partially / wholly exempt. Take for example, purchase of water (which is wholly exempt goods) and interest on borrowings (which is wholly exempt service). In literal terms the said goods / services would qualify as ‘inputs’ / ‘input services’ and hence form part of 80-20 rule computation. The supplier while supplying the goods would have claimed exemption under the goods / services exemption notification respectively. But by virtue of special entry (452Q of the goods rate notification and 39 of the services notification), the very same transaction at the recipient’s end appears to be subjected to imposition of a 18 per cent tax rate to the extent such costs along with other costs cross the 20 per cent URP threshold. Two concerns arise here (a) the transaction is being viewed differently at the supplier’s end (by grant of exemption) and differently at the recipient’s end (by imposing a 18 per cent liability). Moreover, the Government is taking away the benefit granted at the supplier’s end (which ultimately benefits the recipient) by imposing a tax at the recipient’s end. Is this permissible or legally intended? The Government FAQ in this context is below”

“FAQ – 18. Whether the inward supplies of exempted goods/services shall be included in the value of supplies from unregistered persons while calculating 80% threshold?

Yes. Inward supplies of exempted goods/services shall be included in the value of supplies from unregistered persons while calculating 80% threshold.”

We take a step forward to understand the operation of the rate/exemption notification vis-à-vis RCM notification. The source of the rate/exemption notifications assumes significance. Section 9(1) imposes the liability of GST supplies at the rates notified by the Government. Section 9(1) is a charging provision which specifies the subject-matter of tax, its taxable value, its taxable rate and the taxable person. Section 11(1) is an extension of the said provision which provides for a partial or a full exemption to specified categories of goods/ services. By application of these sections, one ascertains the tax payable on supply transactions.

Sections 9(3)/ 9(4), on the other hand, are merely collection provisions whereby the recipient has been fastened with the last aspect of levy i.e. the person by whom tax is payable. These sections operate vis-à-vis the discharge of tax liability and not with respect fixation of the levy (i.e. fixation of rates / value on which tax is payable). To address this, the policy makers have inserted specific entries i.e. Entry 452Q in goods rate schedule and Entry 39 in services rate schedule. The said entries specifically state that despite goods/services being specifically classifiable elsewhere, in respect of the value representing the excess procurement from URPs, the said entry would prevail over all other specific entries. Therefore, there are conflicting rates in the rate schedule – one being the rate under which the goods/ services are classifiable and the other being the special entry introduced by virtue of the 80/20 rule. Going by the explanations to the special entry, the said special entry would prevail over default entry.

But it is important to carefully note that this overriding implication extends only to the rate schedule (i.e. Notification 1/2017 for goods or 11/2017 for services). The extract of the overriding explanation is worth noting:

“Explanation. – This entry is to be taken to apply to all services which satisfy the conditions prescribed herein, even though they may be covered by a more specific chapter, section or heading elsewhere in this notification.”

Emphasis should be placed on the phrase ‘this notification’ which clearly implies that the explanation does not extend its operations to other notifications (including the exemption notification 2/2017 for goods and 12/2017 for services). Keeping this inference in mind, we should apply the provisions of section 9(1) r/w 11(1). Now let’s go back to the water/ interest example which is specified as wholly exempt by virtue of 11(1). The baseline rate in the rate schedule would typically fall under the residuary category of 18 per cent. The special entry for RCM also imposes tax at 18 per cent and the said special entry could prevail over the default entry specified in the rate notification. But on the other hand, the exemption notification grants a complete exemption to water/ interest. Can these conflicting conclusions be reconciled? The possible answer would be that the special entry prescribed for imposition of tax at 18 per cent on all goods/services would extend only to the rates notification and cannot override the exemption notification. Though tax is payable at 18 per cent, by virtue of an exemption notification, the said goods would stand to be completely exempt in terms of section 11(1). Hence, RCM may not be payable on such exempt goods despite the special entry introduced for RCM purposes. The repercussion of this conclusion would give rise to the question of what is comprised in the excess value of URPs. The table below depicts the challenge:

Goods	Rate	Composition to Total Cost
Sand	Taxable	5 per cent
Wood	Taxable	10 per cent
Water	Exempt	5 per cent
Jelly	Taxable	5 per cent
Total URP composition		25 per cent
Excess URP purchase		5 per cent

The question here would be on the attribution of the 5 per cent excess URP purchase to a particular commodity to decide its taxability/ exemption. The law is clearly silent on this aspect and one reaches a dead-end to implementation of the Rule. While one may claim absence of a machinery mechanism, a conservative taxpayer would discharge the tax assuming that all taxable and exempt activities are includible in the 80/20 rule and subjected to the 18 per cent headline rate.

OTHER ISSUES IN IMPLEMENTATION OF 80/20 RULE

Interplay of section 9(3) – specified list of RCMs and 9(4) – RCM on URP procurements

The other interesting issue arises in the inter-play of RCM liability emerging from notification issued u/s 9(3) as well as 9(4). Take the table below as an example:

Services/ Goods	Covered under notification 9(3)	Covered under Notification 9(4)
Lawyer services	Yes	Yes, if the supplier unregistered
Goods transport services	Yes	Yes, if the supplier unregistered
Sponsorship services	Yes	Yes, if the supplier unregistered
Services from the Central/ State Government	Yes	Yes, if the supplier unregistered
Services of renting of motor cab in specific instances	Yes	Yes, if the supplier unregistered

Therefore, certain services are due for RCM liability under both notifications. One would simply believe that the consequence would be neutral as RCM is payable in either scenario. But such a belief is not true. Take for instance a case where these services are procured from unregistered suppliers but fall below the 20 per cent threshold. In such a scenario, the RE construction services notification read with the RCM notification issued under section 9(4) would not obligate the RE promoter to discharge the tax to the extent it falls below the 20 per cent threshold. We may also note that RE construction services notification contains a provision which reads as follows:

“Provided also that inputs and input services on which tax is paid on reverse charge basis shall be deemed to have been purchased from registered person”;

Curiously, the said proviso only states that once tax is paid under RCM basis on certain inputs/ input services, they shall be deemed to have been purchased from registered persons even-though they have been actually purchased from URPs. The proviso operates only on such inputs/ input services where the tax is paid and does not conclude on whether tax is payable at all on such overlapping RCM provisions. The purpose of this proviso is two-fold (a) to avoid consequence of double taxation of RCM under section 9(3) and 9(4); (b) to treat the RCM tax paid on excess procurements as part of the 80 per cent pool and make an otherwise non-compliant service provider, a compliant service provider after payment of the RCM tax, thereby protecting the exemption. But the proviso no-where breaks the conflict arising from simultaneous operation of both section – 9(3) and 9(4).

A conservative view would be to hold that section 9(3) RCM liability would continue to be payable (being a specific entry and applicable to all persons without any exception). Moreover, the RCM notification is not intended to grant any exemption of RCM liability to inputs/inputs services which were previously taxable – the situation is status quo as regards lawyer/ GTA, etc. activities. RCM notification under section 9(4) was introduced to place a new liability on input/input services which are not previously taxable. Therefore, RCM would still be payable in terms of 9(3) and once the RCM liability is paid, the said amounts would fall within the RP basket by virtue of the proviso extracted above. Alternatively, an aggressive view would be that both notifications operate in tandem, but the notification 9(4) is more specific for RE promoters. Moreover, since such notification entry is subsequent to the introduction of entry in notification 9(3), the entry in Notification 9(4) would have overriding effect. Consequently, such lawyer and other specified services falling with the 20% threshold would not be liable for RCM to such extent.

INTER-PLAY OF INPUTS/ INPUT SERVICES WITH PLACE OF SUPPLY PROVISIONS

The basic tenets of imposition of GST liability involve ascertainment of the inter-state or intra-state character of a supply. Once this is decided, the supply transaction is to be legally examined within the confines of the respective statute and notification (i.e. intra-state supply would be subjected to CGST/SGST notifications and inter-state supply would be subjected to IGST notifications). Even in the context of RCM, the recipient has to assess the inter-state/ intra-state character of a supply and discharge its liability accordingly. Curiously the 80/20 rule does not lay down any guideline on this aspect. All RE promoters would charge CGST/SGST taxes on their output supplies on account of the POS provisions. Hence, they avail the benefit of the CGST/ SGST notification and do not have to draw any reference to the corresponding IGST rate/exemption notification.

But they may be availing inter-state inputs and services from both RPs as well as URPs². Two challenges emerge herein: (A) Whether inputs and services specified under the RCM notifications include only those which meet the CGST/ SGST provisions (i.e. intra-state inputs/ input services) or even those which meet the IGST provisions (i.e. inter-state inputs/ input services); and (B) Can an intra-state notification impose RCM liability for an inter-state input/ input service? The RCM notification can be referred herein. While CGST is properly worded, the IGST notification and the corresponding RCM notification apply only when IGST exemption is being availed under the IGST Act:

Sl. No.	Category of supply of goods and services	Recipient of goods and services
(1)	(2)	(3)
1	Supply of such goods and services or both [other than services by way of grant of development rights, long term lease of land (against upfront payment in the form of premium, salami, development charges, etc.) or FSI (including additional FSI)] which constitute the shortfall from the minimum value of goods or services or both required to be purchased by a promoter for construction of project, in a financial year (or part of the financial year till the date of issuance of completion certificate or first occupation, whichever is earlier) as prescribed in notification No. 8/2017-Integrated Tax (Rate), dated 28^th June, 2017, at Items (i), (ia), (ib), (ic) and (id) against Serial No. (3), published in Gazette of India vide G.S.R. No. 683(E), dated 28^th June, 2017, as amended.	Promoter

2. Section 24 provides compulsory registration where the inter-state supply is a taxable supply and possibly exempt suppliers would not have availed compulsory registration despite inter-state supplies

A decisive answer to both the questions may be slightly elusive. One may interpret the IGST entry as having reference to inputs and input services only on application of the IGST statute and the IGST rate/exemption notification. Where the RE promoter is discharging tax under the CGST statute and CGST rate/ exemption notification, the input and inputs services having an inter-state character would stand excluded. This is apparent from the reading of the IGST-RCM notification (7/2019-IGST(R)) which imposes IGST-RCM liability only with reference to the prescription/ quantification as per the IGST exemption notification and falls short from referring to the CGST/SGST exemption entry. There is no apparent cross-linkage among the IGST and CGST/SGST act and their RCM and the rate/ exemption notifications. Thus, literal wordings lead to the pressing interpretation that IGST-RCM may not be payable when applying the CGST/SGST rate/ exemption entry. RE promoters would not be liable to include inter-state inputs/ input services while ascertaining the CGST/SGST liability under the 80/20 rule.

CONCLUSION

The fiscal benefits of a complicated rule such as this should be ascertained by policy makers from the revenue collection statistics. Where the tax collections are insignificant in comparison to the legal complexities and administrative burden, an attempt should be made to simplify the rate notification and ease the business enterprise from the burden of the 80/20 rule. This apart, the initial concerns of stakeholders that the RE notification is complicated and challenging to comprehend seems to have dwindled over the years and the RE promoters have accepted the composition scheme as the norm for the future thereby re-working their project costs with much more certainty. The RE promoters opting for this notification have experienced significant drop in their compliance burden in terms of ITC availment, 2A matching, vendor followup and most importantly project economics. The only urge of the industry is that since the industry is now following main-stream economy, it is time to reduce the overall impact of transaction taxes on this sector.

shailesh.kwebmaker

Logistics Sector

INTRODUCTION

Logistics is one of the most essential sectors of an economy and comprises all supply chain activities, mainly transportation, inventory management, flow of information and customer service. Though primarily concerned with the movement of goods, the sector covers a host of activities apart from transportation of goods, such as clearance with customs authorities, storage of goods, etc., and requires involvement of various stakeholders, such as transporters (road/ rail/ air/ waterways), warehousing service provider, customs house agent/clearing and forwarding agents, etc., The various activities involved in this sector are listed below:

Transport of goods by road, rail, air and waterways, including multi-modal transport,
Freight forwarding services,
Warehousing services, including Free Trade Warehousing Zones,
Clearing and forwarding services, including services provided within port areas.

In this article, we have discussed the above activities covering the sector along with various GST issues revolving around them.

A. TRANSPORTATION OF GOODS

The core activity undertaken by this sector is the transportation of goods with all other activities being incidental to this. The mode of transportation of goods may be either by road, rail, air or waterways or a combination of more than one. The applicable GST rates for service of transportation of goods, when supplied via a single mode are notified under notification 11/2017-CT (Rate) dated 28th June, 2017 as under:

Description of Service	Notified Rate	Conditions
Service of GTA in relation to transportation of goods supplied by a GTA where the GTA does not exercise the option to itself pay GST on the services supplied by it	5 per cent	Credit of input tax charged on goods and services used in supplying the service has not been taken.
Service of GTA in relation to transportation of goods supplied by a GTA where the GTA exercises the option to itself pay GST on the services supplied by it	5 per cent (without ITC) /12 per cent (with ITC)	Option should be exercised in Annexure V on or before 15th March of the preceding financial year. Once option is exercised, the same cannot be changed.
Transport of goods in container by rail by any person other than Indian Railways	12 per cent	Nil
Transport of goods by rail, other than above	5 per cent	Credit of input tax charged in respect of goods in supplying the service is not utilized for paying central tax or integrated tax on the supply of service.
Transport of goods in a vessel including services provided or agreed to be provided by a person located in non-taxable territory to a person located in non-taxable territory by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India.	5 per cent	Credit of input tax charged on goods (other than ships, vessels including bulk carriers and tankers) used in supplying the service has not been taken. This condition shall not apply where the supplier of service is located in non-taxable territory.
Transportation of goods, being natural gas, petroleum crude, motor spirit (petrol), HSD or ATF through pipeline subject to restriction in claim of input tax credit	5 per cent	Credit of input tax charged on goods and services used in supplying the service has not been taken.
Transportation of goods, being natural gas, petroleum crude, motor spirit (petrol), HSD or ATF through pipeline other than above	12 per cent	Nil
Multimodal transportation of goods	12 per cent	Nil
Transport of goods by ropeways	5 per cent	Credit of input tax charged on goods used in supplying the service has not been taken.
Goods transport services other than above	18 per cent	Nil

TRANSPORTATION OF GOODS BY ROAD

The levy of indirect tax on services of transport of goods by road has always been litigative and seen its’ fair share of controversy, right from its’ introduction under service tax regime. The same was primarily due to resistance by the transport sector, which predominantly has been an unorganised sector not geared up to comply with the taxation laws. This is why the concept of reverse charge mechanism was introduced for this sector.

The concept of reverse charge continued even under GST when services are provided by GTA with restriction on claim of input tax credit by the suppliers. Entry 1 of notification 13/2017 – CT(Rate) dated 28th June, 2017 provides that the same shall apply in case of services supplied by a Goods Transport Agency (GTA) to

(a) Any factory registered under or governed by the Factories Act, 1948 (63 of 1948); or

(b) Any society registered under the Societies Registration Act, 1860 (21 of 1860) or under any other law for the time being in force in any part of India; or

(d) Any person registered under the Central Goods and Services Tax Act or the Integrated Goods and Services Tax Act or the State Goods and Services Tax Act or the Union Territory Goods and Services Tax Act; or

(e) Anybody corporate established, by or under any law; or

(f) Any partnership firm whether registered or not under any law including association of persons; or

(g) Any casual taxable person; located in the taxable territory.

In view of representations made by the sector, the rate entries were amended and option to pay tax @ 12 per cent under forward charge was introduced with corresponding credits available to transporter. The entry read as under:

The above indicates that a taxable person may opt to pay tax @ 5 per cent (without ITC) / 12 per cent (with ITC) under forward charge. However, following issues emerge from the above:

Description of Service	Rate (per cent)	Conditions
(iii) Services of goods transport agency (GTA) in relation to transportation of goods (including used household goods for personal use). Explanation.-“goods transport agency” means any person who provides service in relation to transport of goods by road and issues consignment note, by whatever name called.	2.5	Provided that credit of input tax charged on goods and services used in supplying the service has not been taken [Please refer to Explanation no. (iv)]
Or
	6	Provided that the goods transport agency opting to pay central tax @ 6% under this entry shall, henceforth, be liable to pay central tax @ 6% on all the services of GTA supplied by it.

a) Can a GTA having multiple GSTIN, exercise different options for different GSTINs?

b) This is because under GST, each registration obtained by a taxable person is treated as distinct person, i.e., separate legal entity for the purpose of GST and therefore, a view was possible that separate options could have been exercised for separate registrations.

c) Once the option was exercised, did the taxable person have an option to revert to the RCM scheme, i.e., whether the option was permanent or temporary or a taxable person could change the option at the start of the next financial year? The notification did not explicitly provide for a change in the option and therefore, a view prevailed that once exercised, the GTA could not have changed the option.

Considering the above ambiguity, the entry was again amended vide notification 3/2022 – CT (Rate) dated 13th July 2022. It is now provided that the option to pay tax at 5 per cent will be the general rule, unless the supplier exercises the option to pay tax at 12 per cent which should be exercised on or before 15th March of the preceding year. The timeline to exercise the option for FY 2023-24 has been extended up to 31st May, 2023. It is for this reason that many suppliers have started obtaining multiple registrations and entities wherein under one registration / entity, the option is not exercised, i.e., under one registration /entity, the tax is paid under reverse charge by the recipient while in another registration/entity, the option is exercised, i.e., GST is charged @ 12 per cent with corresponding input tax credit. This also invariably clears the first confusion, i.e., whether the option to be exercised is vis-à-vis the legal entity or the specific registration as the Declaration is to be given for the GSTIN and there is no specific condition in the notification to the effect that the option exercised shall be uniform across the legal entity.

GTA VS. NON-GTA – RELEVANCE OF CONSIGNMENT NOTE

An important aspect which needs to be noted in the above rate entries is that they apply to services supplied by a Goods Transport Agency or GTA. The term “GTA” has been defined under the rate notification to mean any person who provides service in relation to transport of goods by road and issues a consignment note by whatever name called. This necessarily means that person who provides the service of transportation of goods by road but does not issue a consignment note is not a GTA. In fact, services of transportation of goods when not supplied by a GTA have been exempted vide entry 18 of notification 12/2017 – CT (Rate) dated 28th June, 2017 which exempts services by way of transportation of goods by road except the services of a goods transport agency or a courier agency.

Therefore, it can be said that whether a person supplying the service of transportation of goods by road is a GTA or not is dependent upon whether such person issues a consignment note or not? In this context, one may refer to the decision of Tribunal in the case of Narendra Road Lines Pvt. Ltd. vs. Commissioner [2022 (64) GSTL 354 (Tri-All)] wherein it has been held as under:

14. … … In some of the cases the appellant transported the goods by road without issuance of the consignment note, the said activity prior to June, 2012 was not classifiable under category of services as no consignment note was issued and it is prime requirement to demand service tax under the category of goods transport agency service. … …

Similar view was followed in the case of Mahanadi Coalfields Ltd. vs. Commissioner [2022 (57) GSTL 242 (Tri-Kol)] wherein the demand under GTA was set-aside by holding that issuance of consignment note is non-derogable ingredient for a service transport to fall under GTA.

It therefore becomes important to understand what constitutes “consignment note”. While the notification is silent to that aspect, vide press release (39 dated 1st January, 2018), it has been clarified that guidance can be taken from the meaning ascribed under Rule 4B of Service Tax Rules, 1994. In terms of the said rule, consignment note means a document issued by a goods transport agency containing following details/attributes:

It should be serially numbered,
It should contain the name of the consignor and consignee,
It should disclose the registration number of the goods carriage in which the goods are transported,
It should disclose details of the goods transported, the place of origin and destination,
It should disclose person liable for paying service tax, i.e., whether consignor, consignee or the goods transport agency.

Therefore, a supplier issuing a document in the course of supplying service of transportation of goods which contain all the above details can be said to have issued a consignment note and therefore, he will be GTA for the purpose of GST. However, in one particular case (K M Trans Logistics Pvt Ltd [2020 (35) GSTL 346 (AAAR-GST-Raj)]) before the Authority for Advance Ruling, a query was raised regarding the applicability of GST in case where the consignment note was not issued by them. In this case, the supplier was providing the service of transport of manufactured vehicles from factory to authorised dealers. It was their contention that in the course of providing the said service, they do not issue consignment note and therefore, the services provided were exempt from the levy of GST. This was however rejected by the Authority on the grounds that the service supplier was generating EWB which contained all the particulars required to be mentioned in a consignment note and therefore, held that they were not eligible for the above exemption. In the view of the author, this conclusion may not survive judicial scrutiny as an EWB does not contain many of the features which are prescribed u/r 4B of Service Tax Rules, 1994, such as being serially numbered, details of person liable to pay tax, etc.

This takes us to the next question of what happens if a supplier is able to prove that he has not issued a consignment note. The answer to this would be exemption from GST vide entry 18 of notification 12/2017-CT (Rate) dated 28th June, 2017 which exempts service provided by way of transportation of goods other than by a GTA or a courier agency.

GTA – SUB-CONTRACTING

At times it may so happen that a GTA (say “A”) has entered into a contract for providing service relating to transport of goods. However, the GTA may not have the means to execute the said service himself and therefore, he may appoint another GTA (say “B”) to execute the said service under the sub-contracting model. Under this model, both A and B are providing the service of transporting of goods by GTA with service flowing from B to A to client.

There remains an issue of whether B, i.e., sub-transporter can be treated to be GTA. This is because in Liberty Translines [2020 (41) G.S.T.L. 657 (App. A.A.R. – GST – Mah.)], it has been held that there cannot be more than one consignment note in a transaction. Since the contract would be awarded to A, the consignment note would generally be issued by A. The question that therefore arises is how the service by B to A shall be classified? In the above ruling, the Authority has also held that upon sub-contracting, classification of supply changes from the service of transportation of goods by GTA to service of hiring of means of transport. Therefore, the sub-transporter would be eligible to claim exemption under entry 22 of notification 12/2017 – CT (Rate) dated 28th June, 2017. However, this would necessarily mean that the sub-transporter will not be eligible to claim proportionate credit to the extent he has exercised the option of paying tax under forward charge.

However, the conclusion of the above ruling is questionable. So far as the conclusion that there can only be one consignment note in a transaction is concerned, one may refer to the Carriage by Road Act, 2007 which does not provide any exception from issuing the goods receipt note when receiving the goods from another transporter. The format of goods receipt note (provided in Form 8 of Carriage by Road Rules, 2011) to be issued by the transporter on receipt of goods from another transporter contains all the particulars which are required to be contained in consignment note. Hence, a view can be taken that even a sub-transporter can issue consignment note to the transporter.

Similarly, the second conclusion that classification changes upon sub-contracting is not correct in all instances. This is because if A has received a contract for transporting goods of a lesser quantity, say five boxes from Maharashtra to Gujarat (half vehicle load) and transports the goods in his own vehicle, he will end up bearing a loss as full capacity is not utilised. In such case, he might contract with B, who has a half-loaded vehicle going on the same route to also load his goods on his vehicle and deliver them on his behalf. In this case, it cannot be said that B has provided the service of hiring of vehicle to A. Rather, it is clearly a service for transportation of goods and therefore, since B is not a GTA for this leg of transaction (as consignment note is not issued), the service provided by him would be exempt under entry 18 of notification 12/2017-CT (Rate) dated 28th June, 2017.

To summarise, if the element of hiring of vehicles is not brought into picture, there can be following variants in a sub-contracting transaction:

Transporter	Sub-transporter	Implications
A – 12 per cent (FCM)	B – 12 per cent (FCM)	A and B will claim full input tax credit.
A – 12 per cent (FCM)	B – 5 per cent (FCM)	A to claim ITC of tax charged by B. No ITC available to B.
A – 12 per cent (FCM)	B – 5 per cent (RCM)	A to pay tax on service received from B under RCM and claim input tax credit. No ITC available to B.
A – 5 per cent (FCM)	B – 12 per cent (FCM)	A will not be entitled to claim input tax credit, thus resulting in tax inefficiencies.
A – 5 per cent (FCM)	B – 5 per cent (FCM)
A – 5 per cent (FCM)	B – 5 per cent (RCM)	A to pay tax on service received from B under RCM and claim input tax credit. No ITC available to B.
A – 5 per cent (RCM)	B – 5 per cent (RCM)	Liability on A to pay tax under RCM with no corresponding input tax credit
A – 5 per cent (RCM)	B – 5 per cent (FCM)	A will not be entitled to claim input tax credit, thus resulting in tax inefficiencies.
A – 5 per cent (RCM)	B – 12 per cent (FCM)

However, if B takes a view and is able to demonstrate that the transaction with A is that of hiring of goods transport vehicle or he is not a GTA (as he is not the one issuing consignment note), he shall be eligible to claim exemption under entry 22 / 18 of notification 12/2017-CT (Rate) dated 28th June, 2017. This will however restrict B’s claim of input tax credit under rules 42 / 43 of the CGST Rules, 2017.

TRANSPORTATION VS. HIRING

There are also instances where instead of providing the transportation services, the service provider gives the entire vehicle at the disposal of the client who can use the vehicle as deemed fit/necessary. Similarly, at times, a transporter having capacity issues may take the vehicle of other transporter on hire.

Such services are distinct from the service of supply of transportation of goods though the end objective
achieved may have been the same. However, the issue remains is whether such supplies will attract classification under chapter 9966 which deals with rental services or 9971 which deals with transfer of right to use any goods. The relevant rate entries are reproduced below for reference:

Chapter 9966:

Description of Service	Rate
Renting of goods carriage where the cost of fuel is included in the consideration charged from the service receiver	12 per cent
Rental services of transport vehicle with operators other than above	18 per cent
Time charter of vessels for transport of goods provided that credit of input tax charged on goods (other than on ships, vessels including bulk carriers and tankers) has not been taken	5 per cent

Chapter 9971

Description of Service	Rate
Transfer of right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or valuable consideration	Same tax rate as applicable on supply of such goods

At this juncture, it may be relevant to refer to the decision of the Hon’ble Supreme Court in the case of Great Eastern Shipping Company Ltd. vs. State of Karnataka [2020 (32) GSTL 3 (SC)] wherein in the context of time charter agreements for vessels along with operating staff, the Hon’ble Supreme Court had held that during the period of agreement, the vessel was at the exclusive disposal of the other party and therefore the same constituted “deemed sales” and shall attract levy of sales tax/ VAT.

The time charter of vehicle specifically attracts 5 per cent GST. However, the same also gets covered under 9971 as per which, the applicable tax rate shall be the same tax rate as applicable on supply of goods. This may result in confusion as to which entry shall be applicable. In such a situation, one needs to refer to Rule 3 (a) of the Rules of Interpretation which provides that the heading with most specific description shall be preferred over a more general description. Therefore, one may take a view that entries under chapter 9966 shall have precedence over entries under chapter 9971, which are the residuary entries.

TRANSPORT OF GOODS BY VESSEL

The activity of transport of goods by vessel generally refers to the service of transport of goods by waterways. Traditionally, it referred to the services provided in relation to import / export of goods. However, with the development of infrastructure for transportation of goods within India using inland waterways, the provisions shall also apply to domestic services. However, to promote inland waterways, services by way of transportation of goods by inland waterways have been exempted under entry 18 of notification 12/2017 – CT(Rate) dated 28th June, 2017.

REGISTRATION ASPECT

The person supplying the service, i.e., shipping line may be located in or outside India. It may happen that an exporter of goods from India contracts for receiving the said service from a foreign shipping line. In such a case, the issue arises is whether the shipping line has supplied the service from India or not? This is because the shipping line receives the goods in India for loading on the vessel. Therefore, a view prevails that the shipping line is providing service from India and therefore, they are required to obtain registration and discharge GST on the charges collected from their clients.

Alternately, they also have an option to appoint the agent who will issue the invoice on their behalf and discharge the applicable GST. In such a scenario, the agents will obtain a separate registration for discharging the tax liability on charges collected on behalf of their principals (“principal registration”). The details under this registration will not form a part of the financials of agent as they are not themselves supplying the service, but merely facilitating the process of raising the invoice and collecting the consideration from the clients on behalf of the shipping lines.

However, other services which the agent provides on their own account will be taxed under their regular registration (“agent registration”), i.e., where they supply services on their own account. This would include local charges levied by ports, charges for transport of goods within the port area, etc., which are recovered from the importer/exporters. Similarly, the agents also recover charges from the shipping line for providing the above services on which GST is leviable as “intermediary”.

The consideration collected on behalf of the clients is remitted to the shipping lines abroad after making various deductions. One of the deductions include various expenses incurred by the shipping lines in India for which the invoices are issued by the local suppliers to the principal registration as the representative of the shipping line. There is a question of whether the input tax credit of tax charged on these supplies can be claimed while discharging the GST liability collected on behalf of the shipping lines. This question arises because the shipping lines sell the freight not only through their Indian agents, but at times, also directly through their foreign offices. Therefore, the location of supplier of service is outside India and no GST is leviable on the same. This would mean that the said inward supplies are used for both, taxable as well as non-taxable activities and claim of input tax credit may give rise to the question of levy of tax on such freight sold from outside India.

TYPES OF CHARGES

The supplies are generally structured under two models, i.e., “prepaid” or “to collect” which applies to both, import as well as export shipments. Under the prepaid model, the customer takes upon himself to pay the freight while in case of “to collect”, the liability to pay the freight and the incidental charges is on the consignee or some third party.

In addition to the above, in the course of providing the transport services, the shipping lines also collect various additional charges, such as:

Bunker adjustment factor
Bill of Lading Charges
Fuel Surcharge
Hazardous Material surcharge
Low sulphur surcharge
Emergency Risk Surcharge
Peak Season surcharge

The above charges are recovered in the course of providing the main supply, i.e., transportation of goods by vessel and therefore, attract same treatment as the freight charges.

EXEMPTION

It may also be noted that upto 30th September, 2022, the place of supply of services of transportation of goods by a vessel from customs station of clearance in India to a place outside India was exempted from the levy of service tax. This exemption was applicable especially when the services were supplied to Indian exporters. However, this exemption has been withdrawn w.e.f. 1st October, 2022 and the said services are now taxable and therefore, instead of outright exemption, the exporters will now have to opt for the refund mechanism to encash the tax charged by the service providers.

TRANSPORT OF GOODS BY AIR

The services of transportation of goods by aircraft are leviable to GST under the residuary rate, i.e., 18 per cent as there is no specific entry for the same in the rate notifications.

There are following exemptions w.r.t the said services:

Services by way of transportation of goods by an aircraft from a place outside India upto the customs station of clearance in India
Services by way of transportation of goods by an aircraft from customs station of clearance in India to a place outside India. This exemption (similar to export of goods by vessel) was applicable only upto 30th September, 2022 and has been withdrawn w.e.f 01st October, 2022.

MULTI-MODAL TRANSPORT

At times, it may happen that a supplier provides the service of transportation of goods by multiple modes, i.e., road, air, waterways or rail. This is termed as multi-modal transportation and the rate notification prescribes rate of 12 per cent for the same. However, this applies only to domestic multi-modal transport, i.e., transport of goods from a place in India to a place within India.

For example, an exporter who wants to ship goods to the US may procure the service of a transporter who picks up the goods from his location and ensures delivery till the US by transporting the goods to the customs port, arranging for vessel, etc., Though this supply involves multi-mode transport, for the purpose of GST, it is not classifiable under the said rate. Therefore, the supply should classify as transport of goods by water and attract GST @ 5 per cent.

The question that arises is would the answer differ if the contract identifies separate consideration for each activity, i.e., transport of goods by road, handling customs compliance, ocean freight, etc.? The answer to this question is in the definition of “composite supply” under section 2 (30) of the CGST Act, 2017 which is reproduced below for ready reference:

(30) “composite supply” means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply.

Illustration: Where goods are packed and transported with insurance, the supply of goods, packing materials, transport and insurance is a composite supply and supply of goods is a principal supply;

(90) “principal supply” means the supply of goods or services which constitutes the predominant element of a composite supply and to which any other supply forming part of that composite supply is ancillary;

As can be seen from the above, to determine whether a supply constitutes composite supply, we need to analyse what is the principal supply, i.e., predominant supply. In the above example, undoubtedly, the principal supply is that of transportation of goods by water and therefore, a view can be taken that the entire service supplied is that of transportation of goods by water and shall attract GST @ 5 per cent.

RESTRICTIONS ON CLAIM OF INPUT TAX CREDIT

A perusal of the rate entries applicable to the sector would indicate that a lower tax rate has been notified for certain services along with restrictions on claim of input tax credit and referring to Explanation (iv) of the notification which provides as under:

(iv) Wherever a rate has been prescribed in this notification subject to the condition that credit of input tax charged on goods or services used in supplying the service has not been taken, it shall mean that,—

(a) credit of input tax charged on goods or services used exclusively in supplying such service has not been taken; and

(b) credit of input tax charged on goods or services used partly for supplying such service and partly for effecting other supplies eligible for input tax credits, is reversed as if supply of such service is an exempt supply and attracts provisions of sub-section (2) of section 17 of the Central Goods and Services Tax Act, 2017 and the rules made thereunder.

Therefore, wherever the rate notifications prescribe restriction on claim of input tax credit, the services providers will not be eligible to claim input tax credit on goods or services exclusively used for supplying the service and for the common inputs/ input services, input tax credit will be allowed only on proportionate basis in the method prescribed as per Rule 42/43 of the CGST Rules, 2017.

However, in cases where there is a restriction on the claim of input tax credit only on inputs, whether input tax credit of input services used in supplying the said service can be claimed in entirety? A view can be taken that where the condition relating to non-claim of input tax credit applies only to inputs, input tax credit of input services can be claimed in entirety. This is because if the intention of the legislature was to deny input tax credit of both inputs and input services, the condition would have referred to both. Instead, in some entries, the rate notification refers to restriction of ITC claim on goods, which includes both inputs and capital goods, while in some entries, it refers to inputs and in some, only to input services.

PLACE OF SUPPLY

Place of Supply is an integral part of the GST mechanism as it determines which tax must be paid by the supplier. Under section 12(8) of the IGST Act, 2017 which applies to services where the location of recipient and supplier of services is in taxable territory, the place of supply is determined as under:

Where the services are supplied to a registered person, the location of such registered person
Where the services are supplied to a person other than a registered person, the location at which the goods are handed over for transportation shall be the place of supply.

Similarly, for cross-border transactions, i.e., where either the location of supplier of service or recipient of service is outside the taxable territory, the place of supply was determined under section 13(9) of the IGST Act, 2017 which provided that except for courier services, the place of supply of service of transportation of goods shall be the destination of the goods. However, the Finance Act, 2023 has omitted the same (effective date of amendment has not been notified) which necessitates the need to relook at the applicable rule for determination of place of supply.

It is in this context that one needs to look at section 13(3) (a) of the IGST Act, 2017 which provides that in case of services supplied in respect of goods which are required to be made physically available by the recipient of services to the supplier of services, or to a person acting on behalf of the supplier of services in order to provide the services, the place of supply of the following services shall be the location where the services are actually performed. The question that arises is whether it can be said that the services supplied are in respect of goods? This aspect was clarified in the context of Service tax vide the Education Guide as under:

5.4.1 What are the services that are provided “in respect of goods that are made physically available, by the receiver to the service provider, in order to provide the service”? – sub-rule (1):

Services that are related to goods, and which require such goods to be made available to the service provider or a person acting on behalf of the service provider so that the service can be rendered, are covered here. The essential characteristic of a service to be covered under this rule is that the goods temporarily come into the physical possession or control of the service provider, and without this happening, the service cannot be rendered. Thus, the service involves movable objects or things that can be touched, felt or possessed. Examples of such services are repair, reconditioning, or any other work on goods (not amounting to manufacture), storage and warehousing, courier service, cargo handling service (loading, unloading, packing or unpacking of cargo), technical testing/inspection/certification/analysis of goods, dry cleaning etc. ….

As can be seen from the above, the Education Guide also provides that courier services are also covered under the above clause. The courier service is an extension of transportation service, which is also apparent from perusal of section 13(9) which prior to amendment, excluded courier services from its’ scope. Therefore, the possibility of the Authorities proposing to classify transportation services provided to recipient outside India under this clause may not be ruled out.

The above view can be countered with an argument that section 13(3)(a) intends to cover only such activities which are performed on goods. Mere handling of goods per se cannot be treated as being covered under section 13 (3) (a). In this regard, one may refer to the recent decision of the Hon’ble Tribunal in the case of ATA Freightline (I) Pvt Ltd vs. Commissioner [2022 (64) G.S.T.L. 97 (Tri.-Bom)] wherein it has been held as under:

13. … … The objective of separate treatment in Rule 4 of Place of Provision of Services Rules, 2012 is not just about accepting responsibility for goods on behalf of ‘provider’ of service as is evident from the proviso

‘4. Place of provision of performance based services. – The place of provision of following services shall be the location where the services are actually performed, namely:-

‘(a) services provided in respect of goods that are required to be made physically available by the recipient of service to the provider of service, or to a person acting on behalf of the provider of service, in order to provide the service :

Provided that when such services are provided from a remote location by way of electronic means the place of provision shall be the location where goods are situated at the time of provision of service:

Provided further that this clause shall not apply in the case of a service provided in respect of goods that are temporarily imported into India for repairs and are exported after the repairs without being put to any use in the taxable territory, other than that which is required for such repair.

xx xx xx’

therein, that goods concerned with the rendering of service is necessarily to be made available to the ‘provider’ or ‘person acting on behalf of provider’ by the ‘recipient of service’ for being put to use in the course of rendering service – an aspect that appears, and even conveniently, to have been passed over for scrutiny by the adjudicating authority. For so doing, the circular referred to by Learned Counsel would also have to be overcome.

It is therefore important that the CBIC issues a clarification on this issue before the notification making the amendment effective is issued.

DEEMED SUPPLY IMPLICATIONS

Entry 2 of Schedule I of the CGST Act, 2017 provides a deeming fiction to include supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business as supply even if made without a consideration.

This provision has created a challenge for all sectors and has been discussed in detail in the past as well. This provision poses a similar challenge for the logistic sector as well. Let us try to understand this with the help of following example:

ABC is a transporter having pan-India presence through its’ branches.
ABC has a client in Gujarat who requests for service of transport of goods from its’ factory in Gujarat to their client in Tamil Nadu. ABC’s Gujarat branch fulfils the said request of the client and provides the services using its’ truck registered with Gujarat RTO Authorities.
When the goods are delivered in Tamil Nadu, its’ Tamil Nadu branch has received client request for transfer of goods to Maharashtra.
Since they already have a truck in Tamil Nadu on its’ way to Gujarat via Maharashtra, the same is used for fulfilling the client request. The Tamil Nadu branch raises the invoice to the customer.
Similarly, the Maharashtra branch also loads goods of its’ customer in this truck while it is on its’ way back to Gujarat and raises the invoice to the customer.

The above simple and very routine transaction in the industry raises the question of whether the Gujarat branch has supplied any service to the Tamil Nadu branch or Maharashtra branch? There is already a ruling by the AAR to hold that this constitutes hiring of motor vehicle and not GTA service. In such a scenario, the service can be treated as exempted in view of entry 22 of notification 12/2017-CT (Rate) dated 28th June, 2017. However, this might trigger reversal u/r 42/43 of the CGST Rules, 2017.

B. FREIGHT FORWARDING

The activity of freight forwarding is very common in the logistics sector. In this model, the freight is sold by the person to consignors, i.e., persons intending to have goods transported, though they themselves don’t execute the said service. Instead, they in-turn buy freight from the various service providers, i.e., transporters, shipping lines, airlines, etc.

Under the erstwhile regime, there was substantial litigation with respect to activities carried out by freight forwarders, primarily because services of outbound transportation of goods did not attract service tax. Therefore, even the freight forwarders would not charge service tax on the amounts recovered from their clients. Therefore, the Department used to allege that the freight forwarders were acting as agents and the difference in the rate at which they sell and buy freight was taxable as intermediary services provided. The demands made on this allegation were set-aside by the Tribunal in the case of Greenwich Meridian Logistics (I) Pvt Ltd vs. CST, Mumbai [2016 (43) S.T.R. 215 (Tri. – Mumbai)] wherein the Tribunal has held that the surplus earned by the freight forwarders arises from the activity of purchase and sale of freight on a principal-to-principal basis and therefore no service tax is leviable on the same. Simply put, the Tribunal has recognised the concept of trading in services. The principle laid down by the Tribunal in the above decision should apply on all fours to GST as well.
However, with GST being applicable on various transactions, the issue of cross-charge cannot be ruled out as there can be a scenario where the freight is sold by one location whereas purchased by another location. The implications relating to deemed supply would therefore need analysis.

C. WAREHOUSING SERVICES

Warehousing service is an integral part of the logistics sector. At times, the goods are required to be stored before they can be dispatched to their destination. As discussed above, warehousing services are in respect of goods and therefore, the place of supply for services provided in cases the location of recipient of service is outside the taxable territory shall be the place where the services are performed. Therefore, if warehousing services are provided to recipients located outside India, the same will be leviable to GST.

The above interpretation will be of aid when looked at from the perspective of a supply where both supplier and recipient are located in taxable territory. In such cases, there is a view that the place of supply is determinable under section 12 (3) of the IGST Act, 2017 which provides as under:

(3) The place of supply of services,—

(a) directly in relation to an immovable property, including services provided by architects, interior decorators, surveyors, engineers and other related experts or estate agents, any service provided by way of grant of rights to use immovable property or for carrying out or co-ordination of construction work; or … …

However, once it is said that the services are in respect of goods for section 13, it cannot be said that for the purpose of section 12, the same are in relation to immovable property. Therefore, when a person in Gujarat receives service of storage of goods in Maharashtra, the place of supply will be determined u/s 12 (2), i.e., the same will be the location of recipient of service and therefore, the supplier will have to charge IGST and not CGST+SGST.

EXEMPTIONS

It may be noted that an exemption has been given to storage and warehousing services provided in relation to specific goods, such as rice, minor forest produce, cereals, pulses, fruits and vegetables, and lastly agricultural produce.

The exemption relating to agricultural produce is mired with controversies as there is confusion revolving around what constitutes agricultural produce. The term “agricultural produce” has been defined as under:

“agricultural produce” means any produce out of cultivation of plants and rearing of all life forms of animals, except the rearing of horses, for food, fibre, fuel, raw material or other similar products, on which either no further processing is done or such processing is done as is usually done by a cultivator or producer which does not alter its essential characteristics but makes it marketable for primary market;

A reading of the above entry would indicate the following:

The goods under consideration should be any produce out of cultivation of plants and rearing of all life forms of animals, except the rearing of horses.
No further processing should be done on the produce or such processing should have been done which is usually done by the cultivator / producer.
The processing should not have altered its’ essential characteristics.
The processing should make the produce marketable for primary market.

The above exemption entry has seen its’ fair share of controversy vis-à-vis each of the above conditions. This has been primarily due to the clarifications issued by the Board Circular 16/16/2017-GST dated 15th November, 2017

For instance, there has been confusion over what constitutes produce. In SAS Cargo [2022 (59) G.S.T.L. 424 (A.A.R. – GST – Kar.)], the Authority has held that fresh eggs in shell on which no further processing is done are fully covered in definition of term agricultural produce.

Similarly, while reading the condition of “processing which is usually done by the cultivator / producer”, the phrase “which is usually” has been ignored, i.e., the Authorities have been denying the benefit of exemption by merely stating that since the processing is not being done by the producer/ cultivator, the exemption is not available. What should have been analyzed is whether the producer / cultivator can carry out the said process themselves? Merely because someone else carries out the process will not disentitle benefit of exemption.

For instance, in Guru Cold Storage Pvt. Ltd. [(2023) 3 Centax 266 (A.A.R. – GST – Chh.)], the Authority has held that the process of de-husking or splitting or both of pulses is not usually carried out by the farmers at farm level but carried out by pulse millers. Therefore, the pulses will not qualify as “agricultural produce”. Similarly, processed dry fruits have also been held to be outside the scope of “agricultural produce”.
Contrarily, in Lawrence Agro Storage Pvt Ltd [2021 (48) G.S.T.L. 47 (A.A.R. – GST – Haryana)] the Authority has correctly interpreted the condition and held that it is immaterial who carries out processes as long as processes such that usually done by cultivator or producer, not essentially altering essential characteristics of agricultural produce but make it marketable for primary market.

This takes us to the third condition that “the essential characteristics of the produce should not be altered”. In other words, the produce should remain as is and should not change form. For example, if a process of drying is undertaken on the grape to increase its’ shelf life, the grape is still called a grape. However, if the same grape is converted into juice, the resultant product cannot be said to be grape and therefore, there is a change in the essential characteristics of the produce. However, the question that needs focus is whether the first produces’ essential characteristic should not change or if even part of the produce is the intended produce, will the answer change?

For instance, in Sardar Mal Cold Storage & Ice Factory [2019 (23) G.S.T.L. 321 (App. A.A.R. – GST)], the Authority has held that when a tamarind pod is cracked open, string (fibre) removed and kernel is taken out, resultant tamarind (ambali foal) do not fall under definition of agricultural produce as shelling and removal of seeds to obtain pulp usually done by specially designed machines. Similarly, in the context of dried mango, dried gooseberry, etc., it was held that such products are procured by the traders from the cultivators/ producers and then undergo processes such as washing, cutting, shelling, cleaning, drying, packing, etc. which lead to considerable value addition as compared to that of product sold in primary market reflecting change in essential characteristic. Therefore, such items cannot be characterized as Agricultural produce.

Similarly, in Chopra Trading Co [(2023) 3 Centax 266 (A.A.R. – GST – Chh.)], the Authority has held that the process of milling of paddy to extract rice alters the essential characteristics of the produce. In Narsimha Reddy & Sons [(2023) 3 Centax 266 (A.A.R. – GST – Chh.)], it was held that benefit of exemption notification will be available in case of storage services provided in relation to seeds when activities undertaken are restricted to only cleaning, drying, grading etc., without any chemical processing. However, since in the said case, chemical processing was done, exemption will not be available.

However, in the context of milk, the Gujarat HC has in Gujarat Co-op. Milk Marketing Federation Ltd. [2020 (36) G.S.T.L. 211 (Guj.)] held that the activity of chilling of milk to extend its’ shelf life does not result in altering of the essential characteristics of the milk and therefore, exemption will be available.

This takes to the last condition of what constitutes “primary market”. The term has not been defined either under GST or even under service tax regime. However, the Gauhati High Court has dealt with the issue in the case of Apeejay Tea Ltd. vs. UOI [2019 (23) G.S.T.L. 180 (Gau.)] wherein it has been held as under:

31. On a reading of the provisions of Section 65B(5) of the Finance Act of 1994, it is to be understood that the expression primary market mentioned therein apparently refers to the market where the agricultural produce as such are being sold and the process that the cultivator or the producer may undertake is to the extent to make it transportable and presentable in such a market. When the aforesaid situation is compared with that of the manufactured and finished tea, which apparently is being transported by the petitioners, the Court cannot take a different view but to conclude that such transported tea is not for the purpose of being marketed in a primary market where the agricultural produces are being marketed, but on the other hand the transported tea is being marketed as a finished product in the consumer market for its consumption. In view of the above, as to whether the expression agricultural produce appearing in Entry 21(a) of the Notification Nos. 3/2013-S.T., dated 1-3-2013 and 6/2015-S.T., dated 1-3-2015 includes tea or not would have to be understood from the perspective of the definition of the expression agricultural produce as appearing in Section 65B(5) of the Finance Act of 1994 and not from the perspective of the expression agricultural produce as defined and explained in D.S Bist (supra).

The above decision clearly indicates that primary market is the market where the agricultural produce is traded, be it the first sell by the producer/ cultivator or subsequent trade by the traders. Therefore, when the storage services are provided in the context of the agricultural produce which satisfies other conditions of the exemption notification, the benefit of exemption notification would be available.

However, the decisions of the AAR are to the contrary. In Lawrence Agro Storage, the Authority has held that primary market refers to markets where cultivator/ producer makes the first sale of produce.

To summarise, while the notification does provide exemption from GST to storage and warehousing services provided in relation to agricultural produce, what constitutes agricultural produce is itself debatable and therefore, the industry is stuck with the various conflicting ruling by the AAR denying the exemption benefit to the suppliers. It therefore remains to be seen how the Courts look at the exemption entry.

D. CLEARING AND FORWARDING SERVICES (INCLUDING SERVICES PROVIDED WITHIN PORT AREAS)

Clearing and forwarding agents and customs house agents are an important cog in the wheel of the logistics sector which facilitate the activity of import and export of goods. This service provider act as intermediary co-ordinating with various agencies, be it customs, port, etc., facilitating the entire process of receiving the goods in the port area till the time the goods are loaded in the vessel in case of export transaction and from the time the vessel arrives in the port till the goods are cleared from the customs authority in the case of import transaction.

While providing the above services, the service providers incur various expenses acting as agents of their client, i.e., importer / exporter (as the case may be). The expense so incurred by them are recovered from their clients on actual basis as reimbursement and the service providers also recover their service charges for carrying out the said activities. Under the service tax regime, the service providers used to charge service tax only on their service charges while the expense incurred were claimed as reimbursement on actuals. The importer / exporters were eligible to claim the CENVAT credit on the strength of invoices issued by the service providers / the supporting invoices included by them in their reimbursement claim.

Whether the amounts claimed as reimbursement was includible in the value of service provided by the agents was a subject matter of litigation and reached finality with the decision of the Hon’ble Supreme Court in the case of Intercontinental Consultants & Technocrats Pvt Ltd [2018 (10) G.S.T.L. 401 (S.C.)].

However, with the introduction of GST and the input tax credit mechanism, there has been a need to change the structure. This is because the agents engage various service providers in the course of providing their services. This includes port authorities, terminal, transporters, etc., who provide services leviable to GST. It may not be feasible to provide the GSTIN of importer/ exporter to all such service providers and therefore, many agents have stopped the reimbursement model and the invoices are issued by them with GST on the entire amount, i.e., service charge plus reimbursement of expenses. This has however increased their exposure as any mismatch in input tax credit has to be borne by them.

On the contrary, in case of agents continuing under the reimbursement model, the issues have increased for the importer / exporter as they have to follow-up with the vendor who is not in their system.

In the port area, there are many service providers. They levy various charges, which include terminal handling charges, inland handling charges, airway bill charges, etc., The charges are levied by them for services provided in relation to goods and therefore, the place of supply is determined under section 12 (2) or 13 (3) (a) as the case may be and applicable taxes have to be charged. This will apply even in cases where the service recipient is located outside India.

CONCLUSION

The logistic sector forms an integral part of the economy as it keeps the economy running smoothly. However, when studied from the perspective of GST, there are substantial issues involved and it is therefore imperative that all such issues are analysed before any decision / tax position is taken.

shailesh.kwebmaker

E-Commerce/Start-ups

An e-commerce set-up is integral to every sector – FMCG, Electronics, Logistics, Banking and Financial services, etc. Integration of e-commerce operations with the respective industry can throw up intriguing issues. Conventional business practices are squandered by fluid business models (without appropriate legal documentation) being adopted by new-gen start-ups, hence posing difficulty in the ascertainment of the true nature of the transaction (sometimes even identifying its true supplier). In an earlier article, we discussed some of the challenges faced in the implementation of GST for the said sector. Certain further conceptual issues have been discussed in the ensuing paragraphs.

STATE WISE REGISTRATION

E-commerce marketplaces operate on a time-sensitive delivery model to end consumers. For this purpose, local hubs are being set up nearest to the customers’ locations in every part of the country. The said marketplaces operate the hub for logistical and last mile delivery of goods by suppliers spread across various locations. Goods from multiple parts are picked up and stocked at their locations. Marketplaces claim that they merely provide e-commerce and logistical support services to the vendors enlisted on their portal. Yet, the question of the requirement of registration of the hubs by (a) Marketplace and/or (b) Listed vendor falls into consideration. The said analysis requires the application of the definition of ‘place of business’ with registration provisions under section 22-25.

A. Normal registration of Enlisted Vendor @ Hub location

Listed vendors fall into two broad baskets (a) those availing end-to-end fulfillment and logistic services and store goods at the Hubs across the country (Category 1 Vendors); (b) those performing direct dispatch from origin to customer location through logistical support in which case goods arrive at the Hubs only for sorting, transshipment and consolidation without any intent for storage (Category 2 Vendors).‘Place of Business’ has been defined to include any premises where the “taxable person” stores “his goods” or “makes/ receives supplies therefrom”. A taxable person is liable for registration under section 22 ‘from’ where he makes the taxable supply of goods or services. A vendor would be required to obtain registration at the Hubs in cases where he himself stores goods and makes supplies therefrom. Mere storage by marketplaces as a part of their overall logistical support activity (say for consolidation, transshipment or any other temporary purposes) would not constitute storage by the taxable person.
While this is a very theoretical statement, the differentiating factor between Category 1 and 2 vendors could be the surrounding factual circumstances. Category 1 vendors who dispatch goods based on expected demand for storage at hub locations, without any pre-determined order from customers, with the objective of providing last mile time-sensitive delivery, may have to ‘stock and then sell’ the goods. They have to perform ‘branch billing’ for stock transfers and ‘local billing’ for end-customer delivery. Such models are generally adopted for standard and fast-moving products (such as electronics, packed consumer edible products, etc.) with state-level registrations at the hubs.
Category 2 vendors dispatch goods from their base location with overall logistical services being provided by the marketplace. The storage of the goods at the intermediary location is a part of the logistic activity by the marketplace and not the vendor. Moreover, the vendor has already identified the customer and raised the invoice to the end customer, appointing the marketplace to execute the delivery. In such cases, category 2 vendors may not be required to obtain state-level registrations at the hub locations.

However, this situation spurs two primary challenges. Firstly, section 24(ix) mandates compulsory registration for every person who makes supplies through an e-commerce operator. It suggests that the listed vendors should register in every state in which the e-commerce operator has presence/takes registration. This may not be a reasonable conclusion as it would make IGST supplies irrelevant for e-commerce operators. It would also become burdensome for a supplier to avail/comply with as many registrations as taken by the e-commerce operator. . A more practical interpretation should be adopted to such machinery provisions. Section 24 should be interpreted as mandating registration only for states ‘from’ where the e-commerce operators’ dispatch goods on behalf of the supplier. Despite e-commerce operator’s presence is spanning in multiple states, the location ‘from’ where the goods are being originally on-boarded by the e-commerce operator should form the basis of registration. Intermediate halts/ breaks in logistics should not alter the origin of goods. Hence, one could view section 24(ix) as a mandatory condition only for states of origin/ dispatch and not states of delivery.

The second challenge is with respect to the validity of e-way bill in cases where stoppage time for goods crosses the time limit; due to delays in transshipment/ consolidation at the Hub locations. The validity of e-way bills is designed assuming average speeds for continuous movement of consignments. Logistics partners (especially in low frequency routes) could consume time in identification of appropriate conveyance and consolidation of small consignments for operational efficiency. Many a times overload in the supply chain also results in delay in shipments. At the last mile, delivery at customer location could fail due to lack of response at the door and goods have to return to the warehouse for re-attempted delivery on a subsequent date. Such logistical challenges pose a practical risk of expiry of validity of e-way bills. With multiplicity in shipments by marketplaces and lack of specific knowledge about the delivery timelines at each warehouse, suppliers are also unable to track the validity of the e-way bills making them susceptible to expiry. NASSCOM has represented about both these practical challenges to the GST council. However, the Council is yet to take action on this aspect.

B. Normal registration of Market Place @ Hub location

Here again, market-places operate under distinct modes (a) those who perform the logistic support through own/ leased premises (Fulfillment Services) and (b) those who outsource the entire activity to a separate logistics arm (Listing Services). While performing fulfillment services, the marketplace procures the consignments, ships to hub locations, packs/repacks, stocks and performs last mile delivery. This is performed at warehouse locations of the market place. In such cases, both the vendor as well as the marketplace obtain registration in every state of warehouse presence. Where marketplace services are limited only to listing services with logistics being provided by a delivery partner (say BlueDart, Delhivery, etc.) and the marketplace does not by itself perform any logistics, then in such cases the marketplace generally avails a single state registration (regular) i.e. state from where they monitor/operate the entire e-commerce operations. In these cases, the logistics backend partner avails pan-India registrations for all the warehouse/transshipment centres set-up across the country for the services rendered by him. These models are feasible only for smaller e-commerce operations, not involved in time-sensitive delivery and for vendors making IGST supplies from their home state. In any case, TCS compliance for the e-commerce operator warrants TCS registration for such e-commerce operator in every state where the vendors are located i.e. states where the supply originates (refer discussion below).

C. E-commerce registration of Market Place for State-level operation

Questions arise in respect of marketplaces (a.k.a. e-commerce operators) whether they are liable to discharge the TCS on the collections from the supplies effected through their portal. There has been confusion on whether e-commerce registration is required for the marketplace in every state to which the supplies are made. Government FAQon this aspect proposes the following:

“8. Whether e-Commerce operator is required to obtain registration in every State/UT in which suppliers listed on their e-commerce platform are located to undertake the necessary compliance as mandated under the law?

As per the extant law, registration for TCS would be required in each State/UT as the obligation for collecting TCS would be there for every intra-State or inter-State supply. In order to facilitate the obtaining of registration in each State/UT, the e-commerce operator may declare the Head Office as its place of business for obtaining registration in that State/UT where it does not have physical presence. It may be noted that each State/UT has indicated one administrative jurisdiction where all e-commerce operators having business (but not having physical presence) in that State/UT shall register. The proper officer for the purpose of registration of ECOs has also been notified by each State/UT.”

The above FAQ does not provide much guidance on the legal position of requirement of TCS registration in every state. Compulsory registration provisions (under section 24(4)) under central and state enactment mandate such operators to take registrations at the respective state irrespective of whether they make any taxable supplies from a particular state. A strict reading of section 24, which overrides section 22, mandates the supplier to collect TCS under section 52 to obtain registration for every state irrespective of having any physical presence in that state. Section 52 places the responsibility of TCS on the e-commerce operator for cases where the supplies are effected through it and their collection is made by the e-commerce operator. Section 52 is merely a collection provision rather than levy on the e-commerce operator – the section should stand triggered only if there is an underlying levy of supply and corresponding TCS is payable by the e-commerce operator. Therefore, one could interpret the registration provision to piggyback the applicability of TCS in such state which in turn is dependent on the supply location. This could be elaborated through the said table:

Location of Supplier	MH	MH	MH with Branch in KA
Type of Supply – Inter-state / Intra-state	Inter-state with POS TN	Intra-state POS MH	Intra-state POS KA
Location of e-commerce operator	KA	KA	KA
Relevant GST law applicability	IGST – POS TN	C/MHGST	C/KAGST
Underlying levy	IGST-POS TN	C/MHGST	C/KAGST
TCS collection	Yes on IGST	Yes on C/MHGST	Yes on C/KAGST
Registration of E-commerce operator	MH registration necessary for TCS on IGST originating from MH	MH registration necessary for TCS on C/MHGST originating from MH	Separate KA TCS registration necessary for TCS on C/KAGST originating from TN

Therefore, from the above table it can be observed that the state in which the dispatch to customer location is performed, would form the basis of ascertaining the state from which TCS would have to be discharged and consequently the applicability of TCS registration may be ascertained. E-commerce operators would take TCS registrations only if they dispatch from a particular state and the underlying supply originates from
that state.

ONLINE INFORMATION AND DATABASE RETRIEVAL SERVICES (OIDAR)

The scope of OIDAR was outlined in the previous article (February 2023 issue). Essentially, OIDAR services have been carved out and granted distinct tax status. B2B OIDAR services have been placed under the RCM mechanism, while B2C OIDAR services have been placed under the forward charge provisions, placing the liability on the overseas service provider to take registration and discharge the tax liability. The definition was significantly wide and the Finance Act, 2023 has further obscured an already delusionary definition. The definition prior to and post amendment has been tabulated below:

Pre-amendment	Post-amendment
(17) “online information and database access or retrieval services” means services whose delivery is mediated by information technology over the internet or an electronic network and the nature of which renders their supply essentially automated and involving minimal human intervention and impossible to ensure in the absence of information technology and includes electronic services	(17) “online information and database access or retrieval services” means services whose delivery is mediated by information technology over the internet or an electronic network and the nature of which renders their supply essentially automated and involving minimal human intervention and impossible to ensure in the absence of information technology and includes electronic services such as,-

It can be observed that the shelter of services being ‘essentially automated’ and involving ‘minimal human intervention’ for a service to be excluded from OIDAR has been removed. The revised definition now states that any service rendered through information technology would amount to an OIDAR service as long as it is necessarily performed through information technology. Thus, the pre-requisite of a human intervention being at the minimal possible level has been removed, implying that the level of human intervention does not have any bearing on classifying a service as OIDAR.On the basis of this phrase, taxpayers hitherto claimed that online video content (like Youtube) would be OIDAR but live video content (such as coaching or live streaming on Youtube) was not OIDAR since human intervention in the latter was significant, albeit, it was routed through the use of information technology. The legislature on the other hand believed that the defense of minimal human intervention was artificial and subjective and hence it was necessary to broadbase the definition of OIDAR to all information technology-driven services. Though the said definition was originally adopted from EU laws, it was believed that service providers increased human intervention for claiming exclusion from the taxation net (particularly in B2C supplies) even though the services were ultimately consumed in India.

Interestingly, the removal of the phrase “supply being essentially automated and involving minimal human intervention” brings into its ambit many more activities beyond the scope of pure information technology-driven services. Take for example two services conducted on the same platform (a) online subscription services to Zoom platform (b) service of online video meetings through Zoom from outside India to business recipients in India.

The former (i.e. Zoom subscription services) was always includible as OIDAR since the services on Zoom platform were essentially automated through information technology involving minimal human intervention. The individual logs onto the Zoom platform and schedules the meetings which are auto-configured to provide the meeting address and credentials to the user’s email accounts. Zoom Inc. (the service provider) does not individually schedule or fix the meetings and this takes place through an automated process at the backend. No specific individual is assigned for the issuance of the digital address or operating the Zoom meeting. Hence, one could easily conclude that these are OIDAR services.

On the other hand, advisory services performed through these online video meetings were excludible on the claim that an individual across the other screen is actively involved in rendition of the service though information technology. The individual interacts (through digital network) with the recipient of services with back-and-forth conversations at both ends, increasing the human intervention. Information technology was a medium of delivery but the services were predominantly driven by human intervention, and hence akin to rendering the services physically to the recipient. This very same service now falls prey to the wide scope thrown open by the amendment.

The EU directives as well as CBEC’s own circular1 (during the service tax regime) provided fair guidance on demarcating the territory of automated services v/s person-driven services. EU directive had juxtaposed automated troubleshooting of computer and classical troubleshooting by an individual through remote connections to explain the comparative degree of human intervention in both activities. The latter displayed a higher degree of human intervention and possibly outside the scope of OIDAR services. But all this guidance material would now be made redundant leaving the field wide open for host of unwanted litigation on this front. The essence of OIDAR being oriented only for automated services has now been given a “go by” and certainly intervention of the Board is critically essential to stop the surge of litigation on this front.

1. Circular No. 202/12/2016-S.T., dated 9th November, 2016

With the amendment now in place, the only pre-requisite left available for a service to be excluded from the definition is the ‘impossibility of ensuring such service’ in the absence of information technology. The impossibility of performance of a service without the use of information technology is a highly subjective term. Taxpayers may claim that personalised services can alternatively be rendered even over physical means. The use of technology saves time and cost. Hence, they cannot be said to be impossible to perform without information technology. Revenue may on the other hand contend that technology has made such services possible, since without such technology an individual across the border cannot render services to anyone. This means that the services are impossible to deliver except through information technology.

Take another example of medical report examination by overseas offices. An individual at the backend examines medical reports and uploads its conclusion through information technology. Though the human intervention was substantial, the revenue could now easily claim that the services are OIDAR since such remote examination of medical reports would be impossible to ensure without information technology. In times where information technology has granted accessibility across borders, it would be very soon difficult for anyone to even fathom an activity which is not driven by information technology.

At the end, one can conclude that this amendment would largely impact B2C transactions where the overseas suppliers are required to obtain OIDAR registration in India and pay tax under forward charge mechanisms. B2B transactions were anyway liable to tax under reverse charge provisions and would have to pay the tax irrespective of if being classified as an OIDAR service.

LOYALTY PROGRAMS

E-commerce entities offer loyalty points/coins to customers on transactions made through their portals. The loyalty points / coins accumulated by these users are convertible into monetary discounts or redeemable vouchers for purchases made through its web-portal. The transactions that need examination here include (a) issuance/accumulation of loyalty points/ coins; (b) monetary discounts on redemptions of such loyalty points / coins against future purchase and (c) expiry of loyalty points / coins.

Nature of these Loyalty points/ coins:– Loyalty coins are a digital representation of future discounts which a customer can avail on the purchase through specified e-commerce portals (say 25 paise / coin). These coins are accumulated by the customer on every purchase through the application through a pre-determined formula and are redeemable after crossing specified thresholds by conversion into a monetary discount. These coins do not have direct money value, are not convertible into cash or any other mode of cash but can be used against transactions over the same web platform or even multiple platforms. CRED is a classic example of an application where every credit card payment through their application generates loyalty points. Flipkart also runs similar programs

Accumulation of Loyalty Points/ Coins: – Coins/ Points at the time of its issuance represent a contingent benefit that may arise in the future to its beneficiary. In a traditional sense, it is a legal entitlement for larger discounts on increasing volume of purchases – it is like saying “Come back to me next time and I will give you a larger discount on your next purchase”. But the digital set-up gives it an obscure appearance resulting in contradictory conclusions. Generally, the T&C of such programs entitle abrupt termination of these schemes and make such points worthless. Therefore, a mere accumulation represents a contingent promise on fulfillment of the purchase criteria at a future point of time. It may be difficult to even term these coins as ‘property’ more-so ‘transferable property’. But it is also difficult to counter-claim this as ‘sums of money’ because they are not equivalent to money itself. Mere accumulation of points should not result in any tax liability as there is no supply of any ‘property’ or ‘service’ being rendered by issuer to the end user. Importantly, there is no flow of any consideration against issuance of such coins. The trigger for issuance of coins is a purchase transaction which has been fully subjected to tax. Consideration being sine qua non of supply is absent at the time of issuance of coins and hence, such issuance could stand excluded from the tax net.Issuers also take an additional defense that this represents an ‘actionable claim’ since a future debt arises in favor of the end-user where the Issuer is expected to honor the monetary value/ discount against redemption of coins. But critically, this debt is not in monetary terms (as the T&C of the scheme do not fix a permanent ratio for conversion and have rights to withdraw the scheme at any point of time). However, such arguments were summarily rejected by the Appellate Authority of Advance Ruling in Loyalty Solutions and Research Pvt. Ltd².

2. 2019 (22) G.S.T.L. 297 (App. A.A.R. – GST)

Expiry of Loyalty Points/ Coins

Loyalty coins come with a particular shelf-life. Unless the user utilises the coins within the shelf life, they would be termed as worthless. Expiry of such loyalty coins is recorded as a reduction from the coins pool on a FIFO basis. This act of expiry/cancellation of coins is a unilateral act by the issuer without any specific approval for the same. Clearly such a unilateral act arose on account of non-usage by the beneficiary of such coins. Since the said coins did not result in any flow of consideration, the said expiry of coins may be viewed as an inconsequential event from a GST perspective. In summary, loyalty schemes are not taxable as either ‘goods or services’ but the finer aspects of the agreement may be worth examining to reach such a conclusion.

DISCOUNT/ PREPAID VOUCHER SCHEMES

Issuance of Vouchers – Varied business practices are adopted under the voucher scheme. Four participants are involved in this scheme (A) Scheme operator who brands/ displays the scheme; (B) Issuer which issues and manages the scheme (C) Merchant Outlet who accepts these vouchers (D) Beneficiary who benefits from the discounts specified therein. In most cases, the vouchers are issued by “Third Party Issuers” against payments made to them by the scheme operator (say a Raymond voucher is issued by Third-party Issuer on redeeming points loaded on the HDFC card – HDFC Bank makes a specified payment to the Issuer at the time of issuance).

The GST law has granted legal recognition to Vouchers as payment instruments issued for settlement of considerations against supply of goods or services. Though the potential supplies settled against such vouchers may be enlisted by the issuing authority, the exact identity of the future supply need not be known at the time of its issuance. In the digital world, challenges are faced in ascertaining whether these digital vouchers (as are being claimed) are truly vouchers as envisaged under the definition under the GST law. Of course, this would require examination of the T&C and the backend understanding between the Issuer and the scheme operator.

RBI has classified such vouchers under the Payments & Settlements Act 2007 – (i) closed-ended (acceptable only at own outlets), (ii) semi-closed ended (acceptable at third party outlets on-boarded under the scheme); (iii) open-ended (prepaid vouchers representing money equivalent and acceptable at any outlet). Each scheme category would have to be examined distinctly from a tax perspective.

Open-ended vouchers (prepaid debit cards) recognised by RBI are equivalent to money and do not have any GST implications. ‘Semi-closed payment instruments’, in terms of the Payments & Settlement Act have been treated as forms of settlement of consideration. These vouchers are issued for redemption with affiliated merchants against specified discounts. In the backend, the issuer is funding these discounts (partly by itself and rest by an affiliated merchant) as part of their marketing activity.

Taxability of such payment vouchers as prepaid payment instruments has been dealt in detail in certain decisions of the AAR³ and the Karnataka High Court in Premier Sales Corporation⁴. These decisions were heavily guided by the Supreme Court’s decision in Sodexco’s case issued in the context of applicability of redeemable food coupons. The driving principle has been that there is no sale/ supply of vouchers by the issuer to the users/ customers. They are payment instruments for the settlement of payment obligations and cannot be treated as either goods or services. With this legal clarity provided under the law and judicial decisions in the said context, such semi-closed vouchers may not be taxable as an independent supply. The tax due on such transactions would be collectible through the underlying supply against which they are redeemed.

3. 2022-TIOL-111-AAR-GST in Myntra Designs Pvt Ltd & 2019-TIOL-499-AAR-GST in Kalyan Jewellers Pvt Ltd
4. 2023-TIOL-158-HC-KAR-GST

Redemption of Voucher on Merchant portals: – Users redeem the voucher against supplies at third party outlets/ web-portals. In the frontend, the consumer receives the specified value/ discount on utilisation of the vouchers against supply by the merchant. In the back-end, the issuer and the third-party affiliates may collaborate with each other and share the discounted / redemption value at a pre-determined ratio. The objective is to jointly promote each other’s offerings to the end consumer.At the merchant’s end, the sale of goods/ services would take place at the gross value with the payments being settled partly in the form of actual payment and partly by redemption. The Gross sale value (i.e. including the amount settled through vouchers) would be considered as the taxable value of the transaction with consideration being received from two sources (a) customer for the actual payment and (b) from the Issuer for honoring the voucher and giving the discount. As an example, a product being sold for Rs. 100 with a 10 per cent redemption voucher being used, GST would be discharged on the entire Rs. 100 with consideration being received partly from the customer and balance from the issuer to the extent of the discount value against which the voucher is redeemed. Alternative practices may be prevalent in the trade depending on the schemes which operate in the back-end between the Issuer, Operator and the Merchant.

Expiry of Redemption Vouchers: Vouchers also have a shelf-life (say 1 year, etc.). Issuers expect, from their statistical analysis, that certain vouchers would stand expired before redemption and become redundant with collected sums (if any) being credited as income of the Issuer. Two theories could exist on the taxability of GST on such incomes. Vouchers considered as payment instruments (or actionable claims) at the time of issuance would now be treated as cancelled and treated on par with forfeiture of any debt. The AAAR in Loyalty Solutions and Research (supra) has unfortunately held that the expired voucher gets converted from an actionable claim to a service and is liable to tax as GST. But the true position should be that the vouchers continue to be an actionable claim even on expiry and fall outside the tax ambit completely and hence not liable to GST. This seems to be sustainable legal position on following additional grounds:

– Underlying supply is a sine-qua-non for taxability of GST;
– Income and Supply have separate legal connotations and cannot always be equated;
– Schedule II can be invoked only on identification of supply under section 7(1). Forfeiture does not amount to a Schedule II supply as being toleration of any act – this stand remotely clarified vide Circular 178/10/2022-GST, dated 3th August, 2022
– HSN/ SAC schedule do not enlist any such activity as being a service or goods and hence rate does not seem to be prescribed.

Of course this position could come under challenge by the revenue on the simple contention that ‘supply’ is all encompassing, and the residuary entries of the rate schedule are sufficient to capture such transactions in the tax net. Therefore, the last word on this issue is far from being said.

PRODUCT RETURN CHALLENGES

E-commerce operations have advanced to providing customers with a national returns policy where customers can purchase anywhere and return the products anywhere. The inter-play with a fragmented state level GST operation poses certain challenges. Take the example of a case where an MH supplier sells goods on IGST basis to a GJ customer with the same being returnable in GJ. IGST with POS GJ would be leviable on such transactions at the time of original supply. On return, the goods are taken back at the e-commerce’s GJ facility and continue to remain in GJ either for re-sale or return to the state of origin.

In case of re-sale from Branch – GST provisions have not possibly envisaged such situations. Section 34 which permits raising of credit notes on such returns does not strictly mandate ‘receipt of goods’. The only condition of reducing turnovers through CNs is to ensure that the recipient does not avail input tax credit. In B2C sales, such input tax credit is anyway not available and hence CNs can be easily accounted on the GST portal. In B2B sales, the MH supplier could establish compliance through reporting CNs in GSTR-1 and reduce the input tax credit reflecting in the buyer’s end. Prior to re-sale, MH branch should internally raise an invoice on GJ branch for retention of goods (in terms of section 31) and comply with the distinct person concept prescribed under section 25 read with Schedule I of GST law. Section 31 permits invoices to be raised where goods are made available to the recipient even without movement involved. Therefore, MH Branch can claim that the goods on return have been directed to be re-delivered back to its GJ Branch, hence making the same available to the GJ Branch for further supplies. On re-sale, the goods having been held by the GJ branch, GJ Branch could perform the supply in normal course.

In case of re-transfer from Branch – In many cases the goods are in open condition and not resalable immediately. They would have been sold directly by the MH Branch to the end customer without the involvement of the GJ Branch of the supplier. The GJ Branch is now in possession of the returned goods without originally having made the supply to the end customer. It would be holding stock of goods which never belonged to it. The GJ Branch would have to now raise a delivery challan for return of such goods back to the origin against the cover of the Credit note raised by MH to the end consumer. The Credit Note would have to place the pick-up location of goods from the customer end and dispatch being made by the GJ branch back to the MH Branch. An e-way bill would have to be raised by GJ Branch on MH Branch without any inward source of such goods at the GJ Branch. The delivery challan and e-way bill would have to capture the transaction chain from the customer location for delivery to the MH Branch. This would pose certainly logistical challenges even-though there is no legal impediment in such movement.

ONLINE GAMING

The booming online gaming industry is already facing the wrath of taxation under the GST law. Under Online Gaming model, the gaming company charges two fees – one Platform Fee and the other which is Pot Money or Prize Money. The platform fee is retained by the company while the Pot money is collected from each player/participant and pooled into an Escrow Account which ultimately gets distributed amongst the players/participants as ‘Prize Money or Pot Money’ immediately upon conclusion of the game.On the platform fee, there is largely a consensus that the same is payable since this is retained by the company as a service. The core issue is about the rate of GST which further depends on the nature of online games, whether it is a game of chance or a game of skill. The game of chance attracts 28 per cent in comparison to the game of skill which is at 18 per cent. The defining line which has been stated in Courts⁵ is the level of skill in the activity rather than the preponderance of chance which is beyond the control of the user.

5. 2022-TIOL-111-AAR-GST in Myntra Designs Pvt Ltd & 2019-TIOL-499-AAR-GST in Kalyan Jewellers Pvt Ltd Ravindra Singh Chaudhary vs. UOI and Ors 2019; Avinash Mehrotra vs. State of Rajasthan & Ors 2021; Junglee Games India Pvt Ltd vs. State of Tamil Nadu 2021; Head Digital Works & Ors vs. State of Kerala (2021); AIGF & Ors vs. State of Karnataka (2022)

On the Pooled Money / Prize Money kept in Escrow Account, there is uncertainty over which is a higher amount since revenue authorities contend that this forms a part of consideration of the overall gaming activity under section 15. The claim is that the entire sum is the price being paid for online gaming activity and the prize money received is a separate appropriation from the collections made by the Gaming Company to the winners. The test of pure agency also fails in such transactions because gaming companies do retain some components of the pot money leaving behind profit on such collections. Moreover, section 15(2) prescribes inclusion of incidental costs as well for the purpose of valuation. In the context of lottery, betting, gambling, Rule 31A prescribes that the value of the entire ticket for the basis of computation of GST. However, this stand of the revenue seems to have been overturned in the context of horse races in the case of Bangalore Turf Club⁶ vs. State of Karnataka where the Court quashed Rule 31A as being ultra-vires by delving on the concept of receipts in fiduciary capacity and receipts towards consideration for services. It was emphasised that even with the introduction of GST, tax is imposable only on the consideration for services and not on the entire amount collected against the game. However, in a contradictory decision of the Delhi High Court in Skill Lotto Solutions Pvt Ltd (2020-TIOL-176-SC-GST-LB), the challenge to valuation rule was rejected on the premise that valuation is a specification of the statute. If the statute specifies a particular valuation, it cannot be a subject matter of challenge. Rule 31A r.w.s 15 clearly specifies that the tax is to be imposed on the ‘face value’ of the ticket (i.e. including the prize money). If such is the case, one cannot claim an exclusion against such specific provision. Hence, it was concluded that while determining the taxable value of supply the prize money is not to be excluded for the purpose of levy of GST.

6. 2021-TIOL-1271-HC-KAR-GST

The GST Council in its 47th Council meeting subtly recognised the gross irregularity in including the ‘prize money’ for the purpose of taxation. It has directed that Group of Ministers on Casino, Race-Course and Online Gaming re-examine the issues in its terms of reference based on further inputs from States and submit its report. News of a distinction in ‘games of chance’ and ‘games of skill’ is being made at the policy level. The likelihood is that games of chance would be taxed at the highest bracket at par with lottery, betting, gambling, etc. (as a Sin Tax) but exclusion may be granted to the prize money component involved therein. Games of skill would be treated as a service being rendered by the operator to the user rather than stake money contests and hence be subjected to the base line rate of 18 per cent on the entire valuation. However, the debate on this subject is highly complex and a balance of legal principles and revenue augmentation is going to be attempted.

PARITY IN TAXATION

In an interesting judicial update, the Delhi High Court in Uber Systems India Pvt Ltd⁷ had the opportunity to examine the argument of discrimination in taxation on auto-rides/hotel bookings, etc. when performed through physical mode versus those performed through the e-commerce operator (‘ECOs’). Aggregators were aggrieved with the imposition of taxes on auto-rides when booked through the e-commerce application even-though the very same auto-ride hailed directly with the auto driver continued to be exempt. Notification 12/2017-CT(R) excluded services notified under section 9(5) from the scope of exemptions when the same where provided through the ECO. In our previous article, we had delved upon the Tax-shift mechanism prescribed under section 9(5) and the significance of the phrase ‘services through e-commerce operator’.

7. 2023-TIOL-426-HC-DEL-GST

Broadly, the arguments of the aggregators were that section 9(5) is merely a tax-shift mechanism where the tax liability rests upon the aggregator merely for the role of assisting the booking on the application. The underlying service is still being performed by auto driver himself i.e. all the legal facets of a service transaction: supplier, recipient and the underlying service/HSN are the same. The ‘mode of booking’ i.e. direct hail of auto-rickshaw and booking through Uber app, has resulted in imposition of taxes on e-commerce operator.The court however negated the arguments of tax discrimination on the following grounds:

– Consumers obtain additional benefits (such as convenience, ride tracking, payment options, supervisory role) through the application. Though the user fee charges of Uber are taxable separately, the said services are distinct from a traditional ride-hailing service. They fall under a separate category and hence can be treated as a different class of tax-payers. Moreover, the consumers who book the auto-rickshaw through the application fall in a different category from those booking the same directly;

– Section 9(5) has placed the responsibility of taxation on the e-commerce operators. Through statutory fiction, they step into the shoes of the service provider, and it is this fiction that has resulted in the imposition of tax on the ECOs. Traditional auto-rickshaw and e-commerce operators are a different class of suppliers;

– The position that ECOs are merely a platform that facilitate a mode of booking, is incorrect as the ECOs assume responsibility for the discharge of services assured by the ECOs to the consumer, which are rendered by the ECO. The ECOs provide a bundle of services and partake a charge/commission from both the consumers and the individual supplier. Therefore, for all purposes, the ECOs are independent suppliers of service to the consumer. And, the service provided by the individual supplier is only one facet of the bundle of services assured by the ECOs to the consumer booking through it. Hence, a supply activity through the application is distinct from the supply performed directly with the supplier.

– Exemptions are not a vested right and the exemptions granted can be withdrawn at any point of time; because taxation is the rule and exemptions are only an exception which is to be kept at the minimum.

In the end, the court also took a socialistic stand by stating that if similar treatment is granted to both activities, it would result in gross inequality to the auto-riders who are not enrolled on the application. This decision hails a very important juncture in e-commerce taxation. It indicates that Courts distinguish between activities performed physically from those performed with the assistance of technology, even though the end delivery may be virtually the same. With the onset of this principle in GST law, we would see a larger list of services being shifted to the tax net if the same were rendered through the e-commerce application.

CASH BURN

During early stages, e-commerce operators offer their goods/ services at penetrative discounts involving investment of substantial capital into their business. On account of these penetrative discounts, some of them face consistent operating losses and accumulation of input tax credit. In economic sense, the private equity capital is being used to subsdise the offerings of the start-up and build a market presence. Government is issuing notices to such start-ups on the ground of “HIGH ITC” utilisation (i.e. greater than 95 per cent) and lack of any cash payment, hence subjecting them to intense scrutiny. Section 15 provides for transaction value (i.e. price payable on the supplies) to be the basis for ascertaining the taxable supply. Transaction value could be adopted only if price is the ‘sole consideration’ for the supply and there is no flowback of any benefit back to the supplier. This reminds us of the legacy Fiat decision of the Supreme Court⁸ where it was stated that the transaction value cannot be adopted under a market penetrative pricing model since ‘price is not the sole consideration’ for a supply. Hence, the Court directed imputation of the price to the market prevailing prices. Subsequently, the CBIC stepped in to clarify that merely because sale is below cost, such cost/ imputed value cannot be adopted as the basis of assessment. The said ambiguity appeared to arise on account of absence of a legal definition of ‘sole consideration’. Excise law was designed to ascertain the duty on manufacturing activity rather than sale value. Moreover, even free supplies were amenable to excise duty at the time of their removal. In this backdrop, the Supreme Court believed that the true value of goods should be ascertained for imposition of the excise duty on manufacture.

The GST law is quite distinct and has been framed on the sales tax/VAT platform. Emphasis under this law is on the contracted price i.e. transaction value rather than the inherent value of goods. Since this was a multi-point levy (unlike a single point excise levy), free market perpetrators believe that any undervaluation would be compensated along the value chain and hence, value distortion in the chain may be avoided. This is in contrast with the Excise levy where goods are outside the tax net after its removal from the factory. Moreover, under the extant law, the term ‘consideration’ has been well defined to refer to any monetary value in response to or inducement of a supply. With a well-defined term present in the statute, the erstwhile decisions rendered under the excise regime can be certainly distinguished. In fact, the Supreme Court in a sales tax decision⁹, rejected any notional attribution to the transaction value and emphasised the adoption of actual sale price for purpose of taxation. This conceptual difference between excise and the GST law should be differentiating factor while applying the Fiat principle.

8. 2012 (283) E.L.T. 161 (S.C.)
9. Moriroku UT India (P) Ltd. Vvs. State of UP 2008 (224) E.L.T. 365 (S.C.)

The other risk would be for the revenue to allege that prices are subsidised by investment capital and hence, the said subsidy is includible as a part of the consideration in terms of section 15(2)(e). However, this remote issue can be addressed by establishing that investment capital is not directly relating to price, rather as part of the fixed capital of the start-up. Technology is omnipresent and one certainly cannot escape the use of technology in trade. Traditional business practices are being challenged and forced to extinction. GSTN has itself been built on a technology platform. The GST law is certainly catching up on the technological advancements and attempting to tax every possible aspect of transaction. While the services are intangible, tracing the flow of funds seems to be the key to identifying the transaction trail and the Income tax law is playing the Big Brother’s role in assisting GST to tax such transactions. Certainly, legal challenges would erupt and the judiciary would be entrusted with the daunting task of fixing the legal implication of e-commerce transactions. Though the earlier moral was to stick to the fundamentals of the transactions and avoid being influenced with the participation of technology, it now must undergo re-thinking and rejuvenation. The e-commerce generation surely views them differently, then why not the Government!!!!

shailesh.kwebmaker

Sectoral Analysis: Banking Sector

INTRODUCTION

The banking sector is the backbone of an economy. It not only acts as the guardian of monetary wealth but also aids in the economic growth of the nation by lending to various sectors of the economy. The sector is consumer-centric and therefore, a bank must be present where its consumer is. Therefore, a bank is required to have a branch in multiple locations across the country and at times, even outside India. This necessarily means that a bank must have sufficient human resources, apart from its’ technical resources which can serve its customer.

Considering the economic importance of the banking sector, it has always been regulated across the globe. In India, the banking sector is regulated by the Reserve Bank of India. The RBI has prescribed various norms for banks to follow, such as capital adequacy norms, assets classification, etc. A bank is required to hold a certain class of investments and therefore, there are frequent transactions of purchase / sale of securities. The complex network within which the sector operates results in peculiar issues from the GST perspective. In this article, we have attempted to analyse the various issues which plague the sector.

TAXABILITY OF REVENUE STREAMS

Interest Income

A bank carries out a range of activities for its clients and therefore, has different streams of revenue. Its core revenue is interest earned from lending activities, which has been exempted by entry 27 of notification 12/2017-CT (Rate). However, interest earned on credit cards is liable for payment of GST.

Processing charges

The next core revenue earned by the bank is processing charges levied when a customer applies for a loan or credit facility, or on an ongoing basis to service the loan. The said services are taxable. However, along with the processing charges, the bank also recovers a host of expenses from the account holder which it incurs while processing the application for loan/credit facility. For instance, in case of a loan against property or a loan for property, banks obtain a title search report to verify the ownership and title of the property. This service is generally obtained through an “on panel” advocate who provides the service, though the charges are recovered from the customer at actuals. The question that arises is whether such recovery is includible in the “value of service” provided or it qualifies as reimbursement on a “pure-agent basis”?Section 15(2)(c) of the CGST Act, 2017 which deals with inclusions in the value of supply provides that the value of supply shall include incidental expenses, including commission and packing, charged by the supplier to the recipient of a supply and any amount charged for anything done by the supplier in respect of the supply of goods or services or both at the time of, or before delivery of goods or supply of services. Therefore, while determining whether the reimbursement of expense needs to be included in the value of supply, it needs to be seen as to whether such expenses are charged by the bank to the customer or the advocate directly raises the invoice to the customer and the bank is only the medium through which the processing of payment takes place?

While one may be tempted to claim the benefit of pure agent under rule 33 of the CGST Rules, 2017, in most cases, the third parties are appointed by the bank, and as such, it may be difficult to demonstrate compliance with all the conditions of a pure agent. Further, the need for such third-party services is essentially necessitated by the banks, and as such the services can be said to be used by the banks. Therefore, it would be prudent to treat such reimbursement of expenses as part of the value of the services rendered by the bank and discharge GST accordingly.

Other charges recovered

Once a loan/credit facility is sanctioned, the bank starts receiving the revenue in the form of interest which is recovered from the client as per agreed terms. As discussed earlier, interest from lending activity is exempted from the purview of GST. However, at times, there are instances where the client defaults in making payment of the instalment, or the cheque given by the client towards payment of the instalment is not honored, etc. This also applies in the context of default in credit card payments. There are also instances where a client approaches the bank for repayment of loan/credit facility before its term, i.e., pre-closure which the bank permits on payment of charges termed in the industry as foreclosure charges. Banks also levy charges on pre-mature withdrawal of fixed deposits. The question revolves around taxability of such charges. We shall analyse the same as under:

a) Additional interest on delayed instalment/cheque bounce: When a customer delays payment of his loan instalment, banks levy additional/penal interest for such delay along with charges for cheque dishonour/ECS mandate rejection. The question that remains is whether such interest/charges are liable to GST or will they be covered under the exemption notification? So far as the additional/penal interest is concerned, it is apparent that the same is directly linked with the service of extending deposits, loans or advances and therefore, should be eligible for the benefit of exemption. This has also been clarified by the Board vide Circular 102/21/2019-GST.

Similarly, for cheque dishonor/ECS mandate rejection charges as well, the loan agreement itself provides that in the event of cheque dishonor/ECS mandate rejection, the bank shall levy charges on the customer. Such charges are also levied while providing the service of extending deposits, loans, or advances and therefore, should be eligible for the benefit of exemption. In fact, the Board has vide Circular 178/10/2022-GST clarified that such charges recovered are not a consideration for any service as they are like a fine or penalty imposed for penalizing/deterring/discouraging such an act or situation in the future.

b) Loan foreclosure charges: The Larger Bench of the Tribunal had in the case of Repco Home Finance Ltd. [2020 (42) GSTL 104 (Tri-LB)] had an opportunity to examine the taxability of such charges in the context of taxability under service tax. In this case, the Tribunal had held that the foreclosure charges are compensation for loss of future interest and therefore, cannot be considered as consideration for the performance of lending services, but imposed as a condition of the contract to compensate for the loss of “expectations interest” when the loan agreement is terminated prematurely. Therefore, foreclosure charges are nothing but damages that the banks are entitled to receive when the contract is broken. The Board has also examined the taxability of such charges in the context of GST and vide Circular 178/10/2022-GST clarified that such charges are not taxable. Therefore, a view can be taken that such charges are not taxable.

c) Fixed deposit foreclosure charges: A person deposits money in a fixed deposit account with a bank for a defined tenure. This is a commitment by the person that he shall not withdraw the money during the defined tenure. For the same, the bank offers a higher rate of interest as compared to the interest paid on the savings account. If a customer opts to close the fixed deposit before the expiry of the said term, the bank levies foreclosure charges, which are levied on the interest of the FD amount, i.e., the same will be deducted from the interest accrued/paid on account of the customer. In other words, the charges are more in the nature of a reduction in the interest paid to the customer, which is the cost for the bank. Therefore, the question of such foreclosure charge being a consideration for supply does not arise.

d) Interest on credit card charges: However, when a credit card customer defaults on making payment of a credit card bill and the bank levies penal interest/charges, the same will not be eligible for the exemption as the notification specifically excludes credit card interest. Therefore, such recoveries are liable to GST.

AUCTION ACTIVITY

In case of default in repayment of loans, the banks take possession of the mortgaged assets and auction the same to recover the outstanding amounts. Section 2(5) of the CGST Act, 2017 defines an agent to include an auctioneer and as such, the bank would be liable for payment of GST on behalf of the defaulting borrower by determining the applicable rate on the underlying product in case the auctioned asset is a moveable property.When banks undertake auctions, as a practice, the goods are auctioned on a “as is, where is” basis, i.e., the successful bidder is required to take the delivery of the goods from the location where the goods are warehoused. This concept of delivery on a ‘as is, where is’ basis presents certain challenges in view of the dual GST framework.

It is possible that the goods may be located in a State where the bank does not have an existing registration. In such a situation, the Department may argue that the supply is originating from the said State and therefore the bank should obtain a registration (maybe as a casual taxpayer) to discharge the GST Liability while the bank may plead that it is already registered in some other state and would discharge the GST liability from the said State. A similar issue in the context of an importer was presented before the Advance Ruling Authorities in the case of Gandhar Oil Refinery India Ltd 2019 (26) GSTL 531 (AAR), wherein the Authority has opined that the importer storing goods in a warehouse in Tamil Nadu need not register in Tamil Nadu and can discharge the GST liability from its existing registration in Maharashtra.

Another situation could be one where an Indian bank branch is auctioning goods located outside India. In view of Entry 7 of Schedule III, such an auction may not attract any GST.

A third situation could be that the goods being auctioned are located/stored in an SEZ Area. Since the goods are generally imported into a warehouse by filing a BOE for warehousing, they will qualify as warehoused goods and therefore, banks can take shelter under entry 8(a) of Schedule III of the CGST Act, 2017. However, the buyer will have to pay the applicable customs duty when after taking delivery; he is clearing the goods for home consumption.

In case the successful bidder is located outside India and intends to take the goods out of India after participating in an auction of goods located in India, in view of the terms of the auction contract, the delivery of goods vis-à-vis the bank terminates in the territory of India. The bank itself does not carry out the process of export and even on the shipping bill; the exporter details would not mention the IEC of the bank. In such a situation, the supply through the auction process may not qualify as export for the bank and GST would be payable.

ASSET RECONSTRUCTION ACTIVITY

One of the main challenges faced by banks is Non-Performing Assets (NPAs), i.e., cases where banks have advanced loans to their clients who have defaulted in repayment of these loans. In such cases, under the RBI framework, the banks transfer such non-performing debts to the Asset Reconstruction Companies at a mutually agreed value. For instance, a bank has an NPA of Rs. 100 crores. Post evaluation, it receives an offer from an ARC to purchase the NPA for Rs. 75 crores. In this scenario, the bank sells its’ NPA of Rs. 100 crores for Rs. 75 crores, i.e., at a loss of Rs. 25 crores and thus clearing its’ asset book of such NPA. On the other hand, the ARC starts the process of realizing the debt, and any excess amount recovered by them is treated as its’ profits.

A two-fold issue arises in the above transaction, namely:

1. Is the bank liable to pay GST on the sale of stressed assets to the ARC?

Entry 6 of Schedule III specifies that actionable claims would be considered as neither supply of goods nor supply of services. The term ‘actionable claims’ is defined under section 3 of the Transfer of Property Act, 1882 as under:

“actionable claim” means a claim to any debt, other than a debt secured by mortgage of immovable property or by hypothecation or pledge of movable property, or to any beneficial interest in movable property not in the possession, either actual or constructive, of the claimant, which the Civil Courts recognize as affording grounds for relief, whether such debt or beneficial interest be existent, accruing, conditional or contingent

As can be seen from the definition above, an actionable claim includes a debt that is not secured. In most of the cases, the debt is a secured debt and therefore a doubt arises whether such a sale of stressed assets can be considered as actionable claims and excluded from the purview of GST. It may be important to note that the term ‘actionable claim’ also includes a beneficial interest in the moveable property not in possession of the claimant. A mortgage in goods creates such a beneficial interest in the moveable property and at the time of sale of stressed assets, the said assets are not in possession of the bank therefore, it can be argued that the second limb of the definition of ‘actionable claim’ can cover such stressed assets and accordingly, the transaction should not be liable for GST

Even the FAQ issued by CBIC clarifies that where sale, transfer or assignment of debts falls within the purview of actionable claims, the same would not be subject to GST.

2. Is the ARC liable to pay GST on the profits earned by it?

The ARC, upon assignment of debt by the bank, would undertake efforts to recover the outstanding from the defaulting borrowers. Any amount realized directly from the borrowers would not be liable to GST as the same is a mere transaction in money. If the ARC ends up realizing a higher amount as compared to the consideration paid to the ARC for the acquisition of the stressed assets, no GST would be payable on the differential amount as the same is profit from its’ business activity and not a consideration for a supply.

However, if amounts are not directly recovered by the ARC, they will also have to take additional steps, such as taking possession of the assets (moveable/immovable), invoking guarantees, etc., against which the loan was given by the bank. If the moveable assets, possession of which is taken by the ARC are sold, the ARC would be liable to pay GST on the same as it would amount to supply of goods. However, in case of immovable assets, the liability to pay GST would not arise as the same do not constitute goods / services.

CHARGES FOR CROSS-BORDER TRANSACTIONS

Banks are the medium for cross-border monetary transactions and all payments to/from outside India need to be routed through banks. For facilitating such transactions, banks levy charges from their customers on which GST is levied.

However, in the case of inbound remittances, the originating banks/intermediate banks also levy charges which are deducted from the gross payments made, i.e., the ultimate recipient receives less money to that extent. For example, ABC, an exporter has raised an invoice of USD 100 to their customer in the US. The customer remits the amount through their bank in the US which levied USD 1 as bank charges and remits only USD 99 to ABCs’ account. The issue that remains is w.r.t liability of payment of GST on the same. Is the bank liable to pay GST under reverse charge and then charge to the customer or is it the customer himself who is liable to pay GST under reverse charge? This issue was examined by the Larger Bench of Tribunal in the case of Tata Steel Ltd [2016 (41) STR 689 (Tri-Mum)] wherein it was held that the liability to pay GST was on the recipient, i.e., ABC in this case under reverse charge mechanism.

CUSTOMER LOYALTY PROGRAMS

Banks generally undertake customer loyalty programs under two different models, which can be briefly explained as under:

a) The points can be redeemed at any approved store for the purchase of goods/services. The customer utilizes the accumulated points towards making payment for the said purchase. The store will recover the amount from the loyalty partner who will further raise the invoice to the bank with the applicable tax.

b) The bank, either directly or through their loyalty partner, gives the customer option of goods/services against which the accumulated points can be encashed. The loyalty partner will raise the invoice to the bank and arrange to deliver the goods/service to the customer.

c) In many cases, banks provide their customer access to lounge at airports. In this case, the service providers charge bank based on use of service by customer and charge GST for the same.

In each of the above cases, the question that arises is whether the bank will be entitled to claim the input tax credit. To determine the answer to the said question, the bank needs to first qualify as a “recipient”. Section 2(93)(a) defines the term recipient to mean the person who is liable to pay the consideration. This is not disputable in the current case and therefore, a view can be taken that the bank qualifies as a recipient. This takes us to other conditions prescribed under section 16 for claiming credit, and more specifically the condition relating to the receipt of goods/services (satisfaction of other conditions though relevant, are not analysed here). This is a classic example where the supply is being made under the Bill To / Ship To concept for which, it has been clarified vide explanation that in such scenarios, it shall be deemed that the recipient has received the goods/services.

This takes us to the next question of whether the input tax credit would be hit by provisions of section 17 (5) (h), i.e., goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples. A conservative view would be that the supplies received are given as a gift to the customer and therefore, are not eligible for an input tax credit. However, a more aggressive view that can be taken is that the supplies are not given free of cost to the customer. The points accrue to the customer on account of various transactions done by him with the bank (through which the bank receives bank charges). In other words, the bank charges levied by the bank factor the cost incurred towards the promotion activity. This is because the basis for the accrual of points is generally a part of the bank–customer agreement. A gift is generally meant to be something given out of ex-gratia. On the contrary, the rewards are arising out of a contractual obligation and therefore, it would be incorrect to treat them as a gift to deny input tax credit.

SAFE DEPOSIT LOCKERS

Banks also provide the service of safe deposit lockers to their customers for storing their valuables. Generally, the services are provided on payment of annual rent. However, banks also insist that the customer make a fixed deposit at the time of allotting the locker which will not be withdrawn during the period locker services are availed by the customer. Such services attract GST @ 18 per cent and may give rise to the following issues:

a) Determination of place of supply: Whether the place of supply will be determined under the property-based rule, i.e., section 12(3), i.e., services directly in relation to an immovable property or under the specific rule for banking sector, i.e., section 12(12)? While the applicability of section 12(3) itself is debatable as the services are storage services provided by the bank and not directly in relation to immovable property, the more plausible argument for section 12(12) would be that it is a specific provision and therefore, the same shall prevail over section 12 (3).

b) Valuation issue: It is possible that where the banks insist for a hefty/long term deposit, the officers may argue that the notional interest on the same is includible in the value of supply of the bank. However, such an interpretation is defendable as the deposit itself is interest-bearing, i.e., banks pay interest on such deposits at the same rate at which other customers, i.e., customers not operating a safe deposit locker with the bank are paid. Therefore, it can be argued that both transactions are unlinked and should be analysed independently.

FREE SUPPLIES AGAINST HUGE DEPOSITS / SATISFACTION OF CONDITIONS

In many cases, banks offer free services to their customers provided they invest a particular amount with the banks as a FD. For instance, various charges, such as NEFT/RTGS, chequebook issuance, etc., are waived for customers maintaining a minimum balance with the bank.

Similarly, for credit card customers, the annual charges for a particular year are refunded/for the next year are waived upon customer spending crossing the specific threshold limit.

The question that arises in the above scenarios is whether the bank has agreed to supply service to the customer where the price is not the sole consideration in which case the bank shall need to value the supply as per the valuation rules. In this case, one may refer to the decision of the Hon’ble SC in the case of Metal Box India Ltd [1995 (75) ELT 449 (SC)] wherein it has been held that when a lower price was charged to the customer on account of the huge deposit made by him, notional interest was includible in the assessable value. However, later on, in VST Industries Ltd [1998 (97) ELT 395 SC], the Court distinguished the above decision and held that where the deposit has no influence on the price charged from the customer, the notional interest is includible in the value of supply. The above principles would squarely apply in the context of GST as well since the Department is likely to argue that price is not the sole consideration and therefore, transaction value cannot be accepted. Infact, the AAR under GST has in the case of Rajkot Nagrik Sahakari Bank Ltd [2019 (28) GSTL 536 AAR] already held that the monetary value of the act of providing refundable interest-free deposit is the consideration for the services provided by the bank and therefore the same shall be treated as supply and chargeable to tax in the hands of the applicant.

To overcome the above, can the bank claim that the waiver granted is a pre-supply discount and therefore, eligible for deduction from the value of supply under section 15(3)? This would be a situation where the bank raises an invoice to the customer and on the invoice itself, discloses the waiver as a discount / subsequently raises a Credit Note claiming it as a pre-supply discount? This may not be a feasible solution as there cannot be an agreement for providing free service and the absence of consideration would render the contract void.

However, in the credit card example, the claim of pre-supply discount may sail through as the bank wants to encourage the customer to spend through credit cards, which gives a higher revenue to the bank in the form of charges from merchants and therefore, a view can be taken that the bank receives consideration from the third party for services rendered to the customer. Therefore, the waiver granted is a subsequent reduction in the value of supply in view of a pre-supply agreement with the customer.

GUARANTEE TRANSACTIONS

Banks also act as a guarantor to the transaction between two different parties. For instance, A (supplier) and B (recipient) intend to enter into a contract for supply of goods/services. However, B insists that A furnish a bank guarantee before the supply commences. Therefore, A approaches his bank and requests them to furnish a guarantee to B on behalf of A. For issuing the said guarantee, the bank levies a charge from A on which GST is applicable.

The above is a simple model of guarantee. There can also be instances where a customer approaches the bank to issue a guarantee in respect of transactions between different persons. For instance, A is a company incorporated in India. Its’ UK subsidiary, B intends to supply services to another UK-based company, C. For the transaction between B & C, C insists that A’s bank issues a guarantee to C since being a parent company, it has sufficient assets to provide such a guarantee. The question that arises is who is the recipient of the supply, A or B? A perusal of the definition of recipient would indicate that it is A who is the recipient by virtue of being liable to pay to the supplier of service, i.e., bank. Therefore, the Bank will be required to discharge GST on the same. Further, this may necessitate A to consider the transaction as a further supply by A to B (in the nature of a deemed supply) and raise an invoice to B. Similarly, in case of a reverse transaction, i.e., where A is outside India and provides guarantee for B, an Indian entity, the liability to pay tax under reverse charge would get triggered with corresponding valuation issues.

So far as government providing guarantees for its undertakings / PSUs is concerned, notification 11/2017 – CT(Rate) dated 28th June, 2017 exempts such services w.e.f. 27th July, 2018. However, for the prior period, the levy of GST is an open issue as the undertakings /PSUs would be liable to pay GST under reverse charge unless one is able to substantiate that such transactions are essentially sovereign functions.

SERVICE BY BUSINESS FACILITATOR / CORRESPONDENTS

Notification 12/2017-CT(Rate) dated 28th June, 2017 provides an exemption to services provided in the capacity of business facilitator/correspondent to a banking company with respect to accounts held in rural area branch and any person acting as an intermediary to a business facilitator / correspondent referred above.

DEEMED SUPPLY: INTERPLAY OF ENTRY 2 OF SCHEDULE I

As discussed earlier, a bank needs to have a multi-locational presence to cater to the various needs of its clients. This is not only in the form of branches, but also ATMs where the bank charges for use beyond the set limit. There can always be instances where the customer linked with a particular state uses the services of branch linked in a different state. In these cases, while the revenue lies in the home state, the expense for the execution of services is incurred by the executing state. The question that arises is whether the executing state has supplied any service to the home state in view of entry 2 of Schedule I of the CGST Act, 2017? In an earlier article (July 2019 BCAJ), the interpretation of Entry 2 of Schedule I has been elaborately discussed. The said principles will apply to the banking sector as well.

FOREIGN BRANCH – DOMESTIC BRANCH

A bank may also have branches in foreign countries. Indian citizens / Person of India origin may operate NRI/NRE accounts with the said branches. The foreign branches also provide services to domestic customers. For instance, a domestic customer travelling abroad avails the ATM facility installed in the foreign branch. Extending the above argument, such services shall be treated as import of services, and are liable for GST under Reverse Charge Mechanism.

If the transaction was reverse, i.e., customer of foreign branch availing the same service at Indian ATM, it would be a case of Indian branch providing service to foreign branch. In view of Section 2(v)(e) of the IGST Act, 2017, which provides that a service shall not be treated as export of service where the service provider and service recipient are distinct establishment of same person, export benefit cannot be claimed and there would be a GST liability on such a transaction. This aspect has also been clarified in the banking sector FAQs issued by the Board. However, notification 15/2018-IT (Rate) dated 26th July, 2018 exempts services supplied by an establishment of a person in India to any establishment of that person outside India, which are treated as establishments of distinct persons in accordance with Explanation 1 in section 8 of the Integrated Goods and Services Tax Act, 2017 provided the place of supply of the service is outside India in accordance with section 13 of Integrated Goods and Services Tax Act, 2017.

CROSS CHARGE VS. ISD

Similar issue would also arise in case of expenses incurred by the Head Office, such as administrative expense, advertising/marketing costs, etc. Logically, the expenses are incurred by the HO and the receipt of services is also by them, though the benefit is enjoyed across the board by the company. The question that remains to be considered is whether such expenses incurred would also require cross-charges or the ITC claimed needs to be distributed under the ISD mechanism? It may be noted that there is already a controversy on the issue of ISD vs. cross-charge on which the Board had shared a draft circular and then withdrawn it. In fact, in certain Commissionerates, taxpayers have received show cause notices denying ITC on cross-charge invoices alleging non-receipt of service, despite the tax being paid by the same legal person. Therefore, the issue is far from resolved and it remains to be seen as to how the Board and ultimately the Courts deal with the same.

RELATED PARTY TRANSACTIONS

In many situations, the bank is a part of a group transacting businesses in various financial services. Through its subsidiaries/group companies, the group engages in a host of other businesses, such as insurance, share broking, mutual funds, merchant banking, etc. While each of these businesses operates through separate legal entities, on a practical front, some facilities/services are used in common:

a) Use of common trade name /logo / stationery

b) Employees of the various entities operate out of the bank branch for easy access to the customers, thus using common premises.

c) Bank employees promoting the products of the group entities and vice – versa

d) Certain services received commonly for the group (for instance, insurance policy for all employees is under the cover of a single policy)

e) Common management overview over the operations of each entity and IT infrastructure

Apparently, there is an activity done by the bank for its’ subsidiary / vice-versa. In view of valuation provisions, it becomes necessary that each transaction be valued and applicable GST be discharged. Further, since the entities have an element of exempt supply, proviso to Rule 28 which provides that the transaction value shall be accepted in cases where full input tax credit is available may not be available and therefore, the banks will have to determine the value of such supplies at arms-length.

LOCATION OF SUPPLIER, RECIPIENT AND THE PLACE OF SUPPLY – THE NEVER-ENDING CONUNDRUM

As mentioned above, a bank is required to have multiple branches across the country, and at times, even outside India. A customer of the bank can obtain the services from any of its branches, which at times may not be in the same state. For instance, A holds an account with the Ahmedabad branch of PQR Bank Ltd. However, during his travel to Maharashtra, he approaches its Worli branch and carries out various transactions, such as generation of Demand Draft-based on balance in his account, offline NEFT/RTGS transfers, cash withdrawals, etc. The Worli branch provides the necessary service to Mr. A.

The above simple transaction gives rise to following GST implications:

a. Who is the supplier of services? PQR Maharashtra or PQR Gujarat?

b. What shall be the place of supply?

c. What shall be the consequences of incorrect LOS/ POS?

d. How shall PQR comply with entry 2 of Schedule I?

DETERMINING SUPPLIER OF SERVICE

The primary question that arises is who is the supplier of service for each type of service? Section 2(15) of the IGST Act, 2017 defines the location of supplier of service as under:

“location of the supplier of services” means, –

(a) where a supply is made from a place of business for which the registration has been obtained, the location of such place of business;

(b) where a supply is made from a place other than the place of business for which registration has been obtained (a fixed establishment elsewhere), the location of such fixed establishment;

(d) in absence of such places, the location of the usual place of residence of the supplier;

In the instant case, the supply is made contractually from Ahmedabad since the valid contract is executed at the time of opening of the account. However, the supply is made physically from Mumbai since the actual performance of activity is in Mumbai. In such a case, it can be argued that the Ahmedabad establishment is the most directly concerned with the provision of the service and the tax will be discharged under the Gujarat registration. However, in cases where the nature of service rendered is not interlinked with the operation of accounts, the location of the supplier can be considered as Mumbai.

DETERMINING PLACE OF SUPPLY

This takes to the next question of place of supply. Section 12 & 13 contains specific provisions for determining the place of supply in relation to services provided by banks. The same provides that the determination of place of supply depends on the location of recipient/supplier of services.

On perusal of the same, it appears that the definitions indicate that whether a recipient is registered or not, the intention is to attribute the place of supply to the location of the recipient. However, services being intangible in nature, it is generally not possible to pin-point the location where the services are actually received, especially in cases like banking services. To overcome such a situation, clause (d) provides that the location of the usual place of residence of the recipient shall be treated as “location of recipient of services.” Therefore, in the context of above example where services provided are linked to the account of Mr. A, his location is available to the bank in its records and therefore, the place of supply will be Ahmedabad, Gujarat irrespective of where the services are availed.

Complications might arise in cases where there are multiple addresses available on record of the bank. There can always be instances where an account holder provides two different set of addresses, one being permanent address and second being correspondence address. The issue that arises is which of the two shall determine the place of supply, especially when both the addresses are in different states? Can a view be taken that the correspondence address is more relevant towards determining the place of supply as it is likely that the customer is residing at such location? This remains an issue for the sector as it is very common that customers change their place of residence temporarily without any change in permanent address.

WRONG / INCORRECT LOS/POS

The next issue which the bank faces is the consequences of wrong location of the supplier / place of supply tagging for the customer. For instance, what would be the consequences if in the above scenario the bank considers the Worli branch as the location of supplier instead of Ahmedabad? The answer in most likelihood would be a likely recovery of tax on the same amount by the Gujarat Officer even though the bank would have discharged IGST from the Maharashtra declaring Gujarat as the place of supply, i.e., the tax would have ultimately flown to the coffers of Gujarat Government only under the settlement mechanism. In this scenario, it is also possible that the bank might not be in a position to even claim refund of tax paid in Ahmedabad in view of time-barring.

Similarly, if in the above scenario, the invoice was correctly raised from the Ahmedabad branch but since the services were “consumed” in Mumbai branch, the bank ended up determining the place of supply as Maharashtra and therefore, paid IGST on the supply. In such an instance also, the bank would end up with a demand notice for recovery of GST as per correct place of supply, i.e., CGST + SGST. Of course, the only saving grace would be the fact that it would be able to claim refund of the IGST paid (Section 21 of IGST Act, 2017 r.w. Section 77 of the CGST Act, 2017) This was so held by the Telangana High Court in Ola Fleet Technologies Pvt Ltd [(2023) 2 Centax 69 (Telangana)].

INPUT TAX CREDIT

Exempt income – restrictions on claiming of input tax credit

A seamless flow of the input tax credit is essential for a successful implementation of a value added tax like GST. However, this flow of input tax credit is hampered when the inward supplies received are used for making both, taxable as well as exempt supplies. As discussed earlier, the core revenue of a bank, i.e., interest from lending activity is exempted under notification 12/2017 CT (Rate) dated 28th June, 2017. To add to this, banks generally have substantial securities transaction, which though not leviable to GST (as securities are neither goods nor services for the purpose of GST), the value of transactions in such securities is includible in the value of exempt supply, thus triggering the need for reversal of proportionate input tax credit.For the same, the bank has two options, one is to follow the rigours of reversal of credits under section 17(3) r.w. Rule 42/ 43 of the CGST Rules, 2017. However, under this option, even the ITC accruing on account of cross-charge will be available on a proportionate basis. The second option available to the bank is to avail only 50 per cent input tax credit monthly. However, under this option, it has been clarified that the ITC on a cross-charge invoice shall be allowed in entirety. The bank has to choose which option it intends to exercise at the start of the financial year and once exercised, it cannot change its stance.

PROCEDURAL ASPECTS

1. Banks have been exempted from complying with the provisions relating to e-invoicing and dynamic QR Code.2. Normal taxpayers must raise the invoice within 30 days of completion of service while banks can raise the invoice within 45 days of completion of service. Therefore, the banks have an option to raise a single invoice for all charges levied during the month on a customer, instead of raising an invoice for each transaction.

3. Services provided by recovery agents to banking company are covered under reverse charge under notification 13/2017-CT(Rate) dated 28th June, 2017.

CONCLUSION

The BFSI sector is a very vast sector and has a substantial impact on the overall economy. While in this article, we have predominantly dealt with the banking sector, we shall deal with financial services and insurance sector in the subsequent article.

shailesh.kwebmaker

E-Commerce: Media or Mediator of Supply

INTRODUCTION

The internet revolution followed with the insurgence of mobility solutions has triggered an unprecedented growth in the e-commerce industry. Initially, emerging as a mere mediator of commercial transactions, e-commerce has now engulfed the entire traditional buy-sell and service delivery model into its wave. The start-up culture with its unconventional business models has further thrusted the steep degeneration of physical interface in commercial transactions. Moreover, with FDI limitations in multi-brand retail/ecommerce inventory trading, innovative techniques have crept into the transaction system. This has resulted in peculiar GST issues which are dealt with in the present article.

BUSINESS MODELS IN E-COMMERCE

E-commerce has been understood as buying and selling goods or services including digital products over digital or electronic network. The typical business models alive in the industry are:

Inventory Model: The operator owns and operates both the electronic platform as well as the inventory for supply of goods/services. He engages into a traditional buy-sell relationship with the end consumer (e.g. Brand Webstores).

Market Place Model: The FDI policy restriction has germinated this model for foreign PE funded companies in e-commerce retail space. The operator only owns the platform and provides ancillary functions in the form of logistics, packaging, collection and customer support. He does not own the inventory and projects itself as a platform where buyers and sellers transact with each other (e.g. Amazon/Flipkart). Sub-variants include aggregator of market-place (such as Trivago) which host multiple web platforms on one platform, akin to super-market place.

Aggregator Model: This is a variant of the market-place model where the operator plays a significant role in monitoring, influencing and pricing the commercial transaction (e.g. Uber). Not only does the aggregator perform a platform service but it also projects itself as a pseudo-service provider to the end customer.

Conversational Model: Social media platforms have made it possible for e-commerce companies to sell their products from their posts. Using this method, consumers are able to shop directly from their newsfeed. One could equate them with a super-market place assisting the market place in procurement of orders.

Each of these variants raise certain intriguing GST issues which have been addressed in the later part of the article.

LEGAL PROVISIONS ON E-COMMERCE

E-Commerce transactions are commercial transactions that take place through electronic networks. In legal sense, the terminology is with reference to ‘supply’ transactions which are executed over the internet network:

(44) “electronic commerce” means the supply of goods or services or both, including digital products over digital or electronic network;

(45) “electronic commerce operator” means any person who owns, operates or manages digital or electronic facility or platform for electronic commerce;

The phrase e-commerce has been adopted in two provisions: (a) section 9(5): ‘Tax shift mechanism’ where GST is being imposed on the E-commerce operator (ECO) as a deemed supplier of the services (Uber/Ola, etc); (b) section 52 – ‘Tax collection at source’ in cases where the e commerce operator is collecting payments on behalf of suppliers for orders received and fulfilled through the e-commerce portal, such an operator retains a portion of the sale proceeds as TCS which is deposited to the Government treasury (Amazon/ Flipkart, etc).

RATES/EXEMPTIONS INFLUENCED BY THE E-COMMERCE BUSINESS

Rate/exemption notifications have been customised for businesses operating under the ecommerce model. Some of them are:

– Entry 23 and 25 provide for taxation of house-keeping services (such as plumbing, carpentering, etc) classifiable under SAC 9985 and 9987 when supplied through an ECO provided input tax credit has not been availed, even though the individual suppliers are below taxable threshold limits and otherwise not taxable;

– Entry 17 and 15 provides for exemption to transportation of passengers in specified cases. But the exemption is not available if the service is supplied through ECO who is liable to pay tax under section 9(5)

SCOPE OF THE TERM ‘E-COMMERCE’ & ‘E-COMMERCE OPERATOR’

E-commerce supplies are generally contracted online but are performed/delivered either in on-line or off-line mode depending on the nature of supply and the customer requirements –variations are tabulated below:

Contractual Mode	Performance/Delivery	Payment	Example
Offline	Online	Online	Banking services
Online	Online	Online	NetFlix
Online	Offline	Offline/Online	Amazon
Offline	Offline	Online	UPI transactions

The narrow issue under consideration is whether adoption of electronic mode is with respect to the contractual mode (for ease we call it ‘contractual supply’) or with reference to mode of performance/ delivery (‘performed supply’). There is absolutely no doubt in cases where both events (i.e. contract to performance) takes place over digital networks; the doubt arises where either one of the commercial elements takes place through physical mode. This debate leads us to (a) basics of supply; (b) the meaning of the phrase supply ‘over digital network’; and (c) contexts in which this phrase is used in the GST scheme.

SUPPLY IS CONTRACTUAL OR PERFORMANCE DRIVEN?

Taking a step back to the charging provisions, the scope of supply under section 7 is: sale, transfer, barter, exchange, license, rental, lease or disposal. These are legally recognized contracts with an obligation on the supplier for performance of certain acts. As a noun, it would refer to the genre of contract and the interpretation would tilt towards the ‘contractual supply’ rather than the ‘mode of performance’. The scope of supply also uses the phrase ‘made or agreed to be made.’ This implies that the scope of supply would stand with reference to the mode of agreement. If this is to be juxtaposed into the above analysis, it appears that supply is triggered the moment a contract comes to birth, and is not prolonged until performance/ delivery.

Alternatively, if supply is understood as a verb, then one would understand it to involve the actual performance obligations undertaken by the supplier. Traditionally, supply involved performance of obligations and counter obligations e.g. sale involves a transfer of property in goods for consideration; services in the nature of lease, license, etc, involve the promise of grant of use of a premises in consideration for a consideration. Historically, Courts have concurred that tax on services is on ‘rendition of service.’¹ Mere agreements for sale were not considered as taxable events under the ambit of sales tax law.² The GST law should not deviate on the fundamental principle that mere agreements should not form basis for imposing a tax levy. Though the tax may be collectible on advances or agreements, the said liability crystallises only on performance of the supply (i.e. rendition of service or sale of goods). While this is a debated topic, some implicit cues from the Government’s own circulars may indicate that performance is a necessary ingredient of supply:

– Circular³ on liquidated damages states that ‘performance is the essence of a contract’ and non-performance results in loss/damages which is not intended to be taxed, thus implying that without performance tax may not be imposable;

– The circular⁴ on fake invoicing also states that the person merely issuing bills is not to be subjected to tax but only penalty in the absence of a supply a.k.a. movement of goods;

– Section 34 provides for issuance of credit notes for reversal of tax payments on account of tax charged being in excess of tax payable, which includes cases where supply is not performed;

– Circular⁵ indicates eligibility of refund on advances for cancelled contracts where supply was not performed.

1. AL&FS v/s. UOI 2010 (20) S.T.R. 417 (S.C.) & AIFTP v/s. UOI 2007 (7) S.T.R. 625 (S.C.)
2. 1954 (5) TMI 17 SC Sale Tax officer vs.. Budh Prakash Jai Prakash
3. No. 178/10/2022-GST 3-8-2022
4. No. 171/03/2022-GST 6-7-2022
5. No. 137/07/2020-GST 13-4-2020

If performance is the basis of understanding supply, the definition of E-commerce should be apply only where ‘performance’ is over digital network rather than mere contracting over digital network. The consequence of these two extremes is laid down for better understanding:

SUPPLY ‘OVER’ E-COMMERCE – WIDE INTERPRETATION OF CONTRACTING USING DIGITAL NETWORK

Toeing the wide interpretation of supply to refer to ‘contractual supply’, ECOs, who facilitate digital communications and order confirmations through digital networks, would be covered and subjected to E-commerce provisions. In real-world scenarios the following could be classifiable as E-commerce transactions:

Contract Mode	E-commerce operator	Performance	Example	Classification
Email	Internet service provider (ISP)	Physical	All transactions	E-commerce
Telephonic	Telecom service provider (TSP)	Physical
Web-portal	ISP	Physical

In today’s digital era all communications/contracts which take place over digital network would be engulfed into this wide interpretation. The only transaction which would be excluded would be the ones which take place over the counter. Consequently, all ISP/TSPs would be conferred as the ECOs and provisions of section 52 could be said to apply to all such transactions which are settled through their online systems. Section 24 would then mandate everyone to compulsory obtain registration without applying the threshold limit in which case the threshold limit of 20 lakhs would become a dead letter. Is this the probable intention of the law? We will hold onto the conclusion until examining other forms of interpretation.

SUPPLY ‘OVER’ E-COMMERCE – NARROW INTERPRETATION

Paying attention to the phrase ‘over’, it appears that the same has been used as an ‘adverb’ to the function of supply (which can be understood as a verb – refer supra). As an adverb to the verb, dictionaries indicate that the term represents a passage or trajectory over which the act is performed. The emphasis in the definition is then on the actual ‘performance’ of the supply obligations (refer discussion above) over digital networks. A narrow interpretation would demand that the definition of e-commerce would be applicable only for digital goods and services performing or passing through the digital network and cannot extend to physical world supplies even-though the agreement or order took place over the digital network. Unless and until the supply i.e. performance takes place over digital network (which is possible only for digital products and/or services), it would not amount to an ecommerce transaction. In the absence of a regulatory supervision, an appointment of an intermediary in the web of digital services would assist the Government in collecting the TCS and building a ‘crawler’ mechanism to identify the supplier in the digital format.

In contradistinction, supplies of goods through Amazon/Flipkart, where the delivery takes place at the doorstep, cannot be considered as an E-commerce transaction. Narrow interpretation demands that supply is performance driven and not merely contract driven i.e. sale and physical delivery should also take place over digital network. Online marketplaces perform services of displaying the product, recording orders, receipt of payment and coordinating the logistics. The subject-matter of contract performance is taking place in the real world through physical performance and hence one may contend that Amazon/Flipkart not falling within the GST understanding of ‘e-commerce’.

SUPPLY ‘OVER’ E-COMMERCE – REASONABLE INTERPRETATION

Naturally, the above views would face immediate resistance on perception as well as legality. The three-fold challenge would be (a) the context of the phrase (section 9(5) or 52 of GST law) encompass cases where even mere agreement or arrangement of the supply takes place through digital network – the very operation of ‘Tax shift’ or ‘TCS mechanism’ is linked to the core function of e-commerce being a facilitator of supply rather than engaging in performance itself; (b) the definition of e-commerce operator signifies a role distinct from that of a supplier, as one who owns, operates or manages a digital network for e-commerce transaction and does not extend to performing the subject supply. It also includes digital products and services separately implying that non-digital supplies would also be covered in the initial part of the definition; (c) FAQs and other government material suggests that Ecommerce operators like Amazon/ Flipkart are intended to be covered in this model and no indication has been made to narrow the scope to digital goods/ services only.

While on one hand, the wide interpretation of E-commerce results in the inclusion of all possible transactions as e-commerce, leaving none out of its fold, narrow interpretation limits inclusion only of digital products or services that are completely performed over electronic network, hence leaving the popular transactions over Amazon/ Flipkart outside its fold, making the other substantive provisions (TCS/ Tax-shift) very limited in operation. Naturally, this confusion would guide us onto a balanced interpretation on following contextual reasons:

– For tax shift mechanism to function under section 9(5), one needs a de-facto supplier which is then substituted with an ECO as a de-jure supplier (refer discussion below) – simple objective being administrative convenience to collect the same from a single point who aggregates all the supplies under an umbrella;

– TCS mechanism (including GSTR-8) is aimed at collecting taxes at the source of a supplier performing supplies of goods or services and receiving the payments through the ecommerce portal though tax is finally payable by the supplier;

Both these contexts indicate that e-commerce is intended to be a mediator of supplies wherein three parties must be necessarily involved. Where the e-commerce operator is the performer of supply itself (such as NetFlix), such transactions would stand excluded from TCS mechanism in the absence of a third party. Unless pure digital supplies are routed through online aggregators TCS provisions should not be invoked. This view also synchronises well with the amendments in GSTR-3B form in table 3.1.1 where separate tables have been now provided for reporting the taxable supplies at both points (a) at the ECO through whom the supplies have been performed under section 9(5) (b) exclusions of the corresponding value at the registered person’s end who performs the supplies through ECO under section 9(5). The industry appears to have accepted this reasonable view and implemented the law accordingly.

TAX SHIFT MECHANISM – SECTION 9(5)

E-commerce operators operating as ‘aggregators’ are governed by the Tax Shift mechanism under section 9(5). This section states that the e-commerce operator is liable to tax on specified categories of services (presently cab travel, accommodation, house-keeping, restaurant services). The e-commerce operator is deemed as a supplier (‘deemed supplier’) instead of the de facto supplier and consequently all provisions applicable to the suppliers extend even to the ecommerce operator. There is a stark difference between the reverse charge mechanism specified in section 9(3)/(4) and the said tax-shift mechanism under section 9(5). Reverse charge provisions fixes the ‘recipient’ of a supply (possessing contract privacy) to discharge the tax liability. Moreover, since this tax liability is not an output tax for the recipient, it has to be necessarily discharged through cash payment rather than input tax credit.

On the contrary, the tax shift mechanism fixes the tax liability onto a third party i.e. beyond contracting parties (i.e. supplier and recipient). It is intended to apply where an e-commerce platform aggregates all the suppliers and recipients (‘Aggregator’) and the parties formalize their agreement through the e-commerce aggregator. Since the aggregator is a central database of all agreements executed through it, the administration thought it fit to fix the liability (of otherwise unorganized service providers) on the e-commerce operator.

Therefore, by legislative choice the e-commerce operator, though an intermediary in the transaction is placed into the shoes of the supplier for GST purposes.

Now this tax shift scheme does not have a separate code. It operates within the entwines of regular provisions as applicable to other suppliers. Hence, all provisions should be read as applying to the e-commerce operator performing the supply of goods itself. Consequently, statutory responsibilities otherwise entrusted on the de-facto suppliers are now placed onto the ECO i.e. (a) ascertainment of character of inter-state/intra-state supplies (b) classification and/or rate of tax – composite/ mixed supply (c) fixation of time and value of supply (d) claim of input tax credit (e) discharge of output tax liability (f) apply for refunds (if any), etc. Consequently, all legal actions would operate against the ECO de-hors the taxable status of the actual supplier who performed the service – for example, revenue action would be taken on Uber for all rides booked through its application even-though the actual cab service was rendered by unregistered/non-taxable individual cab-driver to the passenger.

INPUT TAX UTILISATION FOR TAX PAYMENT UNDER SECTION 9(5)

It is certain that ECOs would have accumulated the input tax credit on account of the IT development and back-end functions. Apart from discharging its own liability on platform service fee, they may still possess the accumulated input tax credit (esp. in cases where the ECO is burning cash). Therefore, one would wonder whether the input tax credit accumulated through the platform business (say Zomato and Swiggy) would be eligible for utilisation/discharge of output taxes under the Tax-Shift mechanism – in other words whether the tax liability of a restaurant that has been shifted to the ECO by the way of deeming fiction can be discharged through electronic credit ledger balance standing to its account.

As stated above, the deeming fiction of section 9(5) does not merely fix the tax liability on the ECO – it treats the ECO as a supplier for all purposes of the Act. Such deeming fiction must be given a strict interpretation and taken to its logical conclusion. Where the law has fixed the ECO as a supplier for all purposes including the tax obligations, in the absence of a specific bar, the input tax credit otherwise eligible to the ECO on the platform business should, as a natural consequence, devolve upon such ECO.

In this context, the following clarifications of the CBEC⁶ may also be worth observing:

“2. Would ECOs have to mandatorily take a separate registration w.r.t. supply of restaurant service [notified under 9(5)] through them even though they are registered to pay GST on services on their own account?

As ECOs are already registered in accordance with rule 8 (in Form GST-REG 01) of the CGST Rules, 2017 (as a supplier of their own goods or services), there would be no mandatory requirement of taking separate registration by ECOs for payment of tax on restaurant service under section 9(5) of the CGST Act, 2017

3. Would the ECOs be liable to pay tax on supply of restaurant service made by unregistered business entities?

Yes. ECOs will be liable to pay GST on any restaurant service supplied through them including by an unregistered person.

6. Would ECOs be liable to reverse proportional input tax credit on his input goods and services for the reason that input tax credit is not admissible on ‘restaurant service’?

ECOs provide their own services as an electronic platform and an intermediary for which it would acquire inputs/input service on which ECOs avail Input Tax Credit (ITC). The ECO charges commission/fee etc. for the services it provides. The ITC is utilised by ECO for payment of GST on services provided by ECO on its own account (say, to a restaurant). The situation in this regard remains unchanged even after ECO is made liable to pay tax on restaurant service. ECO would be eligible to ITC as before. Accordingly, it is clarified that ECO shall not be required to reverse ITC on account of restaurant services on which it pays GST in terms of section 9(5) of the Act. It may also be noted that on restaurant service, ECO shall pay the entire GST liability in cash (No ITC could be utilised for payment of GST on restaurant service supplied through ECO)

5. Can the supplies of restaurant service made through ECOs be recorded as inward supply of ECOs (liable to reverse charge) in GSTR-3B? No, ECOs are not the recipient of restaurant service supplied through them. Since these are not input services to ECO, these are not to be reported as inward supply (liable to reverse charge).”

6.    167/23/2021-GST, dated 17-12-2021

Now, the circular makes certain critical points: (a) registration of ECO as a platform service provider and as an ECO can be under one number implying that they need not be distinct persons under law; (b) the tax liability of ECO ought to be discharged necessarily in cash; (c) input tax credit on platform business is permissible to be availed and utilised in terms of section 49 (d) the ECO is not a recipient of services, and hence does not pay tax as RCM. This leads us to the provisions to verify if law bars utilisation of input tax credit to discharge tax payable under section 9(5) as an ECO.

Manner of Payment of Tax: Section 49(4) provides that electronic credit ledger may be used for ‘any payment of output tax’. Rule 86(2) also states that the said ledger could be debited to the extent of ‘any liability’ in terms of section 49, 49A or 49B. Output tax under section 2(82) has been defined in relation to a taxable person, as tax chargeable on taxable supply of goods or services or both made by him or by his agent but excludes tax payable by him on reverse charge basis. Therefore, neither the definition of output tax nor section 49 provide for a separate legal treatment for payments of tax under section 9(5).

Input tax Credit Rationing: Similarly, provisions of section 17(2) r,w,s. 17(3) bar input tax credit only where the ‘recipient’ is liable to pay tax on reverse charge basis. Reverse charge has been defined under section 2(98) as a liability imposed on the ‘recipient’ under section 9(3)/9(4) and does not make any reference to liability imposed under section 9(5). Therefore, the ITC legal provisions do not also place any specific bar on payment of tax liability under section 9(5) through accumulated input tax credit.

The above analysis could be applied for restaurant services operated through Swiggy/Zomato. The notification prescribing the rates of taxes to restaurant services7 bars the availment of input tax credit used in supplying the restaurant service. Explanation (iv) to the said entry provides that credit used exclusively in supplying the said restaurant services as well as common credits may be reversible on proportionate basis in terms of section 17(2) of the GST law (‘credit rationing provisions’). The fine point which needs to be appreciated is that rate notification conditions as well as provisions of section 17(2) aim at credit rationing at the ‘stage of availment’ and not at the ‘stage of utilisation’. Validly availed input tax credit which have already passed the credit rationing test (such as platform business which is completely taxable) and accruing to the electronic credit ledger, should be available for utilisation of the ‘deemed output tax’ of the ECO under the tax shift mechanism. The difference in availment and utilisation is also evident from the entry for real estate developers which not only bars the availment of ITC, but also bars utilisation (payment) of the output tax liability through input tax credit. The entry for a restaurant does not place any such embargo on input tax credit utilisation.

This issue takes us back to the service tax regime where reverse charge provisions were made applicable to the service recipient as a deemed service provider. Until the amendment in Cenvat regime, input tax credit was permitted to be utilised for payment of tax on reverse charge basis⁸ since the RCM provisions were treated at par with output tax. Adopting these service tax precedents, one could certainly consider paying taxes under section 9(5) through utilisation of input tax credit despite the Circular’s contrary view.

8.   2012 (25) S.T.R. 129 (P & H) CCE vs. Nahar Industrial Enterprises Ltd; 2014 (33) S.T.R. 148 (Mad.) CCE vs. Cheran Spinners Ltd

TAX COLLECTION MECHANISM

Section 52 provides for collection of tax at source where:

– ECO is not operating as an agent;

– Consideration in respect to supplies are collected by ECO;

Unlike the tax-shift mechanism, the said provisions are purely machinery provisions intended to collect taxes at a convenient point and build a transaction trail. The ECO, being in possession of the funds realised from supply of goods or services, has been tapped by the Government as its tax collecting representative. However, the final tax liability on such supplies would be assessed at the supplier’s end and not at the ECO’s end. Moreover, tax liability, rates, exemptions, etc would also be examined at the supplier’s end and ECO would not have any role to play in tax ascertainment. The said provision also provides that any discrepancy in data populated on the GST system would be communicated to the ECO and the supplier, and tax liability arising therefrom would be recoverable from the supplier. ECO’s liability is extended only to collection of taxes at source and its remittance to the Government.

Whether ECO can discharge the said TCS through input tax credit? The answer is a clear NO. This is because section 52 directs the ECO to collect an ‘amount’ rather than ‘output tax’; whereas section 49 clearly directs ‘amounts’ to be discharged through electronic cash ledger and not through the electronic credit ledger.

AGENCY IN E-COMMERCE

Provisions of section 52 are not applicable if ECO operates as an agent of the supplier. The phrase ‘agent’ has been defined under section 2(5) as being factor, broker, commission agent or any other person who carries the business of another person in representative capacity. Many ECO’s in today’s time perform the following:

– List the products over its platform;

– Promote products through listing preferences;

– Collect orders and transmit the same to the suppliers;

– Collect payments on behalf of the suppliers;

– Manage customer returns through their call centre support;

– Influence the product pricing, etc

The circular⁹ also emphasises the definition under section 182 of Contract Act to state that a principal agent relationship is present in case the agent has the authority to represent and bind the principal with its actions. Invoicing has been adopted as a critical factor in assessing whether the agent possess representative character in such transactions.

9.    No. 57/31/2018 dated 4-9-2018

In many instances, online market place perform clinching actions which make them agents. It is not unknown that marketplaces influence product pricing of suppliers listed on their platform through Flash/ Big Billion-day sales, etc. They also develop systems where invoices are issued by their platform for sales made through them. Payments are also routed through their system and the marketplaces deduct their commissions prior to disbursing the sale proceeds to suppliers. These features make certain ECO’s as agents and hence all GST implications applicable to principal-agent relationships (Schedule-1, etc) would fall upon the ECO. While implications under GST can be addressed and neutralised, the larger concern for such ECO’s emerge on the FDI and Income tax front. The FDI policy may hold them as being engaged in retail trading and hence violating FDI regulations. Income tax would hold that ECOs (especially non-resident in India) as operating in India through agents would be taxable in India. This is a touchy subject and ECOs in the zest for market share sometimes go overboard and expose themselves to tax and regulatory vulnerability.

ONLINE DATABASE AND RETREIVAL SERVICES (OIDAR)

OIDAR was introduced as concept to tax digital services in B2C scenarios under the service tax era and carried forward into the GST regime. Service providers outside India having digital footprint in the country were not subjected to any taxation. B2B OIDAR services were in subjected to RCM taxation in the hands of business recipients under regular provisions.

OIDAR has been defined to apply where services are necessarily mediated through internet or electronic network, and so automated that involves either no or minimal human intervention. The scope of OIDAR services has been further spread-out to include all electronic services such as advertising, cloud services, music/video/textual content, database services, online gaming, etc. The wide expanse of such definition naturally places question on the outer limit of the definition. CBEC circulars¹⁰ have clarified that mere order processing or communication of outcomes over internet does not make the services as OIDAR. The essence of OIDAR is that suppliers do not involve any physical exchange with the recipient, and services are delivered entirely over the internet through an automated process – for example pre-recorded video courses were OIDAR but live streaming of the very same course is excluded therefrom.

10.    No. 202/12/2016-S.T., dated 9-11-2016

The OIDAR scheme requires the non-resident service provider to assess whether the recipient of their services resides in India through certain parameters (such as address, credit/debit card issuance, IP address, bank account number, SIM country code, etc). By virtue of the digital footprint, the service provider is required to either establish a physical presence or appoint a representative for performing the tax compliances in India.

OTHER ISSUES

In summary, E-commerce has influenced the revenue administration to develop special provisions to address the peculiarities of this sector. Moreover, the sheer volumes and digitisation of the transactions sometimes makes it impossible for one to ascertain the fundamental character of the transactions. ECOs should thus disclaim their responsibilities not just in agreements but also in their acts and insulate from any regulatory risks. ECO startups are adopting innovative marketing techniques to increase their customer base through promotional or incentive programs. Some of them include exclusive co-promotion programs, cash-backs/ incentives, loyalty discounts/points, etc. These issues would be taken up in the subsequent articles.

shailesh.kwebmaker

RCM on Real Estate Regulatory Costs

In continuation to the series on Real Estate (RE)
sector, the current article is oriented towards the GST implications on
statutory / regulatory costs incurred by the RE developer during
construction of a project. This is significant on account of reverse
charge provisions which have been made applicable to RE promoters /
business recipients when availing services from Governments (Central /
State / UT or local authority). This article would be taking forward the
concepts laid down in the previous articles on reverse charge
provisions made applicable for RE developers (July 2023 issue) and
Government services (February 2019 issue).

BACKGROUND
The
Indian administration operating under the executive function has been
designed under a multi-layered structure comprising the Union
Government, State Government, Municipality or Panchayaths and other
corporations, boards and committees. Primary functions of economic
development and social welfare have been assigned to these
constitutional bodies. Such bodies either perform the entrusted
functions under its own umbrella or form a board / corporation / entity
and assign those functions to such person (termed as ‘Instrumentalities
of State’). This is done with the purpose of better financial and
operational efficiency and autonomy in implementing the government’s
plans.

Section 9(3) of CGST/SGST Act, 2017 imposes tax on
reverse charge basis on recipient business entities availing services
from the Central Government, State Government or Union Territory as
follows:

Sl No:

Category of Supply of Services

Supplier of Service

Recipient of Service

Services supplied by the
Central Government, State Government, Union territory or local authority to a
business entity …

Central Government, State
Government, Union territory or local authority

Any business entity located
in the taxable territory.

Services supplied by the
Central Government, State Government, Union territory or local authority by
way of renting of immovable property to a person registered under the Central
Goods and Services Tax Act, 2017 (12 of 2017)

Central Government, State
Government, Union territory or local authority

Any person registered under
the Central Goods and Services Tax Act, 2017

Services supplied by any
person by way of transfer of development rights or Floor Space Index (FSI)
(including additional FSI) for construction of a project by a promoter.

Any person

Promoter

Long term lease of land (30
years or more) by any person against consideration in the form of upfront amount
(called as premium, salami, cost, price, development charges or by any other
name) and/or periodic rent for construction of a project by a promoter

Any person

Promoter

Prior to fastening the reverse charge tax liabilities on RE
developer on costs discharged to the Government, an assessment ought to
be made on whether all the ingredients of ‘supply of services’ have been
satisfied in terms of section 7 of the CGST / SGST Act, 2017. To
reiterate, the critical ingredients of “supply of service”:

“7. (1) For the purposes of this Act, the expression “supply” includes––

(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a (1) consideration by a (2) person in the course or (3) furtherance of business;”

Thus,
RCM would be applicable on the recipient only on transactions covered
under section 7, i.e., the test is whether the Government(s) are persons
engaged in business for a consideration and considered as a ‘supplier
of services’ under the CGST/SGST Act, 2017. It is to be examined through
a sequential analysis of whether the transaction is (i) chargeable as a
supply; (ii) specifically excluded from the chargeability under section
7(2) or Schedule III; (iii) classification as a supply of service in
terms of Schedule II; (iv) availability of an exemption; (v) deferment
in time of supply.

One may also note that the GST law has
recognised a three-layered government operating structure. At the
primary level, it has recognised functions performed directly by the
Government or local authority; at the secondary level, it has identified
governmental authorities and at the tertiary level, it has identified
government entities performing certain functions as instrumentalities of
State. RCM is applicable only on availing services from Government
while other services availed from Governmental authorities are subjected
to certain exemptions. Therefore, the scope of each entry should take
cognisance of the type of authority concerned, i.e., whether
‘Government’ or ‘Local authority’, ‘Governmental authority’ and
‘Governmental entity’.

Government & local authority — Scope

Article
12 of the Indian Constitution defines a ‘State’ to mean, Central
Government, Parliament, State Government, State Legislature, local or
other authorities. This definition had undergone significant judicial
scrutiny where Courts have developed a six-pronged test to assess
whether even body corporates / corporation falls within the definition
of ‘State’. The Government’s operation and administrative control,
financial assistance have been primary factors to include even PSUs,
Regulatory Boards and Corporations within the term ‘State’. The GST law,
however, refrains from using the said phrase and has adopted a narrower
term for the purpose of taxation. The constitutional understanding of
‘State’ should not be mixed with the statutory meaning of the term
‘Government’.

Under section 2(53) of the CGST Act, 2017,
‘Government’ means the Central Government. As per clause (23) of section
3 of the General Clauses Act, 1897, the ‘Government’ includes both the
Central Government and any State Government. As per clause (8) of
section 3 of the said Act, the ‘Central Government’, in relation to
anything done or to be done after the commencement of the Constitution,
means the President. As per Article 53 of the Constitution, the
executive power of the Union shall be vested in the President and shall
be exercised by him either directly or indirectly through officers’
sub-ordinate to him in accordance with the Constitution. Further, in
terms of Article 77 of the Constitution, all executive actions of the
Government of India shall be expressed to be taken in the name of the
President. Therefore, the Central Government means the President and the
officer’s sub-ordinate to him while exercising the executive powers in
the name of the President.

Similarly, as per clause (60) of
section 3 of the General Clauses Act, 1897, the ‘State Government’, as
respects anything done after the commencement of the Constitution, shall
be in a State, the Governor, and in a Union Territory, the Central
Government. As per Article 154 of the Constitution, the executive power
of the State shall be vested in the Governor and shall be exercised by
him either directly or indirectly through officers’ subordinate to him
in accordance with the Constitution. Further, as per article 166 of the
Constitution, all executive actions of the Government of State shall be
expressed to be taken in the name of Governor. Therefore, State
Government means the Governor or the officers’ sub-ordinate to him who
exercise the executive powers of the State vested in the Governor and in
the name of the Governor. All actions performed under the authority of
the President of India or Governor of a State are treated as Central
Government / State Government functions.

Local authority is defined in clause (69) of section 2 of the CGST Act, 2017, and means the following:

• “Panchayat” as defined in clause (d) of article 243 of the Constitution;

• “Municipality” as defined in clause (e) of article 243P of the Constitution;

• Municipal Committee, a Zilla Parishad, a District Board, and
any other authority legally entitled to, or entrusted by the Central
Government or any State Government with the control or management of a
municipal or local fund;
• …………..;

Therefore, a body
set up under the specific provision laid herein would only fall within
the definition of local authority. One of the important criteria for
treatment of an authority as a local authority is that the authority
concerned should be entrusted with the control or management of a
municipal or local fund. For example, State Governments have set up
local developmental authorities to undertake developmental works like
infrastructure, housing, residential and commercial development,
construction of houses, etc. Examples of such developmental authorities
are Delhi Development Authority, Bangalore Development Authority, etc.
The Supreme Court in UOI vs. R C Jain¹ examined
whether Delhi Development Authority was a ‘local authority’ in terms of
section 3(31) of the General Clauses Act, 1897 (containing a similar
phraseology). Based on certain tests which have been laid down to assess
whether an authority falls within this domain, it was held that Delhi
Development Authority is a local authority. However, the decision did
not have an elaborate exposition of entrustment of local or municipal
fund and hence, such a decision cannot be said to settle the issue. In
the advance ruling in Indian Hume Pipe Co. Ltd²
the question was whether Water Supply Board constituted under an
enactment is considered as a local authority. The AAR held that the
water supply board was not entrusted with State Government funds but was
generating its own revenue as an autonomous body. Hence, it was not a
local authority but a Governmental authority for the purpose of the
exemption notification. Despite the water board being set up by the
Government for implementing the entrusted functions under the
Constitution and an autonomous body aimed at better accountability /
efficiency, the same would not be considered as a local authority.

Similar
question would arise for statutory body, corporation or an authority
created by the Parliament or a State Legislature Government or local
authority? Such statutory bodies, corporations or authorities are
normally created by the Parliament or a State Legislature in exercise of
the powers conferred under article 53(3)(b) and article 154(2)(b) of
the Constitution respectively. The Supreme Court in Agarwal vs. Hindustan Steel³
held that the manpower of such authorities or bodies do not become
officers subordinate to the President under article 53(1) of the
Constitution and similarly to the Governor under article 154(1). Such a
statutory body, corporation or an authority as a juridical entity is
separate from the State and hence cannot be regarded as the Central or a
State Government and do not fall in the definition of ‘local
authority’. Thus, such corporations would not be regarded as the
government or local authorities for the purposes of the GST Acts. These
entities would be ‘Governmental entities’ and not Governments for the
purpose of GST. For a service to fall under RCM, it must be provided by
the Central Government, State Government, Union territory or local
authority. Any service provided by an entity not falling within the said
terms, as examined above, shall not be covered for the purpose of RCM
levy.

____________________________________________________________

1 (1981)
2 SCC 308

2 2023
(73) G.S.T.L. 117

3 AIR
1970 Supreme Court 1150

Government as ‘Taxable Person’

A
taxable person is legal person who is registered or liable to be
registered. A legal person is recognised by law as a subject which
embodies rights, entitlements, liabilities and duties. To be a legal
person is to possess certain rights and duties under law and be capable
of engaging in legally enforceable relationships with other legal
persons. Section 2(84) of GST law defines a ‘person’ to include a
Central Government or State Government. This definition is in the
company of many other legal person who have rights, duties and power to
enter into contractual relationships. While Government is a
constitutional body entrusted with executive functions, the objective of
including Central Government / State Government in the definition of
person under a tax legislation having a commercial character is to
identify scenarios were Governments functions as commercial entities. By
specific inclusion, the intent has been to include Governments and
avoid any ambiguity merely because of the Status of being a
‘Government’. Yet, where governments function as statutory or
constitutional body without any enforceable relationship by the counter
party, it should remain outside the scope of the phrase ‘person’ in the
GST context.

Government ‘in Business’

A business
activity is generally understood as one which is organised and
systematic arrangement of affairs for the purpose of earning income/
profit. Section 2(17) defines business to refer to:

(a) any
trade, commerce, manufacture, etc., whether or not for a pecuniary
benefit whether or not it is for a pecuniary benefit; and includes

(b)
any activity or transaction undertaken by Central Government or State
Government or any local authority in which they are engaged as ‘public
authorities’.

Both these clauses are relevant for the purpose of
whether Government is in business. The primary clause refers to the
general understanding of business where Government would engage in
organised and systematic manner of commercial transactions akin to
commercial entities. The secondary clause attempts to widen the scope of
business activities to include activities or transactions where
Governments are functioning as ‘public authorities’. The phrase ‘public
authorities’ has not been defined under the GST law but has been defined
under the Right to Information Act as follows:

“(h) “public authority” means any authority or body or institution of self government established or constituted—
(a) by or under the Constitution;
(b) by any other law made by Parliament;
(c) by any other law made by State Legislature;
(d) by notification issued or order made by the appropriate Government,
and includes any—
(i) body owned, controlled or substantially financed;
(ii) non-Government organisation substantially financed,
directly or indirectly by funds provided by the appropriate Government;”

This
phrase specifically includes the Central / State Government which are
constituted under the Constitution or Parliament / State Legislature and
function as public authorities. Even where government functions through
its autonomous instrumentalities, the definition of public authority
seems to include such authorities and their functions within its scope.

The Delhi High Court in BIS Ltd case⁴ was
examining whether regulatory functions entrusted to an authority would
amount to carrying on business merely because a fee is charged from the
user. The Court held that BIS was set up for general public welfare and
that a fee being charged, which resulted in profits, does not by itself
take away the primary feature that BIS is a statutory body and
performing sovereign and regulatory functions. This was followed in the
decision of ICAI vs. Director of Income tax Exemptions⁵.
While these decisions seem to attract us to a conclusion that
regulatory bodies may not be subjected to tax on account of being a
non-business body, we should appreciate that the definition of business
is wide enough to even include non-pecuniary activities. Moreover, with
the amended definition to include Government performing functions in its
status as a ‘public authority’, there seems to be a definitive
direction that such statutory bodies can be regarded as engaged in
business activities.

_____________________________________________________

4 Bureau
of Indian Standards vs. CIT 258 ITR 78 (Del)

5
ICAI vs. DGIT Exemptions (2013) 358 ITR (91)

Government as a Supplier of services for consideration

As
observed above, the GST law has specified that Government is a taxable
person and can be said to be in business even when exercising public
authority functions. The moot question which then needs to be answered
is whether Government is a supplier of services for consideration?

The
definition of supply under section 7 of GST law has enlisted
transactions having commercial character such as ‘sale’, ‘transfer’,
‘barter’, ‘exchange’, ‘lease’, ‘license’, etc. We are aware that the
definition of service is all encompassing to include all activities or
transactions other than those being goods, money or securities. Reading
this definition in conjunction with the scope of supply under section 7,
one understands that services which are contractual in nature and
performed against consideration by a person who is in business are
liable to GST. Government has been specifically included as a person
under law and treated as engaged in business in cases where it functions
in the capacity of a public authority. The challenge is to segregate
cases where Government functions as a sovereign authority and cases
where it functions as a commercial body. Only those transactions when
undertaken as commercial bodies for consideration in form of quid pro
quo would fall within its scope.

At the basic level, activities
which are sovereign in nature carried out by the Central Government,
State Government, Union territory or local authority in the capacity of a
“sovereign” or constitutional body cannot be regarded as “services” and
hence cannot be brought to tax? Seven judges’ Bench of the Supreme
Court in the case of Bangalore Water Supply and Sewerage Board vs. A Rajappa⁶
had an occasion to examine as to what can be considered as a “sovereign
function” in connection with a dispute under the Industrial Disputes
Act, 1947. There was a difference of opinion in the said case between
the Judges as to what can be considered as a “sovereign function”. By
majority a restricted meaning was given to the said term to only include
specified categories of so called ‘inalienable functions’ like defense,
making peace or war, foreign affairs, acquisition of a territory and
the like where the State is not answerable to the Courts. Subsequently,
in State of UP vs. Jai Bir Singh (Appeal (Civil) 897 of 2002) observed
that “The concept of sovereignty in a constitutional democracy is
different from the traditional concept of sovereignty which is confined
to ‘law and order’, ‘defense’, ‘law making’ and ‘justice dispensation’.
In a democracy governed by the Constitution, the sovereignty vests in
the people and the State is obliged to discharge its constitutional
obligations contained in the Directive Principles of the State Policy in
Part IV of the Constitution of India. From that point of view, wherever
the government undertakes public welfare activities in discharge of its
constitutional obligations, as provided in Part IV of the Constitution,
such activities should be treated as activities in discharge of
sovereign functions falling outside the purview of ‘industry’. The
matter is before a nine-judge bench for final consideration.

___________________________________________________

6 [1978]
2 SCC 213

On a more micro analysis, a supply would
entail an activity or transaction undertaken by the Government in
reciprocation of a consideration. A compulsory exaction in the nature of
tax does not entail a reciprocal obligation to the tax payer. Moreover,
the definition of business states that the transaction should be
‘undertaken by’ the Government. Where there is no activity undertaken by
the Government at all, there cannot be a supply itself. Where
government collects fees as part of its regulatory function, the
Government does not seem to be performing a reciprocal act apart from
engaging in overall public welfare activity. For e.g., regulating the
height of a building is not for the sole benefit of the builder, rather
the primary object is to ensure that the surrounding public
infrastructure is not over-burdened due to unregulated construction.
There is no direct transaction undertaken by the Government on this
front. Therefore, one should examine the function by placing the
Government in the centre of the transaction rather than the recipient.
If the Government cannot be termed as undertaking a transaction, there
cannot be a supply by the Government for RCM to be invoked. Another
contrasting instance could be the example of Government imposing a tax
on hoardings placed on private land. The land belongs to a private party
and the Government is collecting the tax for public welfare. As against
this, the Government also permits placement of hoardings in public
areas against a specific fee. This is against a permission to use public
property for private purpose. While the former transaction is a
statutory function, the latter is a transaction of commercial character
and hence a supply of service.

Certain cues can be obtained from Circulars of the Government. Firstly, the CBEC in the context of service tax had vide Circular No. 89/7/2006 – S.T⁷ clarified
that fee collected by sovereign / public authorities while performing
statutory functions / duties under the provision of law would not be
exigible to service tax. Said circular reiterated an established
principle that payment/ fee levied and collected by Government
authorities under the mandate of a statute are compulsory levy and
cannot be treated as provision of any service (by such Government
authority) to any person / entity for a consideration. Subsequently, Master Circular No. 96/7/2007-S.T⁷
clarified that activities assigned to and performed by the
sovereign/public authorities under the provisions of any law are
statutory duties. The fee or amount collected as per the provisions of
the relevant statute for performing such functions is a compulsory levy
and deposited into the Government account. Such activities are purely in
public interest and are undertaken as mandatory and statutory
functions. These are not to be treated as services provided for a
consideration. Therefore, such activities assigned to and performed by a
sovereign / public authority under the provisions of any law, do not
constitute taxable services. Any amount / fee collected in such cases
are not to be treated as consideration for the purpose of levy of
service tax. This circular also recognises that Government can
simultaneously function as commercial bodies. In such cases even if a
sovereign/public authority provides a service, which is not in the
nature of statutory activity, and the same is undertaken for a
consideration (not a statutory fee), then in such cases, service tax
would be leviable as long as the activity undertaken falls within the
scope of a taxable service. Therefore, the Circular re-iterates a fairly
reasonable proposition that the mere status of the provider as being a
government should not exclude it from the definition of service.
Emphasis ought to be placed on the substance/ nature of the fee
collected rather than being influenced by it being a statutory body.

____________________________________________________

7 dt
18.12.2006 & dated 23-8-2007

Subsequently, after the introduction of
the negative list regime, it was clarified vide Circular No.
192/02/2016-S.T., dated 13th April, 2016 that any activity undertaken by
a Government or a local authority against a consideration constitutes a
service, and the amount charged for performing such activities is
liable to service tax. It was immaterial whether such activities are
undertaken as a statutory or mandatory requirement under the law and
irrespective of whether the amount charged for such service is laid down
in a statute or not. As long as the payment is made (or fee charged)
for getting a service in return (i.e., as a quid pro quo for the
service received), it has to be regarded as a consideration for that
service and taxable irrespective of by what name such payment is called.
It is also clarified that service tax is leviable on any payment, in
lieu of any permission or license granted by the Government or a local
authority. Despite this circular, the requirement of quid pro quo, i.e.,
an enforceable exchange of promises between the Government and the
counter party was very much the ingredient for taxation. The very same
circular also discusses above the Government’s role while approving the
change in land use. The said circular clarifies that regulation of land
use is a public welfare function and any fee collected for this purpose
cannot be termed as a service.

In the context of GST as well,
the CBIC Circular No. 178/10/2022-GST, dated 3rd August, 2022 on
liquidated damages examined the scope of an entry in Schedule II. The
circular discussed at length the necessity of a contract and performance
of contract along with corresponding consideration for imposition of
GST. Therefore, the phrase supply seems to have an implied pre-requisite
of contractual obligations and enforceability of counter promises of
supply and consideration for it to be treated as a taxable transaction.
Therefore, statutory or sovereign functions which are not enforceable
under contractual obligations or are a compulsory impost would not be
susceptible to reverse charge provisions.

Recently, the Supreme
Court had the occasion to examine the mandi fees charged by Agricultural
Market Produce Committees (APMCs) under an enactment in Krishi Upaj Mandi Samiti vs. CCE⁸.
The argument of the assessees that such fees are statutory levies and
hence mandatory was negated on the ground that the statute has used the
phrase ‘may levy’ on the occupants of the mandi. Such being the
phraseology of the enactment, one cannot contend that the impost is
mandatory and hence outside a service provider–recipient relationship.
Moreover, the fact that such services were specifically placed in the
negative list after 1st July, 2012 implied that such activities were
considered as a service under the pre-negative list regime. Therefore,
one should be mindful of the nature of levy while reaching a conclusion
that a cost is a statutory function and hence, outside tax ambit.

_______________________________________________

8 2022
(58) G.S.T.L. 129 (S.C.)

Neither supply of goods or services

Section
7(2) of GST law notifies certain activities or transactions undertaken
by Central / State Government or any local authority when they are
engaged as ‘public authorities’ as being treated as neither supply of
goods or services. Vide notification 14/2017-CT(R) dated 28th June,
2017, the following entry has been introduced:

“Services by
way of any activity in relation to a function entrusted to a Panchayat
under article 243G of the Constitution or to a Municipality under
article 243W of the Constitution.”

By virtue of this entry
under section 7(2), all services ‘in relation’ to a function entrusted
by the State Government to a Panchayat or Municipality in relation to
plans for economic development and social welfare are outside the tax
ambit. Once an activity or a transaction being a service is considered
as performed by the Municipality/ Local Panchayat by virtue of the
constitutional powers entrusted as public authorities in terms of
Article 243G/243W, then such services need to be further examined for
RCM implications in the hands of the Developer.

In addition to
the primary function of economic development and social justice,
reference can be made to the list of functions being entrusted to the
Government or local authorities under the Eleventh & Twelfth
Schedule. Functions relevant for the RE sector are as follows: (a) urban
planning including town planning, (b) regulation of land-use and
construction of buildings, (c) planning for economic and social
development, (d) provision for urban amenities and facilities such as
parks, gardens, playgrounds. In exercise of these powers, the State
legislature have legislated local municipality and town planning acts
which enforce certain norms for sanction of construction plans and
collection of fees for the said purpose. Elaborate discussion on this
aspect is performed in the ensuing paragraphs.

Specific Exemptions on Government / Local authority functions

In
terms of section 11(1) of CGST / SGST Act exemptions have been
introduced for certain functions performed by the Government / Local
authority. The important exemption entries are:

Sl. No.

HSN

Description of Services

Rate (per cent.)

Condition

Chapter 99

Services by governmental authority by way of any
activity in relation to any function entrusted to a municipality under
article 243 W of the Constitution.

Nil

Chapter 99

Services by a Governmental Authority by way of
any activity in relation to any function entrusted to a Panchayat under
article 243G of the Constitution.

Nil

In terms of this entry, all ‘governmental authorities’ which
are formed for the purpose of functions entrusted to the municipality /
panchayat under the similar article 243G/243W fall in its scope. The
phrase governmental authority has been defined in the notification as
follows:

“Governmental Authority” means an authority or a board or any other body,

(i) set up by an Act of Parliament or a State Legislature; or
(ii) established by any Government,

with
90 per cent or more participation by way of equity or control, to carry
out any function entrusted to a Municipality under article 243W of the
Constitution or to a Panchayat under article 243G of the Constitution.”

Therefore,
Boards or Corporations which are set up under a statute or established
by a government and controlled by the Government are forming part of the
exemption. In terms of scope, notification issued under 7(2) exclude
transactions which are performed by the municipality / panchayats
themselves while the exemption notifications grant exclusion to similar
activities which are entrusted to Boards or Corporations by the State.

Examination of Statutory / Regulatory Costs

Now,
the regulatory fees or charges which are imposed on RE developers need
to undergo these filters for imposition of tax under reverse charge
provisions. Each of the above filters are examined and some possible
costs which can claim shelter of these filters have been detailed below:

1) Excluded from the scope of services

The
classic type of RE cost which is excluded from the scope of service is
the stamp duty imposable on the instrument creating or altering
immovable property rights. Courts (refer below) have articulated the
difference between a tax and a fee and clearly stamp duty falls under
the former. Further, CBEC had clarified in 192/02/2016-S.T. (supra) that
taxes, cesses and duties are not consideration for any service and
hence not liable to service tax. Stamp Duty costs incurred on the
instrument conveyancing land title, etc., are compulsory imposts. They
are imposed under the respective state stamp enactments on specified
instruments. Clearly, such costs cannot be termed as a service rendered
by the Government. Even though the measure of stamp duty may be on the
value of the land being conveyed, that by itself cannot alter the
character of stamp duty from being a tax and not a consideration for a
service.

Along with stamp duty, documents are also subject to
registration fee under the respective registration act. The fee for
registration is for registering the documents, maintenance of registers,
searching the registers, etc. The provision of the Registration Act,
1908, has been enacted for mandatory registration of various documents
to ensure conservation of evidence, prevention of fraud and assurance of
title. This appears to be for the benefit of the public at large
including the registrant. Such registration charge is not towards any
‘activity or transaction’ undertaken by the Government. The act of
registration is not a reciprocal obligation or transaction for the
benefit of the registrant. It is a statutory / public welfare function
and hence a compulsory impost. This should be distinguished from a
person who pays a fee to the Registrar of Lands for inspection of
documents which are already registered. While the registration charges
are statutory, the fee for the database search / inspection and printing
of documents would be a service fee against a specific request and
service rendered to the applicant.

A five-judge bench in the case of Hingir-Rampur Coal Co Ltd⁹ by referring the earlier decision of the Court in Shri Shirur Math¹⁰
case examined the difference between a tax and a fee. The obvious
difference between them has been that a tax is a compulsory exaction of
money for public purposes enforceable by law and not towards services
(‘inherent nature test’). While this difference involves subjectivity,
the court also elaborated other factors which should be considered. Even
if the fee is statutory and compulsory in nature, where the fee is
collected for a corresponding identifiable benefit to the person or area
from which it is being collected (akin to a ‘quid pro quo’ or
‘reciprocal promises’ test), such fee would be distinguishable from tax.
The measure of the fee would also have a bearing and if the measure is
excessive beyond a commercial character, then in such case, it would
have the character of tax (‘reasonable measure test’). Where the
collection is attributed to the general pool for welfare, such
collection is towards tax whereas if the collection is to defray the
expenses incurred to provide the benefit to the payer, then such
collection acquires the character of a fee (‘end use test’). Therefore,
stamp duty and registration charges may fall outside the scope of supply
itself.

____________________________________________________

9 (1961)
2 SCR 537 – AIR 1961 SC 459

10 ‘Commissioner, Hindu Religious
Endowment, Madras v Sri Lakshmindra Thirtha Swamiar of Sri Shirur Mutt (1954)
SCR 1005

2)
Treated as neither supply of goods or services under section 7(2)
as being public authority functions entrusted by the Constitution by
virtue of Article 243W/G;

RE developers incur costs
pertaining to building license for construction as per local
municipality or panchayat norms. The said cost incurred as fee by the
local authority for approving and supervising the building sanction
plans. The said charged are authorised to be imposed by the Town
Planning Act. Section 7(2) excludes public authority functions entrusted
under Article 243W/G and town planning falls within the list of
functions under the constitution. While there may be a debate on there
being a quid pro quo in such activity, the said matter may become
slightly academic on application of the section the subject transaction.

To reiterate, the service tax circular (supra) has
categorically stated that charges towards land use and license
permission for building construction are statutory and regulatory costs.
Moreover, being enlisted as part of the municipal functions under
Article 243W/G, they stand specifically excluded as part of section 7(2)
of CGST/SGST Act, 2017. Accordingly, said costs do not form part of the
RCM pool for the RE developer.

3) Costs which are penal or towards compounding offences

RE
developers may also be imposed with penal or compounding costs for
structural deviations from the sanctioned building plan. These are
statutory costs in nature and imposed by the local authority /
municipality. These being penal in nature and arising because of a
breach of statutory regulations. The compounding fees prevent the RE
developer from demolition / penal implications. Such compounding fee is
not towards a service. While one may argue that Schedule II may be
invoked as being a cost for ‘tolerating an act’, the CBIC circular
178/10/2022-GST (supra) has very well elaborated the
pre-existence of a contract for toleration to invoke the said entry.
Legal consequences from contracts or statutory penalties cannot be
emerging from an ‘agreement’ between the parties and hence, cannot take
the colour of a deemed service under Schedule II.

4) Covered by Specific Exemptions

Certain
costs are imposed by Housing Boards or Water boards, which are
constituted by the respective Governments. These housing boards are
either set up under an enactment or directly function under the
operational control of the Government concerned. In terms of the
definition of ‘governmental authority’, the said Boards are eligible to
qualify as Governmental authority. These authorities perform the
Government functions as their instrumentalities under a separate
operational body. Where the said functions are falling within the list
of functions under the Eleventh / Twelfth schedule (i.e., urban planning
or town planning or construction), the said section would treat them as
exempt services and hence not liable for taxation under reverse charge
provisions.

Typical costs which can fall under this bucket are
those pertaining to obtaining no-objection certificates from Fire Safety
Boards, Airport authorities, Pollution Control Boards, etc. Where these
authorities have been set up as autonomous bodies under Government
control, they can fall within the scope of ‘Governmental authority’ and
subjected to the exemption. One may have to ensure that the functions
performed by the said authorities are those entrusted under Article
243G/W of the Constitution.

Another exemption entry available to
RCM developer is the monetary exemption of Rs. 5,000 for services
availed from Government(s) or local authorities. Therefore, minor costs
such as road-cutting permissions, etc. could claim the benefit of this
entry where the overall costs do not exceed the specified limit. It may
be noted that this entry is not a standard exemption but a threshold
limit for eligibility and any cost above this threshold would be
entirely taxable under RCM.

5) Utilisation of FSI / DR received as compensation for land acquisition

Similarly,
the municipality or development authority issues development right
certificates to the land owners against surrender / acquisition of land.
The said certificates are either usable for the same property or
transferrable to other person for use within the same municipality.
These DRs are a consideration against surrender of land rights to the
authority. There has been a debate on whether issuance of DRs / FSI to
the land-owner and the permission to use to the RE developer against
subsequent utilisation of the DRs constitutes a service by the
municipality. Be that as it may, even assuming this is a service, the
provisions of section 7(2) may be applied as being part of town planning
functions by the local authority and hence, excluded from the ambit of
taxation. Once this is satisfied, the requirement of examining the RCM
notification (Entry 5B) may not be necessary.

That apart, one
also needs to examine whether RCM is applicable on tradeable DRs/FSI if
the same is purchased from a private party after issuance by the
Government. This is because, unlike other services, the RCM entry for
DRs/ FSI specify that RCM would be applicable even where the service
provider is not a Government/ Governmental authority. This requires a
microscopic comparison of the DR / FSI RCM entry with other entries. The
RCM table has three columns (a) category of service subject to RCM (b)
service provider (c) service recipient liable to pay tax. The first
column defines the instances when a service would fall under the RCM
table, the second column defines the service provider and the third
column defines the service recipient. Re-iterating the base entry as
follows:

“Services supplied by any person by way of transfer of development rights or Floor Space Index (FSI) (including additional FSI) for construction of a project by a promoter.”

This
part of the RCM entry specifies that RCM would be applicable where DRs
are used for construction of a project by a promoter. The entry
specifies the category of service and provides the end-use of the said
service for RCM to be triggered. Critically, this entry does not specify
the ‘service provider’ of the DR. DRs/FSI are issued tradeable
certificates and change multiple hands after issuance to the landowner.
On reading this entry, it appears that DRs which are issued to the
landowner can be sold for ultimate use by the RE developer in
construction activity. Such trading takes place through multiple land
aggregators / intermediaries and finally rests with the RE developer. If
one reads the RCM entry, it appears that all intermediate transactions
of DRs are covered by this RCM entry. Implying that once the sale of DRs
/ FSI are covered by the RCM entry, the tax would be paid only by the
end promoter who uses it for construction activity. All the
intermediaries can claim exclusion from taxation on the ground that the
RCM entry makes a general statement of taxing all DRs / FSI only in the
hands of the promoter and no one else. Hence, the provisions of section
9(3) are to be applied at the stage of RE development only, i.e., its
end use. This view also obtains traction when it is compared with other
RCM entries. Take for example the GTA entry. Column (2) of the RCM table
not only specifies the service category but also specifies the service
provider — implying each leg of the service would have to be checked
vis-à-vis its service provider. But the DRs/FSI entry is generic in so
far as it does not specify the service provider. Being a generic RCM
mandate (akin to generic exemption) and not a service provider specific
entry, one can claim that RCM is a single point tax rather than a
multi-point imposition. Hence, RCM would be applicable only at the
end-use of the DRs / FSI at the RE development stage.

While this
view is certainly novel and aggressive, the contra-position would be
that section 9(3) specifies that recipient would be liable to RCM. GST
being a multi-point transaction specific levy, it should be examined at
each leg independently and not wait for the end-use to be reached for
assessing taxation. Moreover, recipient defined under the parent statute
is the transactional recipient and not the end-use recipient (a.k.a.
beneficiary). This understanding of the parent statute should also
extend to the RCM notification and a different version of recipient
cannot be adopted for the RCM entry alone. In such a case, transaction
involving TDR intermediaries would be liable to tax under forward charge
at each level. The last leg of the DR/FSI sold to the RE Developer
would be liable for RCM at the developer’s end. This interpretation
makes the entire DRs a financially unviable model and would not only
cause RCM outflow at the RE developers end, it also causes ITC denial at
the intermediary level who sells the DR/FSI to the RE developer. To
overcome this difficulty, some intermediaries are adopting the agency
model and recovering a commission on the TDR sale and excluding
themselves from the agony of dual tax burden. In light of this, former
interpretation has reasonable legal and commercial viability in DR / FSI
transaction.

5A) Lease Rights / Premium for Government lands

Similarly,
Government is monetising its assets by granting long-term lease to RE
developers under BOT / BOOT model. As an example, Indian Railways is
aggressively venturing into monetising their lands under this model.
Lease premiums are being collected for long-term lease under this model
by grant of land rights to the RE developer. Now the RCM entry provides
for imposition of GST on a RE promoter availing long-term lease (beyond
30 years) for construction of a RERA project. The grant of long-term
lease by the Government of its own property for private benefit under a
contract is clearly a supply of service in terms of section 7 read with
Schedule II. This transaction cannot also claim exclusion from tax ambit
under section 7(2) as it does not directly fall under the functions
entrusted to a municipality / panchayat.

The Bangalore Tribunal in Karnataka Industrial Area Development Board¹¹
examined the issue of taxability of services provided by the KIADB
including renting of immovable property. The Tribunal placed heavy
reliance on the Bombay high court in MIDC’s case¹² to
conclude that such activities are a statutory function and do not fall
within the scope of services. The Tribunal also recognised the contrary
ruling in Greater Noida Industrial Development authority’s case¹³
which stated that this is not a statutory function but a service
arrangement where offers were invited and a particular party was
selected as being eligible for the contract — but the Tribunal recorded
its reservation in applying the decision on account of the stay of the
Supreme Court on this order. Under the GST context, the tenability of
the favourable decisions may be questionable on account of the expansive
manner of defining business and taxable person, which dilute the
argument that statutory / public authority functions are always outside
the scope of services. In summary, one can view this as a quid pro quo transaction and RCM provisions may become applicable to the RE promoter.

______________________________________________

11 2020
(40) G.S.T.L. 33 (Tri. – Bang.)

12 2018
(9) G.S.T.L. 372 (Bom.)

13 2015
(40) S.T.R. 95 (All.)

6) Supply but Not of a ‘service’ and hence not liable to RCM

RE
developers obtain water connections from authorities or board for the
construction of project. The charges for such water supply are in the
nature of procurement of goods. Charges paid towards temporary
electricity connections during the construction of the project are also
purchase of electricity as goods. Since this transaction qualifies as
supply of goods, RCM notification applicable for services would not
apply to such cases.

7) Commercial costs

RE
developers also incur commercial costs such as placement of hoardings at
public places, etc. These are fees paid for a clear commercial nature
involving a quid pro quo and hence, subject to the RCM. This revenue is
generated by the local authority while functioning as a public
authority. Yet, this is akin to formulating contractual relationship
with the Government. These activities would fall within the scope of
services and liable to RCM.

Coupled with the above analysis, one
should not lose sight of an important analysis of whether RCM falls
within the 80–20 rule calculation in terms of the construction services
notification. Whether government services which are commercial in nature
and liable for RCM would fall into consideration in the 20 per cent
bucket of unregistered costs and excluded from RCM. The principles were
analysed in the earlier issue on RCM and the questions emerging were
whether compliance of RCM provisions under section 9(4) (unregistered
RCM) overrides the requirement of section 9(3) (specified RCM). This is
because the rate schedule carries a specific overriding entry for
services availed by the promoter from unregistered persons even though
they may also be covered by another tax entry notification. This entry
seems to prevail and hence, the applicability of RCM under section 9(3)
could be questionable. Therefore, services by government departments to
RE promoters can be examined from this view point as well and not
subjected to additional RCM beyond this rule.

The above RCM
analysis provides merely a starting point to provoke thoughts on this
subject. The subject is wide enough on account of Government activity
being subjected to fair amount of litigation on being a question
bringing a private arrangement versus a private function. Developments
in executive action have led to asset monetisation of Government assets
and innovative approaches are being adopted to generate alternate
streams of revenue to the exchequer. Certainly, RE developers are also
taking part in the Government’s plan for asset monetisation, and RCM
would certainly need to be factored as a significant cash outflow / cost
in project viability.

shailesh.kwebmaker

Input Tax Credit for Real Estate Sector

INTRODUCTION

Real
estate is undoubtedly one of the most complex sectors, be it from the
perspective of levy of tax, quantification of tax or the claim of input
tax credit. This is perhaps because there are different facets involved,
as a transaction of sale of constructed unit is not a simple
transaction of sale of goods or services but is a complex transaction
involving transfer of land / share in land, transfer of goods in the
execution of contract and the provision of services of construction.
From the perspective of indirect taxes, a contract for sale of unit, be
it residential / commercial, is a works contract also involving the
transfer of land / share in land.It is for this reason that
under legacy laws, i.e., VAT and service tax, a lower tax rate was
prescribed. For instance, in VAT, in Maharashtra, the sector had an
option to pay tax at a standard rate of 1 per cent of agreement value
while service tax was levied on 1/4th of the agreement value or 1/3rd of
the agreement value. While the rate prescribed under VAT law was a
composition scheme, meaning no corresponding input tax credit for the
dealers, under service tax, the taxpayer was eligible to claim CENVAT
credit, though only on input services, i.e., credit of tax paid on
capital goods and inputs was not available. This restriction on claim of
input tax credit was through a conditional notification, which provided
for an abatement in the value of taxable services resulting in an
effectively lower rate vide notification 26/2012-ST dated 20th June,
2012 as amended from time to time.On the other hand, under GST,
there was no upfront restriction on claim of input tax credit initially
as works contract was deemed to be a supply of service and the builder
was entitled to claim full input tax credit of tax paid on goods and
services received in the course or furtherance of business. However,
notification 11/2017-CT (Rate) dated 28th June, 2017 which prescribes
the rate of tax for services provided that in case of supply of service
involving transfer of land or undivided share of land, the value of
supply shall be 2/3rd of the total amount charged for such supply.Subsequently,
w.e.f 01st April, 2019, the tax regime for the real estate sector
underwent substantial changes. The projects were classified into two
categories, namely:

a) Residential Real Estate Project: A
project in which carpet area of commercial apartments is not more than
15 per cent of total carpet area of all apartments in the REP. The
effective tax rate applicable on outward supply was reduced to 1 per
cent / 5 per cent with a condition of no corresponding input tax credit.

b)
Other than RREP: A project other than Residential Real Estate Project,
wherein the total carpet area of commercial apartments was more than 15
per cent of total carpet area of all apartments. While the tax rate on
residential apartments was reduced to 1 per cent / 5 per cent with no
corresponding input tax credit, the commercial apartments continued to
be taxable at 12 per cent with eligible input tax credit.

However,
for ongoing projects, the taxpayer had an option to continue pay tax
under the existing rates or pay tax under the new scheme. In case of
ongoing projects where the option to pay tax under the new tax rate was
applied, the developer was also required to reverse the input tax credit
attributable to construction which has time of supply on or after 1st
April, 2019. Simply put, the formula for determining the ITC reversible
is:

Essentially, therefore, the eligibility to claim input tax credit is now restricted
only for ongoing projects where the option to pay tax at lower rate of 1
per cent / 5 per cent was not exercised or commercial units in other
than RREP project where the tax rate continues to be 12 per cent.
Further, vide a Removal of Difficulty Order, Rule 42 was amended
prospectively requiring the taxpayer to, at the time of completion of
project / first occupation, whichever is earlier, reverse the input tax
credit proportionate to the unsold area at that time. The formula to
determine the input tax credit reversible, simply put is:

It may not be out of place to highlight that both under the legacy laws as
well as GST, no tax is leviable on sale of constructed units after the
receipt of completion certificate.

In this article, we have
attempted to identify the various issues which plague the industry and
probable resolutions available for the sector from the perspective of
input tax credit.

Input tax credit reversal on area sold after completion certificate / first occupation, whichever is earlier:

Controversy under service tax pre-GST regime
The
process of undertaking the activity of construction is a time-intensive
project. All the units which are sold up to the receipt of completion
certificate / first occupation, i.e., while construction activity is
underway are liable to tax. This means that when the taxpayer incurs
substantial expenditure on construction, including paying tax on the
inward supplies, he also gets the right to claim the credit of the taxes
so paid on the inward supplies as they are used / intended to be used
for making a taxable supply. If during this stage, the taxpayer sells
any unit, the said sale becomes taxable service / supply.

Under
the CCR, 2004, Rule 6 provided that the credit on inputs / input
services to the extent used for providing exempt services shall be
liable to be reversed in the prescribed manner. The said rules required
every taxable person engaged in providing taxable as well as exempt
services to determine the credit on inward supply of inputs / input
services availed and used for providing both, taxable as well as exempt
services and such person was eligible to claim credit only to the extent
such inward supplies were used for making taxable supplies based on the
ratio of taxable services to value of total services provided during
the relevant financial year. In other words, an assessee
was required to carry out an exercise on an annual basis to determine
the credit reversible u/r 6 to the extent inward supplies are used for
providing both, taxable as well as exempt services.

Despite Rule
6 clearly providing a method fordetermining CENVAT credit attributable
to exempt services, many taxpayers were served with notices raising
ademand by applying the provisions of Rule 6 on a project basis /
totality basis / area basis. For example, a builder starts a project in
2012 which is completed in 2016 (say 31st March, 2016). The various
details of the project are as under:

FY	Total area sold	Total value of service	CENVAT availed
2012-13	2,000	2,00,00,000	7,50,000
2013-14	5,000	5,00,00,000	6,50,000
2014-15	8,000	8,00,00,000	7,00,000
2015-16	1,500	1,50,00,000	4,25,000
2016-17	11,000	11,00,00,000	2,75,000
Total	25,000	25,00,00,000	28,00,000

Notices were issued to taxpayers demanding reversal of
credit u/r 6 of CCR, 2004. The reversal was towards the proportionate
CENVAT credit availed by them during the period of construction, which
was ultimately also used for providing non-taxable service, i.e., sale
of units after receipt of completion certificate / first occupation. For
example, in this case, sale of 44 per cent of units would be
non-taxable and therefore, credit claimed towards area which did not
attract service tax, i.e., 44 per cent of the total area sold was
alleged as being liable to be reversed. Accordingly, notice demanding
Rs.12,32,000 was raised on the taxpayers (Rs. 28,00,000*11,000/25,000).

The
matter came up before the Hon’ble Ahmedabad bench of the CESTAT in the
case of Alembic Ltd. vs. CCE & ST, Vadodara I [2019 (28) G.S.T.L. 71
(Tri.-Ahmd)] wherein it was held that the eligibility / entitlement to
credit has to be examined only at the time of receipt of input service
and once it is found to be availed at a time when output service is
wholly taxable, the same is availed legitimately and cannot be denied
and / or recovered unless specific machinery provisions are made.

The
Revenue appeal against the Tribunal’s decision was dismissed by the
Hon’ble Gujarat High Court in 2019 (29) G.S.T.L. 625 (Guj.) wherein it
was held that since at the time of receipt of input services, there was
no exempt service provided by the Appellant, the question of
applicability of Rule 6 does not arise. Rule 6 became applicable only
after the completion certificate was obtained.

Controversy under GST – pre-amendment scenario

At the time of introduction of GST, in a manner similar to Rule 6 of CCR,
2004, the provisions under GST, i.e., Rule 42 provided for reversal of
input tax credit based on turnover of exempted supplies to total
turnover, i.e., exempt plus taxable when an inward supply is used for
making both, taxable as well as exempt supplies.

Rule 42
prescribed that the amount of input tax credit attributable towards
exempt supplies be denoted as D1 and the same be calculated as (D1=E÷F) x
C2. In the present context, E refers to the value of exempted supplies
i.e., the value of the flats sold post completion, F refers to the
aggregate value of exempted supplies as well as taxable supplies and C2
refers to the common credit pertaining to both exempted as well as
taxable supplies. It may further be noted that this formula is
applicable for each tax period. The term ‘tax period’ is defined to mean
the period for which the return is required to be furnished, which is
monthly in GSTR-3B and annually in GSTR-9. Therefore, each of the above
values needs to be calculated for each period and the disallowance
should be restricted to the period only after the taxable person starts
making exempt supplies. Necessarily, for effective implementation of
this Rule, the taxpayer should be simultaneously engaged in making
taxable and exempt supplies, which is likely to occur only when the
project is likely at the end stage.

In that sense, there is a
strong reason to believe that the decision of the Gujarat High Court in
the case of Alembic Ltd. shall apply to GST as well.

CONTROVERSY UNDER GST – POST-AMENDMENT SCENARIO

Rule
42 was amended w.e.f 01st April, 2019 to provide that for the value of
exempt supply shall be the aggregate carpet area of the apartments,
construction of which is exempt from tax plus aggregate carpet area of
the apartments, construction of which is not exempt from tax but are
identified by the promoter to be sold after issuance of completion
certificate or first occupation, whichever is earlier. Similarly, the
value of taxable supply shall be the aggregate carpet area of the
apartments in the project.

The above demonstrates that the
prescribed method for determining the amounts to be reversed on account
of input tax credit used for making exempt supplies shall be based on
area and not value, as provided for u/s 17 (3). Therefore, to overcome
this apparent conflict between the amended Rule and the provisions in
the Act, Removal of Difficulty Order No. April, 2019 – Central Tax dated
29th March, 2019 was issued vide which it was clarified that in case of
supply of services covered by clause (b) of paragraph5 of Schedule II
of the said Act, the amount of credit attributable to the taxable
supplies including zero rated supplies and exempt supplies shall be
determined on the basis of the area of the construction of the complex,
building, civil structure or a part thereof, which is taxable and the
area which is exempt.

The first question which arises is whether
the ROD is legally sustainable? To understand this aspect, we need to
refer to section 172 of the CGST Act, 2017 which empowers the Government
to issue such Order, which is reproduced below for reference:

(1)
If any difficulty arises in giving effect to any provisions of this
Act, the Government may, on the recommendations of the Council, by a
general or a special order published in the Official Gazette, make such provisions not inconsistent with the provisions of this Act or the rules or regulations made thereunder, as may be necessary or expedient for the purpose of removing the said difficulty:

Provided that no such order shall be made after the expiry of a period of three years from the date of commencement of this Act.

(2) Every order made under this section shall be laid, as soon as may be, after it is made, before each House of Parliament.

Reading
of the above provisions shows that section 172 empowers the Government
to make provisions to remove any difficulty which may arise in putting
the law into operation. However, the powers are to be exercised in such a
way that it does not change the basic policy of the Act in question. It
should not be inconsistent with the provisions of the Act. In the
present case, the ROD provides that ITC reversal in case of
constructions services shall be done based on carpet area of
construction of complex despite the section clearly providing that the
reversal of ITC shall be based on value. It is therefore clear that in
guise of ROD, a new provision has been introduced which creates hardship
or puts the taxpayer at a disadvantage. It is likely that such order
and amendment to Rule 42 may therefore be held to be unconstitutional as
ROD orders cannot be issued to change the basic provisions of the
section itself.

This principle has been followed by Courts on
multiple occasions. In Madeva Upendra Sinai vs. Union of India
[2002-TIOL-1189-SC-IT-CB], the Hon’ble Supreme Court has held that in
removal of difficulty, the Government can exercise the power only to the
extent it is necessary for giving effect to the Act. The basic or
essential provisions cannot be tampered with. Similar view has been
followed in Straw Products Ltd. vs. Income Tax Officer
[2002-TIOL-1564-SC-IT-CB] wherein it has been held that power to remove
difficulty can be exercised in the manner consistent with the scheme and
essential provisions of the Act. In Krishna Deo Misra vs. State of
Bihar and Ors. [AIR-1988-Pat 9], it has been held that ROD must not be
inconsistent with any provisions of the Parent Act. Also, ROD clause
cannot be used as a substitute for rule making power. In view of the
above, it can be said that the amendment to Rule 42 w.e.f 1st April,
2019 aided by the ROD 4/2019 is clearly unsustainable in law.

Even
if one opines to the contrary, i.e., the amendments introduced in Rule
42 for the sector are maintainable in law, the position can be
summarized as under:

PROJECTS UNDER THE OLD SCHEME

a)
Whether the amended provision would apply to ongoing projects where
the option to pay tax under the old scheme has been exercised will need
analysis. This is because the eligibility to claim input tax credit is
determined at the time of receipt of inputs / input services, as held by
the Larger Bench of Tribunal in the case of Spenta International Ltd.
vs. CCE, Thane [2007 (216) E.L.T. 133 (Tri. – LB)] wherein it has been
held as under:

10. In the light of the above discussion, we
answer the reference by holding that Cenvat credit eligibility is to be
determined with reference to the dutiability of the final product on the date of receipt of capital goods.

b)
Further, when the input tax credit was claimed upto 31st March, 2019,
the same would have already been subjected to the provision of Rule 42,
as applicable at that point of time. Therefore, by a subsequent
amendment, the input tax credit already claimed by the developer cannot
be altered.

PROJECTS UNDER NEW SCHEME

c) The
amended provision would not have any relevance for ongoing projects
where the option to pay tax under new scheme have been exercised or new
project classified as residential real estate project. This is because
in case of ongoing projects where the builder pays tax under the amended
rates, the taxpayer would be liable to reverse the input tax credit as
per notification 11/2017 – CT(Rate) dated 28th June, 2017 (as amended)
which has been claimed upto 31st March, 2019 and there will be no fresh
claim of credits w.e.f 1st April, 2019.

d) However, in case of
other than RREP project where the tax is payable under new rates, i.e.,
residential units are taxable at 5 per cent while commercial units
continue to be taxable at 12 per cent, Rule 42 will be applicable, and
the taxpayer will need to identify the input tax credit proportionate to
the taxable commercial units. There can always be a question as to how
to determine the input tax credit attributable to such residential
projects, which have been dealt with separately in the article.

CHALLENGES IN IMPLEMENTING AMENDED RULE 42

The amended Rule 42 is sought to be implemented in the following manner:

a)
On a monthly basis, the input tax credit claimed is deemed to be C2,
i.e., used for effecting taxable as well as exempt supplies.

b)
The taxpayer shall be required to calculate input tax credit
attributable to exempt supplies by applying the following formula:

c) In the month in which the completion certificate is
received / first occupation takes place, whichever is earlier, the total
input tax credit attributable to exempt supplies is to be determined by
modifying the above formula as under:

d) The cumulative of amount determined at (b) is to be
compared with amount determined at (c) above and the differential amount
is either to be reversed [if (b)<(c)] or to be reclaimed [if
(c)<(b)].

The above exercise is to be done vis-à-vis the project.
A project has been defined to mean a Real Estate Project or a
Residential Real Estate Project.

Therefore, if a taxpayer has
multiple projects, he would be required to maintain a separate account
for each project. The same would not be an issue as even for RERA, a
developer is required to maintain separate accounts for each project.
However, when a project involves multiple buildings, say two buildings
of which one is commercial and second residential and separate accounts
are maintained within the same project, the developer will be faced with
a peculiar situation. This is because while the input tax credit
relating to residential building will be T3 and therefore, not eligible
for input tax credit, rule 42 deems the value of T4, i.e., the amount of
input tax credit attributable to inputs and input services intended to
be used exclusively for effecting supplies other than exempted supplies
to be zero. This inter alia means that the entire ITC shall be subjected
to the reversal and the option of excluding the same from the formula
will not be available.

In simpler words, while the builder will
not be eligible to claim input tax credit attributable to residential
units, the input tax credit attributable to commercial units will be
subjected to the reversal u/r 42, which appears illogical.

Similarly,
there may be instances where a builder receives multiple completion
certificates. For instance, a builder constructing 12 floor building
(with 4 floors commercial and 8 floors residential) receives Completion
Certificate in parts with simultaneous occupation, as under:

Date of CC	For floors
April 2020	1 – 4
April 2021	5 – 8
April 2022	9 – 12

The question that arises is how will the taxpayer implement Rule
42 in the above scenario where a single project entails multiple
completion certificates? The probable solution for this situation would
be that when the first and second completion certificates are received,
the corresponding area will have to be treated as exempt and the final
calculation will be required only when the third CC is received, which
indicates completion of the project.

Sale of units post
receipt of completion certificate / first application can be treated as
exempt occupation – whether exempt supply?

The
requirement for reversal of proportionate input tax credit is
necessitated in view of provisions of sub-sections (1) to (4) of Section
17 of the CGST Act, 2017. Section 17 (2) provides that where goods or
services or both are used partly for effecting taxable supplies and
partly for exempt supplies, the amount of credit shall be restricted to
so much of the input tax as is attributable to the said taxable
supplies. Section 17 (3) thereon deals with determination of value of
exempt supply for the purpose of section 17 (2) and includes supplies on
which the recipient is liable to pay tax under RCM, transaction in
securities, sale of land and subject to clause (b) of paragraph 5 of
Schedule II, sale of building.

It is by virtue of section 17 (3)
that the value of units sold after receipt of completion certificate /
first occupation (whichever is earlier) which are not leviable to tax is
included in the value of exempt supply. However, the important question
that remains is whether the sale of units post receipt of completion
certificate is classifiable as exempt supply for section 17 (2) to
trigger in the first place? The term “exempt supply” has been defined
u/s 2 (47) as under:

(47) “exempt supply” means supply of any
goods or services or both which attracts nil rate of tax or which may be
wholly exempt from tax under section 11, or under section 6 of the
Integrated Goods and Services Tax Act, and includes non-taxable supply.

As
can be seen from the above, the term exempt supply covers only such
transactions which are supply of goods or services but specifically
exempted or are classifiable as non-taxable supply, i.e., supply of
goods or services or both which are not leviable to tax.

Let us
first analyse if the sale of unit after receipt of completion
certificate / first occupation is exempted from the purview of tax or
not? The sale of unit after receipt of completion certificate / first
occupation is not exempted from the purview of tax as the same is
excluded from the scope of supply itself. Similarly, non-taxable supply
means such supply which is not leviable to tax, i.e., under section 9 of
the CGST Act, 2017. What is excluded from the levy of tax is only
supply of alcoholic liquor for human consumption. In that context, it
can be said that even the petroleum products are not excluded from the
levy of GST, but rather it is deferred to a future date u/s 9 (2) of the
CGST Act, 2017

Therefore, sale of unit after receipt of
completion certificate / first occupation may not qualify as “exempt
supply”. Infact, a view can be taken that in view of Schedule III, the
activity does not qualify as supply u/s 7. Hence, once an activity is
not covered within the purview of supply, the question of it being a
taxable / exempt supply does not arise. Therefore, section 17 (2) does
not get triggered as the same applies only when exempt supply is being
made by the taxpayer. Having said so, one may need to recognize that
Section 17(3) includes sale of buildings after receipt of completion
certificate in the value of exempted supply. However, it can be argued
that merely including the value of units sold after the receipt of
occupation certificate / first occupation in the value of exempt supply
in section 17 (3) is not sufficient to trigger the applicability of
section 17 (2), which is a must for demanding reversal of input tax
credit. Accordingly, the requirement of reversal of proportionate input
tax credit at the time of receipt of completion certificate can be said
to be litigative.

ABATEMENT FOR VALUE OF LAND – WHETHER EXEMPT SUPPLY?

Sale
of constructed unit not covered under Schedule III is liable to tax for
which the rates have been prescribed under notification 11/2017-
CT(Rate) dated 28th June, 2017. It is in this taxable transaction where
there is an embedded element of sale of land or undivided share in land.
The question that therefore arises is whether the explanation, which
provides for a lower taxable value can be treated as an exemption
provided u/s 11 of the CGST Act, 2017 to fall within the purview of
exempt supply?

As mentioned above, notification 11/2017-CT
(Rate) dated 28th June, 2017 which prescribes the rate of tax for
services provides that in case of supply of service involving transfer
of land or undivided share of land, the value of supply shall be 2/3rd
of the total amount charged for such supply. This has been provided for
by way of Explanation to the notification which is reproduced below for
ready reference:

[2. In case of supply of service specified in
column (3), in items (i), [(ia), (ib), (ic), (id), (ie) and (If)]
against serial number 3 of the Table above, involving transfer of land
or undivided share of land, as the case may be, the value of such supply
shall be equivalent to the total amount charged for such supply less
the value of 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.
Explanation — For the purposes of this paragraph [and paragraph 2A below, “total amount” means the sum total of —

(a) Consideration charged for aforesaid service.

(b)
Amount charged for transfer of land or undivided share of land, as the
case may be including by way of lease or sub-lease.]

The
question that needs analysis is whether the reduction for value of land
(deemed / actual) is granted u/s 11 of the CGST Act, 2017 or u/s 15 (5)
which provides for determining the value of specified supplies. Section
11 provides as under:

(1) Where the Government is satisfied
that it is necessary in the public interest so to do, it may, on the
recommendations of the Council, by notification, exempt generally,
either absolutely or subject to such conditions as may be specified
therein, goods or services or both of any specified description from the
whole or any part of the tax leviable thereon with effect from such
date as may be specified in such notification.

From the
above, it is seen that section 11 empowers the Government to exempt
goods or services or both from the whole or any part of the tax leviable
thereon. However, the fact remains that land, being immovable property
is not goods for the purpose of GST as goods include only moveable
property within its’ purview. The question that remains is whether land
can be treated as service? The answer to the same would be negative as
service traditionally is referred to an activity. Immovable property per
se is not an activity and therefore, cannot be treated as service.
However, any activity on or relating to immovable property may be a
service, for instance, renting / leasing of immovable property.
Therefore, sale of land, which is neither goods nor service and excluded
from the scope of supply, cannot be exempted by section 11 of the CGST
Act, 2017. In this context, one may refer to the conclusion of the
Hon’ble Supreme Court in the case of Larsen & Toubro Ltd. [2015 (39)
S.T.R. 913 (S.C.)] wherein it has been held as under:

44.
We have been informed by counsel for the revenue that several exemption
notifications have been granted qua service tax “levied” by the 1994
Finance Act. We may only state that whichever judgments which are in
appeal before us and have referred to and dealt with such notifications
will have to be disregarded. Since the levy itself of service tax has
been found to be non-existent, no question of any exemption would arise.
With these observations, these appeals are disposed of.

Therefore,
it cannot be said that the Explanation intends to provide exemption
from the supply. On the other hand, since the activity sought to be
taxed is a transaction involving supply of services as well as supply of
land, the reduction is clearly for determining the value of supply and
therefore, the explanation is for determining the value of supply, i.e.,
u/s 15 of the CGST Act, 2017.

This aspect needs to be analyzed
since if a view is taken that the value of land, for which a deduction
is provided under notification 11/2017 – CT(Rate) dated 28th June, 2017
is towards exempt supply, the corresponding expenses incurred by the
taxpayer would be hit by section 17 (2) r.w. Rule 42 and would be liable
for reversal as under:

Input tax credit on expenses directly attributable towards acquisition of land / associated costs shall be classified as T2.

Input tax credit on expenses used for making both, taxable as well as exempt supplies shall be classified as C2.

Let
us understand this with the help of an example. A builder takes land on
100-year lease from CIDCO for a proposed residential / commercial
project which he intends to sell to customers. CIDCO charged a one-time
lease premium of Rs. 30 crore and 18 per cent GST on the same, i.e., Rs.
5.40 crore. The lease would be transferred to the co-operative housing
society upon completion of the project. In addition to the lease
payments, the builder also incurs various expenses relating to the
acquisition of land, such as legal payments, soil testing, etc.

The input tax credit implications in light of the above discussion can be summarized as under:

a)
The reduction towards value of land cannot be attributable to supply
u/s 7 and therefore, the question of there being a taxable / exempt
supply does not arise. Therefore, since section 17 (2) does not get
triggered, section 17 (3) becomes inconsequential.

b) The
reduction towards value of land is not attributable to an exemption
provided u/s 11 and therefore, is not covered within the purview of
exempt supply.

c) In view of the above, a taxpayer is entitled
to claim input tax credit on expenses incurred towards acquisition of
land on which construction activity is undertaken even though no GST is
leviable on the amounts recovered from the clients towards the same, be
it on the actual / deemed basis.

Contrarily, a builder may take a
view that in order to claim input tax credit on the land costs, he may
forego the deduction for value of land and pay GST on the gross value
and claim full input tax credit. However, this option may not be
available in view of the recent decision of the Hon’ble Supreme Court in
the case of Interarch Builders Pvt. Ltd. [(2023) 6 Centax 40 (S.C.)].
In this case, the facts were that the assessee had opted to pay tax on
works contract services provided on the whole value, i.e., without
excluding the value of goods involved in the execution of such contract
and claimed correspondingly full CENVAT credit, including on inputs and
capital goods which was otherwise not eligible. Upon Appeal by the
Department, the Hon’ble Supreme Court held that the contention of the
taxpayer that they have a legal right to pay tax even on the goods
portion as service tax and take input credit on the duty paid on the
goods is clearly contrary to para 25 of the decision in the case of
Larsen and Toubro [2015 (39) S.T.R. 913 (SC)] and Rule 2A of the
Valuation Rules, 2006 and proceeded to held that the taxpayer was liable
to pay tax only on the service component. This analogy can squarely be
extended to GST as the Court may very well hold that the liability to
pay tax was only on the construction services and not on the land
component.

Input tax credit on free area in re-development projects / government schemes

Land
in metro cities like Mumbai is a scarce commodity. Therefore, the
sector finds avenues to identify opportunities to recycle the land. This
is done by undertaking redevelopment projects wherein existing
structures are demolished and new structure is developed. While
undertaking this redevelopment activity, the builder is required to
provide alternate accommodation to the existing occupants. Similarly,
the Government also encourages the sector to take up slum rehabilitation
activities whereby the builder agrees to construct a new structure
where the slum occupants are rehabilitated in such buildings and the
developers are given construction rights to construct separate structure
for sale in open market.

When the builder undertakes
construction activity to the extent done for the existing occupants (in
case of re-development) / slum dwellers (in case of SRA project), the
question is whether the builder is eligible to claim input tax credit
corresponding to such free area in re-development / SRA projects?

Under
service tax regime, a dispute was raised on the taxability of such free
area and a demand was proposed on the taxpayers (on the output side).
The Tribunal in Vasantha Green Projects vs. Commissioner [2019 (20)
G.S.T.L. 568 (Tri. – Hyd.)] has held that no service tax was payable on
such free area as the price collected from the customers also factored
the cost incurred towards construction of the free area and therefore,
no service tax was separately leviable on such free area. The conclusion
of the Hon’ble Tribunal will squarely apply to the claim of input tax
credit since the builder can very well claim that the input services
attributable to the free area is ultimately used for providing taxable
service and therefore, input tax credit is eligible. This logic will
squarely apply under GST regime as well.

However, another issue
which may arise under GST is whether the claim of input tax credit to
the extent it pertains to free area is hit by section 17 (5) (h) which
restricts claim of input tax credit on goods lost, stolen, destroyed,
written off or disposed of by way of gift or free samples? The answer to
this would be in negative. This is because what is given free to the
existing occupants / slum dwellers is not any goods, but rather a
constructed area which is an outcome of a composite supply. Secondly, in
the course of undertaking this construction activity, the builder also
receives various input services to which this restriction does not
apply. Readers may kindly note that this discussion will be relevant
only for projects concluded up to 31st March, 2019 since input tax
credit is denied for RREPs after 01st April, 2019.

CONCLUSION

When
GST was introduced, input tax credit was expected to flow seamlessly
and avoid cascading effect of taxes. Till 31st March, 2019, the sector
did enjoy the benefit of input tax credit which was not available under
the legacy laws. However, the amendment w.e.f 01st April, 2019 keeping
the sector in mind has left the sector worse off as compared to the
legacy laws, i.e., service tax. It is therefore imperative that before
claiming any input tax credit, the various conditions and restrictions
prescribed for the sector be analyzed carefully to avoid subsequent
litigation.

shailesh.kwebmaker

Entertainment and Media Sector

INTRODUCTION

Entertainment and Media, though generally referred to as one sector, actually represents two diverse sectors. While entertainment deals with content (films, television, etc.) creation and its’ exploitation, the media sector primarily deals with the delivery of the content. The advent of technology, especially social media, has further reduced the lines of demarcation between the two. In this article, we have attempted to discuss the specific issues faced by this sector. To do so, let us first understand the business model under which the sectors operate.

THE ENTERTAINMENT SECTOR

This sector has various sub-sectors, such as films, television, theatre, etc. The entire sector depends upon content for its survival, i.e., a film, television or play is successful only when the audience well receives the content. Therefore, the key activity in this sector is twofold, one being content creation and the second being content exploitation.

Content creation, an elaborate process, involves various activities, such as:

Identifying the idea/script based on which the content is to be created.
Pre-production activities (finalizing the cast, crew, location, etc., before the shooting occurs).
Production activities (actual shooting takes place).
Post-production activities (editing, dubbing, marketing and promotion, etc.).

The above activities result in the content coming into existence. However, the content per se may not be the product. Though a person may be in possession of the content, he may not be able to freely use the same. For example, a person purchases a movie CD and starts exhibiting it in a theatre. However, freely using it may not be allowed because the CD is sold to him with a specific use direction, and such a person does not have a right to use it otherwise. In other words, unless the person using the content has obtained the required license/rights from the content owner, he cannot use it for the intended use. This, inter alia, means that the product emanating from the content creation is not the content itself but the various rights which vest in the said product. The question that therefore remains is:

(a) What are the different kind of works in which copyrights subsist?

(b) What types of copyrights subsist in such works?

The Copyrights Act, 1957 deals with copyrights and provides that the copyrights shall vest in different types of works, namely (a) original, artistic, literary or musical works, (b) sound recordings and (c) cinematographic films (which would include films, web-series, etc., and is referred to as “content” for the sake of brevity in this article). Generally, the first two classes of works in which rights subsist become an integral part of the third class, though they continue to retain their separate identity. For example, the script of the film, the lyrics of the songs, the dialogues delivered by the cast, etc., are original literary works, while the recorded music of the film is a sound recording, etc. However, when all these works, along with the actual recorded content (video), are brought together in a synchronized form, a new work of cinematographic film comes into existence. Each of these works, which comes into existence, and different types of works which go on to form part of the final work, have different copyrights which subsist in them. As provided for in the Copyrights Act, 1957, the rights vesting in an underlying work may be exploited in different ways, as summarized below:

Rights subsisting	Manner of exploitation
Right to communicate the cinematographic film to the public	• By theatrical screening (by granting theatrical rights). • By televised screening (by granting satellite rights). • By streaming through apps (by granting specific rights to that extent, for example, Hotstar, Netflix, etc.).
Right to communicate the sound recordings to the public	• By granting rights to Radio stations to play the said songs. • By granting the right to record and reproduce the said sound recordings in a medium. • By granting the right to stream the said sound recordings through apps (example Gaana.com, Saavn, etc.).
Rights subsisting in literary, musical works	• By granting the rights to remake the film in different language or make the sequel to the said film. • By granting the rights to use the lyrics/tune to create a new song.
Rights subsisting in dramatic works	• By granting the rights to re-create the story in the form of a drama.

Therefore, it is apparent from the above that the product to be exploited is the copyright in the underlying works, not the work itself. The exploitation of the copyright can be done either by the owner of the said work, who by virtue of the provisions of the Copyright Act, 1957 is generally the person who created the said work, or any person who has become owner by way of assignment of copyrights or holds a valid license to exploit the said copyrights. Such a person is able to exploit each copyright originating from the underlying work as well as copyrights in different works which go on to form a part of the underlying work either separately or jointly. For example, the theatrical rights may be transferred to a distributor, the OTT rights to OTT platforms, satellite rights to television channels, music rights to music labels, etc.

COPYRIGHTS – GOODS VS. SERVICE AND ASSOCIATED ISSUES

This takes us to the first issue, which needs analysis, i.e., whether copyrights are classifiable as goods or services. The Supreme Court has already held in Tata Consultancy Service vs. State of AP [2001 (128) ELT 21 (SC)], that intangibles are to be treated as goods if they satisfy specific attributes, namely, utility, capable of being bought and sold, and capable of being transmitted, transferred, delivered, stored and possessed. Copyrights do satisfy these attributes, and therefore, there is no iota of doubt that they would classify as goods for GST. Even the rate notifications very well accept this principle where the tax rates for the permanent transfer of copyrights are notified under the goods notification [1/2017-CT(Rate)], while tax rates for temporary transfer of copyrights are notified under the services notification [11/2017-CT(Rate)] with the same tax rates notified. However, there are different issues which need cognizance.

Let us take an example of a foreign language movie. A production house procures the right to remake the said film in Hindi on a perpetuity basis from the owner of rights located outside India for a lump sum consideration. In such cases, the issue that arises is whether the purchase of the remake rights by the Indian production house will be treated as import of goods or import of service? While one may argue that when the rights owned by a person outside India are assigned, the same would be treated as import of goods and therefore, no tax can be levied on the same u/s 5 of the IGST Act, 2017. However, the bigger issue would be whether such imports would be liable to tax u/s 12 of the Customs Act, 1962 or not, especially when the document of title evidencing assignment of rights is received electronically. In case the document of title is brought into India, either as a courier or baggage, there may be customs duty implications on such imports, but on what value would the same be payable would be a subject matter of dispute?

Similarly, in a reverse transaction, i.e., rights being transferred on perpetual/permanent basis to a foreign entity, the same would also be treated as export of goods. The issue remains w.r.t how the supplier will claim refund u/s 54. This is because once this is treated as export of goods, the refund claim will have to be filed in a particular manner which will firstly require the existence of a bill of entry filed with customs duty. Just like in the case of an import transaction where there is no bill of entry/interface with the customs authority, a similar issue would remain in case of an outbound transaction as well. Even the claim of export of goods would be scrutinized from the context of how the “goods” have gone out of India?

Continuing with the first example, after purchase of copyrights, while the film is in the pre-production stage, the film producer enters into an agreement with the distributor for exploitation of copyrights whereby he assigns/transfers on perpetuity basis the entire distribution rights to the distributor of the film. The rights will subsist in the film once the film comes into existence, though the distributor will be required to make stage-wise payments to the producer. Since this would be a contract for transfer of rights in perpetuity, i.e., permanent transfer of copyrights, this will be treated as supply of goods.

The first question that arises is what would be the point of taxation? Would it be at the time of entering into the agreement for transfer of copyrights or when the stage-wise payment clause becomes due? Can it be argued that though the agreement is entered into at an early stage, the actual transfer of copyrights takes place only when the film comes into existence and the rights subsisting in the said work of film accrue to the distributor for further exploitation? At times, it may also happen that the distributor might have also further exploited the said works without the work being in existence.

This takes us to the ‘Time of Supply’ provisions. The same is dealt with u/s 12 r.w.s. section 31 of the CGST Act, 2017. Section 12 provides that the liability to pay a tax on goods shall be the earlier of the following dates, namely:

a) The date of issuance of invoice by the supplier of goods or the last date on which he is required to issue such an invoice u/s 31; or

b) The date on which he receives the payment with respect to such supply.

Section 31 further provides that the invoice for supply of goods shall be raised by the supplier before or at the time of:

a) Where supply involves movement of goods, the removal of goods for supply to the recipient; or

b) In any other case, delivery of goods or making available thereof to the recipient.

Being intangible in nature, supply of copyrights on a permanent basis would necessarily mean that clause (a) of section 31 would not apply. This means that clause (b) becomes applicable. In the case of a copyrights transfer agreement, once the agreement is entered into, it necessarily means that the rights are transferred to the other party, i.e., distributor and even before the said rights come into existence, the distributor is at liberty to enter into agreements w.r.t such rights with other parties. This implies that section 31(b) gets triggered when the agreement is entered into between the two parties. This would inter alia mean that the film producer would be required to raise an invoice and make payment of the GST on the entire consideration value at that stage itself, though the payment may become due in installments. So far as the eligibility to claim a corresponding input tax credit on the distributors’ front is concerned (on the issue of receipt/non-receipt is concerned), there is no issue of non-receipt of goods. Even otherwise, once the invoice is raised as per time of supply provisions, Explanation 1 provides a saving grace to the effect that a supply shall be deemed to be made to the extent covered by the invoice/payment. This means that the eligibility to claim credit cannot be denied merely because the rights have not come into existence. However, it does mean that a film producer will be required to pay the tax upfront and not as per the agreed stage-wise payments.

Tweaking the above example, let us assume that instead of permanent transfer, the agreement for transfer of copyrights was on a temporary basis, say for 20 years. In such a case, the supply will change its nature from being a supply of goods to a supply of service. Since the services are to be supplied over a period of more than 3 months, the same would be classified as continuous supply of service and therefore, the producer would be at liberty to raise an invoice as per the payments clause of the agreement. The distributor would also be eligible to claim the corresponding input tax credit in view of the explanation to section 14 (like section 13), which provides a relaxation to the effect that a supply shall be deemed to be made to the extent covered by the invoice/payment.

COPYRIGHTS – ONLINE EXPLOITATION

With the advent of technology and the emergence of social media, a new source of revenue has emanated for content owners, namely, hosting of content on social media platforms (YouTube, Facebook, etc.,) with revenue earned in the form of a share in advertising revenue. In this model, the content owners monetize their rights by hosting their content on such platforms and the platforms further sell advertising slots on the content to third party advertisers. The revenue generated by the platform on sale of such slots is then shared with the content owners.

Generally, the platforms deal with the content owners through their entities outside India. For instance, in case of Google, the agreement is entered into with Google Ireland Ltd. There may/may not be any interaction with the Indian Google entity. The content owner is required to follow the technical instructions contained in the agreement with respect to hosting the content on the platform, which is primarily to avoid copyright infringement, tracking revenue generation vis-à-vis the content, etc.

Since such agreements are with a recipient located outside India and all other conditions for treating the supply as export are satisfied, the content owners have been classifying the supply as export of service. However, tax authorities have been disputing the claim of export of service, primarily on the following grounds:

a) The content may be viewed in India as well as outside India. As such, services are provided partly in a taxable territory and partly outside taxable territory and therefore, as per the ‘place of provision of service’ rules, the place of provision of service would be in taxable territory and therefore, cannot be classified as export of services.

b) The services are supplied through the medium of information technology and therefore should qualify as OIDAR services for which the place of supply would be the location of the service provider (up to 30th November, 2006).

While the above grounds are flimsy at best for denying export benefits to taxpayers, litigation on this aspect, even under GST, may not be ruled out. It is, therefore, important to correctly classify such supplies. Merely because the revenue earned is in the form of a share in advertising revenue, it would not mean that the supplies are to be classified as advertising revenue. It must be borne in mind that the supply is that of a grant of temporary license, and therefore, the supply should be classified accordingly only. Once the supply is classified as a copyright service, the question of OIDAR also does not remain as the use of information technology is only incidental to the main service, and therefore, the same cannot trigger classification as OIDAR.

CONTENT CREATION

Having discussed the issues which plague the entertainment industry from the revenue perspective, we now focus on the activity of content creation, which forms a part of the input of the industry. This is a complex process and in general, requires the film producer to incur various expenses such as:

a) Payment for the crew – this includes not only the actors, but also various support personnel hired for the shoot, such as directors, videographers, choreographers, make-up team, props, etc.

b) Arranging for the wardrobe and makeup of the acting crew.

c) Arranging for the stay and travel of the entire crew in case of a shoot at multiple locations (in India/outside India).

d) Arranging for the music.

e) Arranging for editing and special effects (VFX, 3D, etc.) on the shot content.

f) Arranging for catering of the crew during shoots.

The above is merely a descriptive list and not an exhaustive one of the expenses incurred in the content creation process. The industry faces various issues/pain points in each of the above steps which we shall discuss now.

BLOCKED CREDITS

A substantial amount is incurred by a film producer during shooting towards arranging food and beverages for the entire crew, arranging for the acting crew’s makeup, arranging for vanity vans where the main acting crew gets ready for shoot, rests during breaks, etc. At times, they also have to arrange private aircraft for the main actor/actress. The suppliers charge GST on forward charge, or the film producer must pay tax under reverse charge. The issue arises on account of specific restrictions u/s 17(5), which denies input tax credit in the following cases:

(i) food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, leasing, renting or hiring of motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) except when used for the purposes specified therein, life insurance and health insurance:

Provided that the input tax credit in respect of such goods or services or both shall be available where an inward supply of such goods or services or both is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply;

However, the above supplies that the film-maker would receive will not get covered under the exception as the film producer is not using them to make the same outward supply. Similarly, the film producer is making a single supply, which is that of transfer of copyrights, and therefore, the question of there being a taxable/composite supply does not arise. As such, a film producer receiving the above services must treat them as blocked credits and take the corresponding GST charged by the suppliers/tax paid under reverse charge as the cost of production.

An interesting question might arise in the case of beauty treatment. The term beauty treatment means a treatment- an activity. Therefore, the mere purchase of the makeup material may not constitute beauty treatment. Therefore, if a film producer purchases the material required for beauty treatment separately and obtains separate services of professionals to carry out the activity, can he claim credit to the extent of tax paid on the purchase of such materials?

MULTI-LOCATIONAL SHOOTS AND ITC BLOCKAGE

The next issue the sector faces is with respect to cases where the shooting takes place in multiple States. For example, a film producer based in Maharashtra undertakes film shooting in Gujarat and Rajasthan. In this case, the film producer is required to make multiple arrangements in these two states, incurring location charges where the shoots are to take place, accommodation for the crew, arrangement of food and beverages, etc., All such expenses, being covered under the property basket, would attract levy of local taxes, i.e., CGST and SGST by the local vendors which the film producer will not be eligible to take input tax credit in Maharashtra. This invariably would result in incremental costs for the film producer.

A question that arises is, can the film producer obtain ISD registration and distribute the credit to his Maharashtra registration? The answer would be in the negative. This is because the ISD is a mechanism to distribute the credits received at multiple registered locations of a recipient for which a single invoice is raised at the Head Office. In this case, let’s say even if the film producer obtains ISD registration in Gujarat and Rajasthan, the fact would be that the services are received in Gujarat and Rajasthan and therefore, the option of transfer of credit from ISD of Gujarat and Rajasthan to Maharashtra may not be available.

Therefore, to overcome this issue, the industry has come up with a workaround whereby either they appoint a contractor in the respective states to arrange all the facilities, namely, location, accommodation, F&B, etc., and as per the agreed terms, raises a single invoice to the film producer towards line production service, an industry specific term. In this case, the role of the line producer is to merely arrange and facilitate the supply of said services to the film producer and his crew. With multiple supplies being made in one contract, the question of composite vs. mixed supplies come into picture. It is the position of such service providers, i.e., line producers that their principal supply is line production services and therefore, the entire consideration received by them is attributable to line production service on which they can charge IGST treating the location of service recipient, i.e., the film producer as place of supply. With the line producers making multiple supplies to the film producer as part of a composite supply, to a large extent, the restrictions from claim of credit u/s 17(5) discussed earlier can be avoided and shelter can be taken under the exception provided therein. This view finds agreement with the ruling of the AAR in the case of Udayan Cinema Pvt. Ltd. [2019 (23) GSTL 345 (AAR-GST)], wherein a similar agreement was analyzed in the context of cross-border transactions.

At times, to avoid the incremental cost of hiring a line producer, the film producer also obtains registration in the State where the shoot is to be undertaken and treats the location as a line producer and raises the invoice to his main registration under the cover of supply of service under Schedule I, Entry 2. It has been observed that claim of input tax credit at the recipient end is being questioned during the audit/ investigation proceedings, which needs to be borne in mind.

CONTENT CREATION – WORK FOR HIRE VS. WORK OF HIRE

The foundation of the content creation process is the intellectual work of authors (concept, idea, script, etc.,), on which the entire activity of content creation depends. While generally the person who is the author of such works, termed as literary work under the Copyrights Act, 1957 is treated as the owner, there is a concept of work for hire vs. work of hire under the Indian law.

The need to analyze whether a contract is a work for hire or work of hire arises in view of notification 13/2017-CT(Rate) which casts the liability to pay tax under reverse charge in case of services received by way of transfer of copyright in original literary, artistic or musical works as under:

Nature of service	Service provider	Service recipient
Services supplied by a music composer, photographer, artist or the like relating to original dramatic, artistic or musical works	Music composer, photographer, artist or the like	Music company, producer or like located in the taxable territory
Services supplied by an author relating to original literary works (optional reverse charge at the discretion of author)	Author	Publisher located in the taxable territory

The above entries can trigger in two specific scenarios, one, where the service supplied is in relation to an already existing work or second, where the author, music composer, photographer or artist is commissioned to create a new work. Let us take an example of a person who has authored a novel published in a particular language. If a publisher intends to publish the same in a different language and acquires the rights from the author, the royalty paid would be liable to reverse charge.

However, when a person is hired to carry out the activity of commissioning a new work, say taking a photograph, or creating a musical tune for another person, this would come within the purview of work for hire vs. work of hire. Section 17 (b) provides that in the absence of a written agreement between the parties, the person who requested that a work be created by an author shall be the first owner of the copyright. Similarly, section 17 (c) also provides that in the absence of an agreement between the parties, the employer is the original owner of the copyright in cases where an author creates a work while employed under a service or apprenticeship contract.

Therefore, in cases where a new work comes into existence and by virtue of clauses (b)/(c) of section 17, the person for whom the work has been created becomes the owner of the said copyright, the question of there being a transfer of copyright does not arise and in such cases, the reverse charge entry might not trigger.

Furthermore, the nature of transfer of copyright would need to be analyzed. If the transfer of copyrights is on a perpetual basis, the same would constitute a supply of goods and therefore, the question of payment of tax under reverse charge would not arise as notification No. 13/2017-CT(Rate) applies only to supply of services.

THE MEDIA SECTOR

The second limb of the sector, i.e., the media sector primarily refers to a medium for dissemination of content. This can be through print, television, radio, online, etc., The primary source of revenue for this sector is advertisement income with incidental revenue being in the form of sponsorships, marketing support services, etc.

MEDIA SECTOR – REVENUE VS. COST BALANCING

A common issue faced across this sector is the revenue/cost mismatch. Most media entities have a multi-locational presence. There can be scenarios where the revenue and the associated tax liabilities are at one location while the expenses and the corresponding credits are spread across locations. Let us take the example of a newspaper publisher who has printing activities across the country from where newspapers are published daily. A leading corporate placed a Release Order (RO) for publishing a front-page advertisement in newspapers across India. The RO was issued to the Mumbai Office of the company which raised the invoice to the client with applicable GST. Therefore, while the revenue would be in one state, the cost would be spread across multiple states which will result in cash outflow in one location and blockage in other locations. A similar challenge is faced even by TV/radio broadcasters.

The question that arises is how to ensure a revenue/cost balance which will also ensure proper balancing of GST credits across location. The first solution which comes to mind is a cross-charge policy under Schedule I, Entry 2 whereby the printing location will raise an invoice to the Mumbai location for advertising services. This service will have to be valued at an arm’s-length since all locations would be engaged in making exempted supplies (newspapers are nil rated) and therefore, Rules 28 – 31 would need to be followed to determine the value of supply.

There is a specific reference to four different methods of valuation of a supply in these rules which must be applied sequentially, as under:

a) Open Market Value of Such Supply – Rule 28(a)

b) Value of supply of goods or services of like kind and quality – Rule 28(b)

c) Value based on 110 per cent of the cost of provision of services – Rule 30

d) Value determined on reasonable means consistent with the principles – Rule 31.

The term ‘open market value’ is defined through an Explanation to Chapter IV of the CGST Rules, 2017 as “under open market value” of a supply of goods or services or both means the full value in money, excluding the Integrated tax, Central tax, State tax, Union Territory tax and the cess payable by a person in a transaction, where the supplier and the recipient of the supply are not related and the price is the sole consideration, to obtain such supply at the same time when the supply being valued is made

It may be noted that for the purposes of applicability of Rule 28(a), it is only the specific product or service which is being supplied that would possess an open market value. In this case, there is a specific service being supplied by each registration and therefore, the value of service by each registration will need to be determined under this method.

PRINT MEDIA – SALE OF UNSOLD NEWSPAPER – TAXABILITY

Once the day is over, the newspaper loses its value. A publisher will always have a stock of unsold newspapers. The question arises whether such unsold newspapers would continue to be classified as newspapers and, therefore, is liable to tax at nil rate or as scrap of paper attracting GST at 5 per cent.

In the context of Sales Tax, the Hon’ble SC has in the case of Indian Express vs. State of TN [(1987) 67 STC 474 (SC)], held that such unsold newspapers when sold will be treated as sale of scrap and therefore, liable to tax accordingly. However, in the case of Sait Rikhaji Furtarnal vs. State of AP [1992 85 STC SC], the Hon’ble SC has held to the contrary that old newspapers are also “newspaper” and would be entitled to the exemption provided under the Constitution. As such, the question of whether unsold newspapers would be liable to GST or not is still open for debate.

However, as a prudent business, a preferred position would be treating such a newspaper as sale of scrap and tax it at 5 per cent. This will enable the publisher to alter its ratio of exempt service and entitle it to claim more input tax credit. In any case, the person buying the scrap of newspaper would be eligible to claim input tax credit (if GST is charged) and therefore, there may not be any concerns from that end.

OOH MEDIA – PLACE OF SUPPLY?

The Out of Home (OOH) media refers to advertisements displayed in hoardings at prominent locations such as cross-road, airports, railway stations, etc. In this case, there is a specific issue of determination of place of supply. This is because, to provide the service of displaying advertisements at any locations, the service provider needs to have advertising slots on such locations. For the same, the service provider needs to obtain the necessary permission/approval from the appropriate authority/owner of the property where he intends to display his clients’ advertisements. The issue which arises is with respect to the place of supply. Can it be said that the service supplied by way of grant of permission/approval is directly in relation to an immovable property and therefore, the place of supply will be determined u/s 12 (3) of the IGST Act, 2017?

The answer to this would be in negative because the service is not in relation to immovable property, but rather that of displaying of advertisement on the immovable property. This view has been followed in the context of EU VAT in Minister Finansow vs. RR Donnelley Global Turnkey Solutions Poland (RRD), and is relevant. The issue in the said case was that RRD was engaged in providing a complex service of storage of goods involving storage, admission, packaging, loading/unloading, etc. The issue was whether the service could be classified under Article 47 or not, which deal with supply of services connected with immovable property. The same is reproduced below for ready reference:

The place of supply of services connected with immovable property, including the services of experts and estate agents, the provision of accommodation in the hotel sector or in sectors with a similar function, such as holiday camps or sites developed for use as camping sites, the granting of rights to use immovable property and services for the preparation and coordination of construction work, such as the services of architects and of firms providing on-site supervision, shall be the place where the immovable property is located.

From the above, it is evident that Article 47 is worded similarly to Section 13 (4). In the context of Article 47, the Court had held as under:

Article 47 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, as amended by Council Directive 2008/8/EC of 12 February 2008, must be interpreted as meaning that the supply of a complex storage service, comprising admission of goods to a warehouse, placing them on the appropriate storage shelves, storing them, packaging them, issuing them, unloading and loading them, comes within the scope of that article only if the storage constitutes the principal service of a single transaction and only if the recipients of that service are given a right to use all or part of expressly specific immovable property.

In fact, Article 47 has been amended w.e.f. 1st January, 2017 to specifically provide transactions which shall be treated as being in connection with an immovable property and transactions which shall not be treated as being in connection with an immovable property. Some specific inclusions and exclusions are tabulated below:

In Connection with
Immovable Property

Not in Connection with Immovable property

• Drawing up of
plans for a building/ parts of a building designated for a particular plot of
land

• On site
Supervision/Security services

• Survey and
assessment of risk and integrity of the immovable property (Title search by
advocates)

• Drawing up of
plans for a building/ parts of a building not designated for a particular
plot of land

• Storage of
goods in an immovable property if no specific part of immovable property is
earmarked for the exclusive use of the said customer

• Property
management services (other than REITs)

• Estate agent
services

• Provision of
advertising, even if involves use of immovable property (Out of Home
Advertising)

• Intermediation
in the provision of hotel accommodation services acting on behalf of another
person

• Business exhibition services

• Portfolio management of investments in real estate (REIT)

CONCLUSION

The entertainment and media sector plays a very important role in the day-to-day lives of citizens. However, the industry is faced with specific issues which need to be looked into, including clarity on input tax credit eligibility on specific supplies, an inbuilt mechanism to handle the revenue/cost mismatch, etc.

shailesh.kwebmaker

Automobile Sector

INTRODUCTION

Uniqueness of an
industry practice poses specific tax challenges and warrants a separate
analysis with careful orientation towards the business dynamics
prevalent in the industry. As part of the Decoding GST series, an
attempt is being made to identify some industry-specific GST challenges
and examine current practices adopted by the industry to tackle such
situations.

Typically, tax issues faced by an industry can be
categorized into the following buckets (a) Classification/Rate of Tax,
(b) Other substantive issues and (c) Procedural issues.
Classification issues arise on account of the description of the goods
and/ or services specific to the said industry. Substantive issues
emerge from valuation, input tax credit, etc. and procedural issues
arise from tax collection/payment, reporting procedures envisaged under
law.

THE AUTOMOBILE SECTOR

The automobile sector
comprises of OEMs (including supporting component manufacturers) of
two-wheelers to four-wheeler passenger vehicles, commercial vehicles and
other special purpose vehicles. With the recent spurt in electric
mobility, a sub-vertical of electric motor vehicles manufacturers and
its supporting participants have emerged. The said sector also includes
the dealer network, after market spares and service network as well as
pre-owned vehicle market. While GST has subsumed multiple taxes/cesses
(National Calamity Contingency Duty, Infrastructure Cess, Automobile
Cess, etc.) imposed on the sector, it is still considered as one of the
most ‘tax-burdened’ sector. This is probably because of the importance
and contribution of the sector to India’s GDP and tax exchequer.

PRODUCT CLASSIFICATION

Product
classification has been an intriguing issue for the automobile sector.
In terms of rate structure, motor vehicles have been designated with
peak GST rate of 28 per cent along with imposition of Compensation Cess
on ad-valorem basis also peaking upto 22 per cent – aggregating upto 50
per cent in case of SUVs. Passenger motor vehicles (classifiable under
HSN-8703) have been subdivided based on (a) physical characteristics –
length, engine capacity, ground clearance, specific fitments, etc.; (b)
technology (electric or internal combustion, hybrid, CNG, fuel type,
etc.). Commercial vehicles have been currently exempted from the
imposition of Compensation Cess.

Classification of Sports Utility Vehicles

Peak
Compensation cess of 22 per cent is applicable to SUVs having engine
capacity > 1500cc and 17 per cent is applicable to other motor cars
(greater than 4000mm length and more than 1200cc engine capacity. The
issue arises on vehicles sold as SUVs (such as Tata Nexon) having engine
capacity below 1,500cc but having more than 170mm ground clearance –
whether they are liable to the higher compensation cess. The inclusive
definition of SUV in the explanation has created the confusion:

Plain
reading of this explanation seems to suggest that the inclusive format
makes the definition expansive and covers all vehicles known as SUVs
even though the length or ground clearance are below the threshold
specified in the explanation. While the Revenue is pursuing this
interpretation, it seems to lose sight of the primary condition of the
entry i.e. engine capacity should always exceed 1500cc. Unless the
primary condition on engine capacity is not satisfied, none of the
secondary conditions in explanation can be extended to the
classification entry. Therefore, a Tata Nexon having engine capacity
below 1500cc cannot be taxed under this entry even if they are marketed
as SUVs.

The said entry also raised one question on the manner of measurement of ground clearance¹. Whether the measurement had to be performed in laden or unladen weight? In the case of Tata Harrier²,
though the ground clearance in unladen condition was above 170mm, in
laden condition it fell below the said threshold. ARAI which prescribes
the standards for automobiles in India, has defined ground clearance on
the basis of laden weight rather than unladen weight. The AAAR upheld
the view of the taxpayer and adopted the full laden condition as the
basis for measurement of ground clearance. The Revenue’s argument that
passengers could be of different weights was set aside since ARAI also
prescribes the standards (68 kgs) for measurement of laden condition.
Though this issue may not be applicable to Tata Harrier (on account of
change in configuration), this could have impact on other vehicles whose
ground clearance in laden condition fall below the threshold.

Hybrids – Internal Combustion (IC) Engines and Electric Motors

Hybrid
vehicles bridge the deficiencies of IC technologies and EV
technologies. They combine both technologies for propulsion of the motor
vehicle – depending on the dominance of one technology over the other,
hybrids can be sub-divided into ‘Mild Hybrids’ and ‘Full Hybrids’ IC³.
The Compensation Cess Act imposes a cess of 15 per cent for hybrid
vehicles and 17 per cent in case of other vehicles as follows:

1. IS-9435 is Indian Standard for terms and
definitions states – “The distance between the ground and the lowest
point of the centre part of the vehicle. The centre part is that part
contained between two planes parallel to and equidis- tant from the
longitudinal median plane (of the vehicle) (see 4) and separated by a
distance which is 80 per cent of the least distance between points on
the inner edges of the wheels on any one axle. This measurement has to
be done on fully laden vehicle to the maximum authorized GVW.”
2. TATA MOTORS LIMITED 2019 (31) G.S.T.L. 544 (App. A.A.R. – GST)
3.
Mild Hybrids – electrical motor is used only when additional power is
needed and IC engine is used to provide most of the power; Full Hybrids –
electrical energy is used while the car needs less power and IC engine
is used when the car needs more power.

While
the classification would be unambiguous in case of full hybrids
(covered under Entry 48 at 15 per cent), classification of mild hybrids
poses some challenge. An issue arose in the case of Maruti Suzuki India Ltd⁴
involving mild hybrids of S-Cross, Ciaz and Ertiga. The bone of
contention was whether the electric motor are motors of propulsion in
such mild hybrids. As stated above, in mild hybrids, the electric motor
starts the engine while the initial mobilization is provided by the IC
engine. At higher speeds, the electric motor also provides additional
force to the IC engine. Multiple reports documented that electric power
cannot solely propel the engine but certainly add force to the IC engine
to reduce the fuel consumption even at higher speeds. Moreover, the
phrase “both” in the said entry is not a question of independent
capabilities of IC engine and electric motor but implies a combined
effect of both technologies to propel the vehicle. Despite the role of
electric motors documented in technical reports, the AAR observed that
electric motor is not capable of independently propelling the vehicle
and only an adjunct to the IC engine, hence cannot be termed as Hybrids.
This clearly fails to appreciate that additional investment into
hybrids (mild or full) are with visible advantage of reduction in fuel
consumption. The degree of contribution of electric in the hybrid
vehicles is not an ex-facie criterion to remove the vehicle from
hybrids and classify them with conventional IC engines. Propulsion
should not be narrowly understood as initial movement (commonly called
as ‘pick-up’) but also include additional force while in motion. The
objective of granting an incentive to hybrids seem to have been
misplaced with the narrow interpretation of Hybrids.

4. 2021 (49) G.S.T.L. 50 (A.A.R. – GST – Haryana)

Specific Use or General Use Parts

The
mysterious issue which evades this industry is whether a particular
item is a ‘specific use’ or a ‘general use’ part. The rate notification
mandates a rate of 28 per cent in respect of specific parts or
accessories of motor vehicles. The parts which are either manufactured
from a metal alloy, plastic, rubber, etc. could alternatively be
classified in their respective Chapters based on their product
composition.

To take an example, fasteners, nuts, bolts etc. are
designed specifically for automobile manufacturers. The industry
practice is that the OEM partner will manufacture and develop the design
through sophisticated software tools. Prototype of these products would
be tested in the R&D center and finally approved for commercial
production. OEMs also place a condition that the said products should
not be supplied in the spare market and sold exclusively to the
manufacturer or dealer network. On the legal front, the following points
can be gathered:

– Note 2 to section XV on base metals states
that screws, nuts, bolts, etc. classifiable under 7318 are to be
treated as ‘parts of general use’.

– Note 3 to Section XVII
states that any reference to ‘part’ or ‘accessories’ in Chapters 86-88
would be only limited to specific use parts i.e., solely and principally
designed for use with the goods mentioned in the said chapter (e.g.,
steering wheel designed only for motor cars even though it is made of
plastic material and classifiable under the respective chapter).

–
Note 2 to section XVII also provides for an exclusion that ‘general
use parts’ made of base metal should be classified under the respective
chapter heading.

– The Revenue cites the decision of GS Auto international⁵
wherein the said tests have been re- iterated based on the commercial
identity (trade parlance) of the product rather than the functionality.

Strictly
speaking, referring a nut as a ‘part or a motor car’ is an incorrect
application of the commercial identity test. The commercial identity
would first be a screw, bolt, etc. The court has viewed ‘screw’ merely
as a function without cognizance that the nomenclature has given birth
to the functional term and not vice-versa. The fact that this is
designed for a motor car still results in it being a general use part in
view of a specific note in section XV. Moreover, applying the general
interpretative rules, tariff heading of screws, nuts bolts, etc. under
HSN 7318 would be more specific rather than a residuary entry under
‘parts of motor car’ under HSN 8708. However, the appellate advance
ruling authority in A Raymond Fasteners India Pvt Ltd⁶
overturned a lower authority decision and held that since the design
has been developed in consonance with the principal manufacturer and the
purchase order contains a clause that they cannot be sold in the spare
market, they are specific use parts and hence classifiable under HSN
8708 rather than 7318.

5. 2003-TIOL-92-SC-CX
6. 2021-TIOL-05-AAAR-GST

An
issue was raised in the case of “air springs” (made of vulcanized
rubber) where the functionality of the product is driven by the rubber
material rather than the metal holders. The revenue in SI Air springs⁷
held that since 60 per cent of the part comprises of metal components,
it is not an article of vulcanized rubber. The item is a specific use
part and the exclusion in section notes 2(a)/ (b) apply only to general
use parts. Since the item has not been considered as articles of
vulcanized rubber, it was held that the said item being a specific part
is classifiable as parts of motor vehicle under HSN 8708 and not under
HSN 7318. The primary grievance in this approach is that air springs
provide shock absorbing abilities which can only be performed by the
rubber material. Treating the metal components as the primary basis for
classification seems to completely ignore the functionality of the
product as being an article of vulcanized rubber. Resultantly, the
Section note which excludes items of vulcanized rubber entirely from the
Chapter cannot be applied to the product. The incorrect understanding
of the product led to an error in the entire classification matrix.

The CBEC circular⁸
has stated that disc brake pads would be parts of motor cars (under HSN
8708) and not items of asbestos or like (chapter 68) because of a
specific entry of Brakes in HSN 8708. This appears to be understandable
because of a specific entry under HSN 8708 which covers brake pads. The
Advance Ruling Authority has also affirmed that the said parts are
liable to GST as ‘specific parts’ and taxable at 28 per cent⁹.
But extending this analogy for all parts designed for automobiles may
not be the appropriate application of the HSN scheme as the section note
of the chapter clearly spell out the chapters to which this test can be
applied.

Specific Heading vs. General Heading

Even
within the domain of specific parts, the other intriguing issue is
whether a particular part is covered by a specific heading rather than
general heading. One topical issue is whether the ‘Track assembly’
fitted to the floor of the car which enables the forward and backward
movement of the seat is a ‘part /accessory of a motor car’ (HSN-8708 @
28 per cent) or ‘part of a seat’ (HSN 9401 @ 18 per cent). The issue has
emerged with the amendment to the Rate notification in November 2017
wherein HSN 9401 was shifted from 28 per cent rate schedule to the 18
per cent rate schedule. The OEM manufacturer did not lay emphasis on the
accurate classification prior to the amendment and hence following
divergent practices on account of rate neutrality. After the amendment,
manufacturers approached the AAR¹⁰ and it was unequivocally
held that the appropriate classification would be under HSN 8708 at 28
per cent. Reiteration of the legal background to the said issue is:

–
Note 3 to Section XVII states that any reference to ‘part’ or
‘accessories’ in Chapters 86-88 would be only limited to specific use
parts i.e., solely and principally designed for use with the goods
mentioned in the said chapter (e.g. steering wheel designed only for
motor cars even though it is made of plastic material and also
classifiable under the respect chapter).

– Note 2 specifies a
negative list of parts / accessories which would be classifiable in
their respective chapter and not under this Section.

– Parallelly, Section XIX also classifies seats and its parts under HSN 9401 which is taxable at 18 per cent.

– HSN 8708 provides for classification of ‘parts’ and ‘accessories’ of motor vehicles and hence liable to GST at 28 per cent.

–
Therefore, seat adjusters / assemblies appear equally classifiable
under HSN 8708 as parts / accessory of motor car and 9401 as parts of a
seat.

– The HSN Explanatory Notes provide that Headings under
Section XVII cover only those ‘parts’ or ‘accessories’ which comply with
all 3 conditions:

Not excluded by Note 2 of Section XVII;

Suitable for use solely or principally with articles of Chapter 86 to 88 [Note 3 of Section XVII], and

Not specifically included elsewhere in the Nomenclature.

– The Supreme Court recently in Commissioner vs. Shiroki Auto Components India Pvt. Ltd.¹¹ affirming the CESTAT judgement held that child spare parts which form part of the seat is classifiable under HSN 9401.

– In a previous case, the Supreme Court in CCE vs. Insulation Electrical (P) Ltd¹² held that seat assembly are classifiable under HSN 8708 as motor vehicle parts and not parts of the car seat.

7. 2021-TIOL-25-AAAR-GST
8. 52/26/2018-GST, dated 9th August, 2018
9. Roulunds Braking India (Pvt.) Ltd 2018 (15) G.S.T.L. 142 (A.A.R. – GST)
10.
M/s. Shiroki Technico India Pvt. Ltd 2021 (1) TMI 492 (Guj.) & 2019
(7) TMI 1734 (Haryana); Daebu Automotive Seat India Private Limited
2021 (6) TMI 685 (TN)
11. 2021 (378) E.L.T. A145 (S.C.) affirming
2020 (374) E.L.T. 433 (Tri. – Ahmd.)(Shiroki Auto Components India Pvt.
Ltd. vs. Commissioner).
12. 2008 (3) TMI 22 (SC)

On
placing the said issue in appropriate perspective, we can decipher that
the said seat assembly is an adjunct to the motor car on which the seat
is placed. The nomenclature of it being a seat assembly does not make
it classifiable under HSN 9401. The seat is complete without the seat
assembly and the function of the assembly is to move the seat backward
or forward. At most, this can be an accessory to the seat rather than a
part of the seat. HSN 9401 is limited only to ‘parts’ of the seat and
not to ‘accessories’. Therefore, the specific vs. general test would
result in classifying the said product under HSN 8708. The Supreme
Court’s decision in Shiroki (supra) is rightly
distinguishable on multiple grounds (i) the product is a child spare
part which fits into the seat and not an accessory, and (ii) the extant
section notes had a specific exclusion for parts identifiable under HSN
9401 which is different from the current section note.

SUBSTANTIVE ISSUES

ISD/ Cross Charge

OEMs
perform R&D at their dedicated centers which could be either
located in a separate state or even outside India. These are units which
work on design, improvisation and technological upgradation of the
motor car. The final outcome (success or failure) is unknown until the
commercialization of the R&D outcome. Even after commercialization,
it undergoes improvements based on customer and service station
feedback. Whether the said activity constitutes a ‘supply or service’ to
the corporate office and/or factory is a growing debate. Schedule I
r.w.s. 25 treats these R&D centres as distinct persons. The
employees at the R&D center may be subjected to performance
appraisals based on outcome but there is no obligation on the part of
the R&D center to develop a product for the OEM, for it to
constitute a ‘service’. R&D by its nature is a repetitive trial and
error method and the benefits (if any) would accrue to the OEM as a
whole. The obscure definition of ‘service’ should not be made applicable
to this arrangement. But in the absence of a cross charge to the
corporate office/factory, input tax credit starts accumulating at the
R&D center without any source of taxable revenue. In view of this,
OEMs have either adopted the ISD mechanism for transfer of service or
raise a cross-charge invoice (where both goods and services are
involved) with a nominal mark-up (say 10 per cent) on the corporate
office. This makes the entity GST neutral since the corporate/ factory
claims the input tax credit of the same.

Free Supply – Moulds / Drawings, etc.

Components/ sub-components are manufactured based on moulds/ drawings
provided by the OEM. The ownership, intellectual property, etc. fall
within scope of the principal manufacturer. The issue emerges on
valuation of the components which are produced by use of the said moulds
by the component manufacturer. Section 15 requires that the transaction
value would be the taxable value provided ‘price is the sole
consideration’ in the supply transaction.

The
manufacturing agreement/ PO prescribing the scope provides that
moulds/drawings would remain in the ownership of the principal
manufacturer and is being provided to the component manufacture solely
for exclusive use of components to be supplied to OEMs. The obligation
to provide the mould rests on the OEM and the component manufacturer
uses the moulds to meet the product specifications. CBEC circular¹³
addresses this issue vide two separate scenarios (a) where the scope of
‘moulds’ is with the principal manufacturer, the value of such moulds
need not be included in the taxable value of the components; whereas (b)
in cases where the scope rests on the component manufacturer and the
principal manufacturer takes on this obligation on FOC basis, it
requires an imputation of the amortised costs of the moulds over the
life of the moulds. While there is no legal basis for such amortization,
this circular appears to be echoing the practice under the Central
Excise valuation rules¹⁴ which required amortization of such mould costs.

13. No 47/21/2018-GST, dated 8th June, 2018
14. Rule 6 of Central Excise Valuation Rules

Discounts vs. Incentives

Innovative
rewards schemes are diminishing the difference between discounts and
incentives. Generally, OEMs provide volume based or non-volume-based
price reductions to the dealer network. In many cases, these schemes are
developed based on the market response to a particular product line
through periodic circulars. OEMs also fix the end delivery price in the
back end and reimburse the shortfall to the dealers through price
supports. While these concepts are distinct in theory, the application
of the same in the complex dealership agreements makes the task
complicated. The academic issue is whether the said amounts are
deductible from the taxable turnover of the OEMs against the sales made
to the dealers. In cases where there is no doubt (say volume based
routine discounts), OEMs are claiming the same as a deduction from their
turnover. In cases where the incentives are post sale or after dispatch
of the goods, the OEMs generally reimburse the same against a tax
invoice from the dealer and hence the transaction is GST neutral.
Essentially, any pre-agreed reduction having a bearing on the sale price
is being availed as a deduction from OEM’s turnover. Reductions which
are an OEM mandate (such as corporate discounts, loyalty discounts and
season discounts) on the end customer price may be incentives and
generally routed through the tax invoice mechanism.

Authorised Service Station – Reimbursement

OEMs
reimburse the authorized service station costs incurred towards the
free services provided to the end customers under their warranty terms.
As a part of the terms of sale, the OEM assures its customer free after
sales services up to a specific period/ mileage. This obligation is
discharged through the service network associated with the OEM. The
service station conducts the service and only bills certain chargeable
consumables to the end customer. The free service component is charged
to the OEM along with GST. Under the legacy laws, chargeability of
service tax on such free services was a subject matter of intense debate
on the issue of whether there was any service rendered to the OEM. With
the expansion of the definition of ‘recipient’ under the GST regime,
this issue seems to have been fairly settled and automobile dealers are
recovering this cost from the OEM as being the person ‘liable to pay
consideration’ for the said service under the dealership agreement.

Product Recalls/ Warranty replacements, Insurance claims

Warranty
terms with the OEM and end customer provide for replacement/repair of
critical components on account of manufacturing defects or sub-standard
performance. The warranty claim emerges at the authorized service
station who immediately attend to it. There are set of protocols for
implementing the warranty claims of the customer. Authorized service
station then seek a reimbursement of the materials and labour costs of
such warranty claims. On the first leg of warranty replacement, the
position appears to be fairly settled¹⁵ by a CBEC FAQ which
holds that supply of replaced goods are not taxable in the hands of the
end customer. However, the recovery from the OEM either in the form of
fresh stock or monetary claim would be taxable in the same manner as a
free service activity discussed above. This concept can be applied even
to cash-less insurance claims where insurance companies disburse the
compensation directly to the dealer towards the motor car repair costs.

An
adjoining point would pertain to the ascertainment of the place of
supply of goods (spares replaced). The said spares are delivered to the
end customer but are being billed to the OEM as being in-warranty
replacements. Here the movement is local/intra-state, but the OEM may be
registered outside the state of replacement. The industry is taking
support of section 10(1)(b) of the IGST Act to conclude that the place
of supply would be the principal place of business of the OEM even
though the delivery concludes in the same state. Though this is slightly
against the popular application of s.10(1)(b) only to ‘bill to ship to’
models, it represents the correct position in law.

Composite Supply – Service Station

Service
Station perform service and repair jobs involve use of both material
and goods. Under legacy regime, in view of distinct VAT and service tax
laws, a clear bifurcation of the same was performed by the dealers and
respective taxes were charged. In the GST regime, the concept of
‘composite supply’ posed a significant challenge, more so because the
peak rate for many parts were at 28 per cent while labour charges were
taxable at 18 per cent. Replacement of a part places two composite
obligations (a) supply the part (b) and replacement, both of which are
equally important to the end customer. Going by the Revenue’s
inclination, it would be termed as a mixed supply (in the absence of a
clear principal supply) and taxed at 28 per cent (being the higher of
the rates applicable). In practice though, the dealers have been
applying the CBEC circular¹⁶ which has curiously scuttled the
issue by stating that separate values charged for material and labour
would make them liable to tax at their respective rates. Though the
clarification defeats the concept of composite supply (concurrent/
inter-twined obligations), automobile dealers are content in applying
this circular as it assures legal certainty to the illusionary solution.

15. CBIC has issued FAQ on 31st March, 2018
16. 47/21/2018-GST, dated 8th June, 2018

Body Building – Sale or Service

Body
building involves supply and fixation of materials on chassis sold by
the OEM manufacturer. Alternatively, the body builder also purchases the
chassis and supplies the body-built bus/ truck to the customer. In the
former scenario, CBEC¹⁷ has held that it amounts to a job
work/ manufacturing services and deemed as a service under Schedule II
Entry 3. While in the later scenario where a completely built bus is
directly sold to the end customer, the rate as applicable to goods (bus,
etc.) would be applicable to the body-built motor vehicle as well
(i.e., 28%). This appears to be sound position in the context of
composite supply as well as the deeming fiction being placed by Schedule
II. The physical condition at the time of supply and the obligations
undertaken for the entire motor vehicle make the supply as that of
‘goods’ rather than a ‘service’. Similar views have been adopted in
multiple advance rulings where despite contribution of substantial raw
materials (such as steel, fabrication, etc.) during body building
activity, the fact that the underlying chassis is owned by the principal
has been the tipping point of whether the transaction is supply of
goods or services¹⁸.

Input Tax Credit on Demo Cars / Display Cars / Loyalty Cars

Dealers
are required to maintain the Demo Car which shall be used for the test
drives for a specified mileage/ period after which they are sold in the
after-market at a lower value. These are purchased from the OEMs on
payment of taxes. Section 17(2) debars motor car credit other than cases
of re-sale/ supply. Demo cars at the time of purchase may not be
available for re-sale but by trade practice would be sold after its use.
Contrary advance rulings are prevalent on this issue – one school of
thought states that these would be ultimately sold and hence eligible
for input tax credit¹⁹ – section 17(5) does not place any
time limit over the further supply of such motor vehicles; other school
of thought states that since the purchase of such cars is not with the
intention for further supply and sold after much use, input tax credit
is not permissible²⁰. While section 16(1) also permits credit
on mere intention of use of goods/ services, negative wordings of
section 17(5) permits credit only when they are actually used. Demo cars
are certainly for business use and by trade practice sold in the
after-market. The dilemma faced by dealers is that Demo cars are not
being sold and fall within the permitted uses only when they are
actually sold (say in 1-2 years) but the credit availment is subject to
statutory time limits. While strict wordings may not permit credit until
actual supply, a more liberal interpretation, keeping the object of the
statute, may help the dealers in availing the credit.

17. 34/8/2018-GST, dated 1st March, 2018 later elaborated in 52/26/2018-GST,dated 9th August, 2018
18.
AB N Dhruv Autocraft (India) Pvt. Ltd. 2020 (41) G.S.T.L. 383
(A.A.R.-GST-Guj.); Rohan Coach Builders [2019 (26) G.S.T.L. 525 (A.A.R. –
GST)]; In Re:Tata Marcopolo Motors Ltd. [2019 (27) G.S.T.L. 283 (A.A.R.
– GST)]
19. Toplink Motorcar Private Limited 2022 (7) TMI 181 & Chowgule Industries Private Limited 2020 (1) TMI 741

20. Khatwani Sales & Services LLP 2021 (1) TMI 692 & BMW India Pvt. Ltd. 2022(3) TMI 487

Eligibility
of credit on display cars is fairly straightforward and not subjected
to much debate. In case of loyalty cars (replacement cars at the time of
handing over end user cars for service), they are used for
transportation of passengers, but the said amounts do not accrue any
direct revenue to the dealer. Credit on loyalty cars may be denied until
its actual sale wherein the legal position would be akin to Demo cars.

Composite Supply – PDI, RTO charges

Pre-Delivery
inspection charges are costs recovered from the OEM for conducting the
inspection before the end sale of the car. These recoveries form part of
the dealership agreement. The Supreme Court in TVS Motor Co Ltd ²¹
negated the inclusion in the assessable value of the car sold by the
OEM to the dealer as being a post-sale activity. The prevailing
definition restricted itself to consideration payable ‘by reason of’ or
‘in connection’ with the sale and hence Courts held that only those
amount, in the absence of which the sale may not be consummated, would
be included and not amounts which are deferred beyond the date of sale.

21. 2016 (331) E.L.T. 3 (S.C.)

In
the GST context, the term ‘consideration’ has been defined as any
amount as part of, inducement or in connection with the supply from any
person including the recipient. With transaction level valuation, the
issue may not be relevant at the OEM level but now trickles down to the
dealer level. Here, the sale of the motor car to the end user also has a
simultaneous recovery from the OEM for the PDI conducted on their
behalf. To include the said PDI as part of the sale price under the
supply to the end customer terming it as ‘additional consideration
received from the OEM’ may not be an appropriate application of the said
definition and hence may not be chargeable at the same rate as
applicable to the motor car (GST + Compensation cess). Having said this,
it would certainly be chargeable as a separate service activity by the
Dealer to the OEM at 18 per cent.

Sale of Old and Used Vehicles²²

Motor
vehicles have been barred from input tax credit both under the legacy
VAT/ CENVAT and GST laws. Under the GST regime, sale of used motor
vehicles is subjected to tax. Having denied the input tax credit on
purchase, any further tax on output would result in tax cascading and
hence Notification No. 18/2018 provided that GST would be chargeable
only on the profit accruing over the tax depreciated value of the asset.
The benefit is available only where the seller has not availed input
tax credit either under the GST laws or under the legacy laws. The
notification uses the phrase ‘old and used’ in contradistinction to the
phrase ‘second-hand goods’ as used in the Margin Scheme (refer
discussion below). Use of a distinct terminology raises doubt over
whether there is any perceivable difference. Probably, the notification
is oriented towards the actual use and the claim of depreciation rather
than number of transfers recorded in the Regional Transport Authority
records.

The said notification presents two cases in hand (a)
profit margin over the depreciation value, in which case the profit
margin is taxable – this would be case of partial exemption and hence
not subjected to any kind reversal of common inputs u/s 17(2); (b) loss
on account of sale value lower than depreciated value – though in this
case no tax actually accrues to the seller on account of valuation
methodology, it continues to be a case of partial exemption since the
notification, as a matter of principle, is not oriented to granting full
exemption. Therefore, reversal of common input tax credit may not be
required in both scenarios.

22. Notification No. 8/2018-C.T. (Rate), dated 25th January, 2018

Margin Scheme for Pre-owned Vehicles

As
per Rule 32(5) of the CGST Rules, 2017, where a taxable supply is
provided by a person dealing in buying and selling of second hand goods,
i.e., used goods as such or after such minor processing which does not
change the nature of the goods and where no input tax credit has been
availed on the purchase of such goods, the value of supply shall be the
difference between the ‘selling price’ and the ‘purchase price’ and
where the value of such supply is negative, it shall be ignored.

In
this regard, Notification No. 10/2017²³ exempts supply of ‘second-hand’
goods received by a registered person, dealing in buying and selling of
second hand goods and who pays the central tax on the value of outward
supply on the profit margin earned on such second hand goods under Rule
32(5). In case any other value is added by way of repair, refurbishing,
reconditioning, etc., the same shall also be added to the value of goods
and be part of the margin. If margin scheme is opted for a transaction
of second-hand goods, the person selling the car to the company shall
not issue any taxable invoice and the company purchasing the car shall
not claim any ITC. In a recent advance ruling²⁴ it was held that
refurbishment costs cannot be deducted as it is not ‘purchase price’ in
strict sense though it may be purchase cost. The price would be the
amount payable as consideration at the time of purchase of the car and
exclude own costs. However, the advance ruling fired another salvo by
also stating that input tax credit on such refurbishment is not
permissible. This seems to be unfair and contextually illegal, hitting
the dealers on both fronts.

23. Notification No. 10/2017-Central Tax (Rate) New Delhi, dated 28th June, 2017
24. 2022 (5) TMI 402 IN RE: M/s. Tej Kumar Jain

PROCEDURAL ISSUES

E-way Bill

A
curious issue arose before the Kerala High Court²⁵ in the context of an
E-way bill for movement of motor cars by the auto dealer from one state
to another after completion of supply. In the peculiar facts, the motor
car was sold to the customer and a temporary registration was obtained
under the Motor Vehicles Act. Subsequently, the dealer performed the
transportation of the motor car (having an odometer reading of 17kms)
from the point of sale to the point of delivery. The Court held that the
fact of temporary registration, odometer reading, operative insurance,
handing over possession and distinct after-sale service of
transportation leads to the conclusion that the supply was complete in
the state of origin and tax would accrue to the destination state. The
act of transportation is distinct from the act of supply which is
complete and hence no e-way bill was required on the grounds of being a
transportation of ‘personal goods’ of the purchaser. Other observations
of the Court having a bearing on taxability are also worth noting:

–
Transaction which terminates with the supply is an intra-state supply,
and despite the purchaser having taken delivery of the goods and moving
the same inter- state, would not alter the character of the supply.

–
In case of intra-state supply, other states are not entitled to any
revenue and hence cannot cause detention on ground of tax evasion.

25. Kun Motor Co. Pvt. Ltd. vs. Asst. State Tax Officer 2019 (21) G.S.T.L. 3 (Ker.)

One
may also note that the section 68 is a machinery provision which is
subservient to the charging provisions. Once the supply is complete and
tax is discharged, they are no more a subject-matter of governance by
the GST law in so far as output taxes are concerned. Section 68 requires
an e-way bill for ‘consignment of goods’ under a transaction of live
supply. It ought not to cover goods of a consummated supply which have
entered the consumption stream. It is for this reason that the scope of
the law is only limited to business transactions and does not extend to
personal activities. Therefore, at a principle level, the provisions of
section 68 mandating e-way bill should be limited only to supplies in
the course of business and not beyond that.

CONCLUSION

The
future of automobile sector is towards driverless technologies,
mobility services, etc. The GST law is also progressing towards
driverless GST implementation through e-invoicing, etc. where human
intervention is on its decline. But the substantive issues are driving
the industry into cumbersome challenges and the Government could
undertake a drive to resolve some of the said issues through appropriate
circulars/ amendments.

shailesh.kwebmaker

How an Apparent Relief Became a Burden for Government & Taxpayers?

INTRODUCTION

Goods & Service Tax in India is a destination-based consumption tax, i.e., the tax collected on a supply (taxing event) becomes revenue of the State in which the supply is consumed. This is evident on a reading of Article 269A(1) of the Constitution, which, while giving exclusive powers to the Parliament to levy and collect tax on inter-state supplies, also requires the apportionment of the said tax between the Union and the States.

Accordingly, Sections 10-13 of the IGST Act, 2017 lay down the rules for determining the place of supply, which in effect will aid in determining the State where the supply is being consumed.

Further, Section 17 lays down the manner of apportionment of tax and settlement of funds, being an integrated tax collected by the Parliament. Since GST works on the principle of value addition and availability of input tax credit for businesses, section 17 recognizes that for a B2B transaction, the tax collected does not accrue to any Government and accordingly provides for settlement of taxes only in cases of B2C transactions and B2B transactions where the corresponding credit is not available.

Section 17 of the IGST Act, 2017 accordingly deals with the following scenarios for the settlement of taxes between the Governments:

a) In respect of supplies made to an unregistered person (B2C)/ composition dealers paying tax u/s 10.

b) In respect of supplies made where the registered person is not entitled to claim the input tax credit.

c) In respect of import of goods/ services by a registered person not entitled to claim the input tax credit.

d) In respect of supplies made where the registered person does not claim input tax credit within the prescribed timelines.

e) In respect of import of goods/ services by a registered person who does not avail the said credit within the prescribed timelines.

f) In respect of import of goods/ services by an unregistered person or a registered person paying tax u/s 10 or a registered person not entitled to claim an input tax credit.

DATA POINTS FOR SETTLEMENT

Conceptually, the above settlement process, along with the provisions for inter-se settlement in case of cross utilization of credits, would seem adequate and logical. However, in a nation with millions of taxpayers and trillions (or even more) of transactions, compiling the relevant data could be a daunting exercise. This aspect was thought through at the time of the introduction of GST, and the detailed, elaborate transaction level uploading and two-way matching process was inter alia also designed to provide the said data points. As a quick recollection, an elaborate mechanism for filing returns was proposed involving the following steps:

• GSTR 1: wherein suppliers furnished details of outward supplies made by them to registered / unregistered persons. The details of supplies made to unregistered persons, though to be furnished at summary level, was to be provided supply-wise.

• The supplies to registered taxable persons disclosed in GSTR-1 were intimated to the receiving taxable persons in GSTR-2A.

• Based on the details intimated in GSTR-2A, the receiving taxable person was expected to carry out the matching exercise while furnishing GSTR-2, which is the details of inward supplies and marks each supply as either accepted (i.e., matched), rejected (i.e., incorrectly appearing or requiring amendment) or pending (appearing correctly but not credit eligible in terms of section 16 of the CGST Act, 2017). In addition, the receiving taxable person also had an option to add transactions, not disclosed by the supplier. The input tax credit on such transactions was provisionally subject to the supplier making the necessary rectifications.

• The transactions marked as ‘rejected’ / ‘added’ were to be sent back to the supplier in GSTR-1A whereby they could take the corrective action for the mismatch to be rectified.

• The information furnished in the GSTR-1 and GSTR-2 was to be auto-populated to the GSTR-3 wherein the taxable person was also required to report other adjustments, such as reversal on account of Rules 37, 38, 42, 43, etc., and details of blocked/ ineligible credits and discharge the tax liability by utilizing balances lying in electronic cash/credit ledgers.

The complex transaction-based return cycle was designed to ensure that the data could be collated for proper settlement of taxes among the States.

However, in August 2017, during the first return cycle under GST, the portal displayed unpreparedness to facilitate filing of the above returns. The delay in filing GSTR-3 meant a delay in collection of tax revenue. Therefore, as a makeshift arrangement, the above-detailed process was temporarily substituted by a disjoint process of filing GSTR–1 -> GSTR–3B. It was clarified in the press release that this was to be applicable only for two months where the tax would be payable based on a simple return containing a summary of inward and outward details. However, as time progressed and the portal failed to facilitate the filing of GSTR-2, which delayed the filing of GSTR-3, the proposed filing mechanism was scrapped, and the GSTR-3B replaced GSTR-3 instead of being a mere stop-gap arrangement.

This also meant that the matching process was never implemented on the portal though GSTR–2A was made available to taxpayers. In many cases, basis mismatch between credit claimed in GSTR–3B at a summary level and credit auto-populated in GSTR–2A, recovery notices were issued to the taxpayers alleging an excess claim of the input tax credit. In many cases, the taxpayers were forced to approach the High Court for relief against such exercises. But, ensuring compliance was perhaps just one of the challenges faced due to the makeshift arrangement. A lot has been talked about the same in various professional forums, and this column has also featured an article on the same. This article focuses on certain other challenges.

OTHER ISSUES EMANATING FROM THE MAKESHIFT ARRANGEMENT

Apart from the above, the failure to implement the proposed returns filing process meant that the information required to carry out the activity of apportionment and settlement of funds amongst the Union and the States was not readily available due to the following:

• For supplies made to unregistered persons and composition dealers, if the supplier supplying goods or services to a dealer under composition scheme discloses the supply as B2B, based on the tagging of the recipient, the Government gets a report of supplies received by composition dealers where input tax credit is not available. Similarly, the information of supplies made to unregistered persons was supposed to flow from GSTR-1, which was expected to be the gross liability to be discharged by a taxpayer. However, the disjoint filing of GSTR-1-3B meant mismatches in the liability disclosed versus liability discharged. Therefore, GSTR-1 was no longer a reliable means for obtaining the said information. In fact, there were occasions where a taxpayer would file GSTR-1, i.e., disclose outward supply but not file GSTR-3B, resulting in a loss of revenue to the exchequer.

• For data points listed at (b) to (e) earlier, the information was expected to flow from GSTR-2 and GSTR-3, which required furnishing of transaction level details for credit matched but not claimed as the same was ineligible, time-barred, etc. Non-operationalization of GSTR-2 and GSTR-3 meant that the accurate details required for apportionment/ settlement exercise were no longer available.

• For (f) above, the source is the ICEGATE data. GSTIN must be mentioned in all import cases. Therefore, wherever importers are flagged as unregistered/ paying tax under composition scheme, details of ineligible credit can be obtained by the Government.

INPUT TAX CREDIT – WAY FORWARD

To rectify these shortcomings, vide Circular 170/02/2022-GST, the manner of disclosure of claim of the input tax credit is laid down. Let us understand what the changes are.

Under the format applicable till now, the figures appearing in the ‘taxpayers’ books of accounts were considered as the starting point, and basis of the matching (as required u/s 16(2) (aa)). He was required to disclose the credit. More importantly, there was no necessity to disclose the credit appearing in GSTR-2B but not accounted/ not appearing in books of accounts. This practice is now sought to be changed by making certain changes to the format of GSTR-3B. Let us first understand what the change is:

Old

New

4. Eligible ITC

Details

(A) ITC
Available (Whether in full or part)

(1)
Import of goods

(2)
Import of services

(3)
Inward supplies liable to reverse change (other than 1 & 2 above)

(4)
Inward supplies from ISD

(5) All
other ITC

(B) ITC Reversed

(1) As
per rules 42 & 43 of CGST Rules

(1) As per rules 38, 42
& 43 of CGST Rules and
sub-section (5) of section 17

2.
Others

(C) Net ITC Available (A)-(B)

(D)
Ineligible ITC

(D)
Other details

(1) As
per section 17(5)

(1) ITC
reclaimed which was reversed under Table 4(B(2) in earlier tax period

(2)
Others

(2)
Ineligible ITC under section 16(4) and ITC restricted due to PoS provisions

The changes can be primarily summarized as under:

a) Disclosure of ITC covered u/s 17(5) shifted from 4D(1) to 4B(1).

b) Complete change of information required to be disclosed at 4D.

On a first reading of the above, one may feel that it is a mere change in the details to be submitted. However, there is much more than what meets the eye. Under the new process, a taxpayer is expected to carry out the detailed matching process wherein the claim of the input tax credit is based on figures auto-populated in GSTR-2B. Indirectly, the taxpayer must mark each transaction either as accepted, pending, or rejected as initially envisaged at the time of introduction of GST, with the only variation being that the same is to be done manually. The reporting continues to be at a summary level, i.e., the Government still has no means to identify errant suppliers at an early stage.

More importantly, the amounts to be disclosed at 4B, which deal with other reversals, have now been classified as permanent and temporary reversals to be disclosed at (1) and (2), respectively. The permanent reversals are described as those that are absolute in nature and are not reclaimable, and refer to reversals required to be made under Rules 38, 42 and 43. While reference to Rule 38, an ad hoc reversal of input tax credit, by a bank or financial institution including NBFC is understandable, the same may not extend to Rule 42/43 since it contains a specific provision for reclamation in case of reversal of excess input tax credit. Therefore, to this extent, the circular seems to be ultra vires the Rules referred to, and taxpayers might still have an option to reclaim the excess credits reversed u/r 42/43.

This takes us to ‘temporary reversals’. Under the temporary reversal, what is required to be reported is the input tax credit appearing in GSTR-2B and auto-populated in GSTR-3B but not matching with the books of accounts and, therefore, liable to be reversed. The circular clarifies that this shall include, apart from credits reversible u/r 37, instances where restrictions under clauses (b) & (c) of Section 16(2) which restricts the claim of input tax credit in case the goods or services or both or the tax charged in respect of a supply has not been paid to the Government. More importantly, it refers to this as a reversal of input tax credit and proceeds to clarify that a taxable person shall be entitled to reclaim the credits so reversed on account of a mismatch as and when the same appears in GSTR-2B. This would mean that the credit disclosed at 4A.(5) as per GSTR-2B would mean availing of input tax credit at the first stage, which would be a contravention of conditions laid down in section 16. For instance, a supplier has issued an invoice to a taxable person and disclosed the same in his GSTR-1 of August, 2022. However, the taxable person has received the invoice and goods in the subsequent month, i.e., September 2022. Therefore, the question that remains is, can the recipient even disclose the credit to the extent of this transaction in 4A. (5), and then reclaim the same in September GSTR-3B? In that sense, it can be said that the Circular requires the taxable person to disclose availability of input tax credit which is contrary to the provisions of the Act.

There is one more issue in the above. The purpose of this exercise is to enforce proper reporting of ineligible credits/ blocked credits. However, many businesses have a practice whereby they do not recognize the tax separately in case of blocked credit and book the gross expenditure in the books of accounts. Therefore, the tax component of the blocked credits do not appear separately in their purchase register. As such, when matching between GSTR-2B and books is done monthly, such transactions always appear as unmatched transactions, and therefore, are reported as temporary reversals. Such transactions may never be reported as permanent reversal, and therefore, the details of such credit will be available to the Government only as time-barred credits.

One advantage of this clarification is that it can be used to bypass the provision of section 16(4). Let us take an example of an invoice appearing in GSTR-2B of September, 2022. For some reason, the invoice was never accounted by the taxable person (non-receipt of the invoice, dispute, etc.,) and therefore, while filing GSTR-3B of September, the credit was first shown at 4A.(5) and after that reversed at 4B.(2) as a temporary reversal. In December, 2023, the taxable person accounts for the invoice. The question is, can he claim this credit now as in terms of the above circular, the credit has already been availed & reversed, and now the same would amount to reclaim of the credit to which the provisions of section 16 (4) may not apply.

This takes us to the point 4D of the new format. At 4D.(1), the format expects a taxable person to disclose instances of reclaim of input tax credit which was reversed earlier in table 4B.(2). The intention behind this specific disclosure seems to be to track the difference in credits claimed in 4A.(5) of GSTR-3B and GSTR-2B on a month-on-month basis by probably using the following method:

Tax Period

ITC as per GSTR-2B

ITC as per 4A. (5)

ITC as per 4B. (2)

ITC as per 4D. (1)

2022-08

1,50,000

-75,000

–

2022-09

2,50,000

2,95,000

-1,00,000

45,000

2022-10

3,50,000

4,60,000

–

1,10,000

Total

7,50,000

9,05,000

-1,75,000

1,55,000

The above table demonstrates the need for separate disclosure of recredits at table 4D.(1). The various notices received to date based on GSTR-3B versus GSTR-2A/2B notices have focused on amounts disclosed in table 4A. (5). In view of the additional disclosure of input tax credit reclaimed at 4D.(1), it will be convenient for the taxable person to explain the difference to the tax authorities.

However, a question remains regarding the claim of credits appearing in GSTR-2B of July, 2022 and prior period and matched during August, 2022 and subsequent periods. This is because such credits were not disclosed as availment and subsequent reversals during the earlier GSTR-3B. Therefore, even if such credits are claimed on a matching basis, the same cannot be treated as reclaim of input tax credit, and therefore, reporting the same at 4D.(1) would appear to be grossly incorrect. Thus, the easy resolution of mismatch notices may not be on the horizon, at least till September, 2023 as credits for the period April, 2022 to July, 2022 can be claimed till the filing of GSTR-3B of September, 2023. Perhaps, either 4B.(1) should have been appropriately worded to cover this aspect, or a separate row for reporting such cases would have helped the taxpayers. To the least, had the new method been introduced in a new financial year, the mismatch could have been averted as a taxpayer is required to disclose the input tax credit of a particular F.Y. claimed in the next year at 8C and 12 and 13th GSTR-9 and 9C for each financial year.

PLACE OF SUPPLY: CAPTURING CUSTOMER DETAILS

Another issue faced by the Government was the perceived incorrect disclosure of the place of supply in GSTR-3B on which, the Board has clarified as under:

3.3. Accordingly, it is advised that the registered persons making inter-state supplies-

… …

(iii) shall update their customer database properly with correct State name and ensure that correct POS is declared in the tax invoice and in Table 3.2 of Form GSTR-3B while filing their return, so that tax reaches the Consumption State as per the principles of destination-based taxation system.

Let us try to understand the background of the above clarification with the help of an example. A telecom operator has roped in the services of a payment gateway. Under this arrangement, whenever a subscriber intends to renew his connection/ pay his bill, he will make the payment online through the payment gateway. For each transaction through the payment gateway, it charges a nominal fee plus applicable GST to the subscriber. While the telecom would have the subscriber’s details, termed as ‘address on record’ available with him, the payment gateway won’t. The issue that remains for the payment gateway is how to determine the place of supply and more importantly, pay the applicable tax. For instance, the payment gateway is registered in Maharashtra, while the person making the payment is in Gujarat. There can also be a scenario where the payment may be done for a connection obtained in an altogether different state.

In the above, the issue would originate regarding the determination of place of supply. This is because the services provided by the payment gateway are not covered under any of the exceptions provided u/s 12 of the IGST Act, 2017, and therefore, the place of supply will be determined under the general rule, which provides as:

(2) The place of supply of services, except the services specified in sub-sections (3) to (14), –

(a)   made to a registered person shall be the location of such person;

(b)   made to any person other than a registered person shall be, –

(i)   the location of the recipient where the address on record exists; and

(ii) the location of the supplier of services in other cases.

In most cases, it is likely that the payment gateways provide services to end consumers/ unregistered recipients; therefore, clause (b) above becomes applicable for determining the place of supply in case of charges recovered from them. The same provides that the recipient’s location shall be the place of supply when the ‘address on record’ exists. However, when no such address exists, it is the location of the supplier which becomes the place of supply. In such a scenario, it would therefore mean that the tax leviable on a supply being made to and consumed by a person in Gujarat shall be Maharashtra. Therefore, the tax authorities in Gujarat likely feel aggrieved that the tax revenue on a supply consumed in their state accrues to another state. The second option, i.e., to claim that no ‘address on record’ available is the appropriate solution with a supplier as it will help him reduce compliance on his hand. However, does a supplier have such an option or not is something which needs to be analyzed. It becomes important to understand what is meant by ‘address on record’.

The term ‘address on record’ is very loosely defined u/s 2 (3) of the CGST Act, 2017 to mean the address of the recipient as available in the records of the supplier. However, the definition does not define, either address or record. However, Chapter VIII of the CGST Act, 2017 deals with what Accounts and Records every registered taxable person must maintain under GST. Rule 56 (5) thereof requires every registered person to keep particulars of the following:

(a) Name and complete addresses of suppliers from whom he has received the goods or services chargeable to tax under the Act.

(b) Name and complete addresses of the persons to whom he has supplied goods or services where required under the provisions of this Chapter.

The above indicates that while it is mandatory to maintain the ‘complete address’ of all suppliers, the same does not apply when it comes to recipients. In the case of recipients, the requirement to maintain the name and complete address arises only when it is required under the provisions of this Chapter, i.e., Chapter VII of the CGST Rules, 2017. A detailed reading of this Chapter would indicate that there is no requirement for any taxable person to maintain the ‘name and complete address’ of the person to whom goods or services have been supplied. Therefore, a payment gateway is well within ‘its’ rights to claim that they do not have the ‘address on record’ of person using their services and therefore, they are right in treating their supplies as intra-state supply irrespective of the State where the recipient is located.

As pointed above, such a position in the law is certainly to be countered by the other states, who would feel aggrieved by the perception that they are losing out on the tax revenue. However, one may very well argue that the tax revenue never belonged to them as the consumption, by virtue of the exception provided u/s 12 (2), belonged to the originating State. However, many state tax authorities have already raised this issue during assessments/ proceedings on service providers.

The Circular goes on to presume that such suppliers are making an inter-state supply. However, when a taxable person claims that the supply made by him is an intra-state supply, the applicability of this circular/clarification/instruction on such taxable person can be questioned. Secondly, the Circular requires the service provider to update their database correctly with the correct State Name. For the same, the circular presumes the existence of a database. However, in the case discussed above, the supplier may not be maintaining a database in the first place, which would make the clarification not applicable.

The next question is whether the Board considers the name of the State as sufficient data for determining address on record, especially when the provision relating to ‘Accounts & Records’ refer to complete address. Even in common parlance, the address on record can be used for communication, i.e., sending notices, visited using such records, etc. More importantly, what would be the sanctity of the data captured by a service provider in his records when it only contains the name of State. A person can always make mistakes while entering the State data in the database.

Further, even if the suppliers start collecting the State details from their customers, their local tax authorities might question the non-availability of address on record and therefore allege that there is a wrong POS determined resulting in payment of wrong tax. This might trigger the initiation of recovery proceedings for applicable tax not paid, i.e., CGST/SGST. Already, the Hon’ble HC has held that internal adjustment of tax wrong paid would not be permissible, i.e., if a supply is classified as inter-state. and IGST is paid on the same, and subsequently, if it is determined that the supply was classifiable as intra-state supply, in such a case, recovery of CGST/SGST will be done separately. Tax wrongly paid under IGST will have to be claimed as a refund. The only saving grace in such a case would be that interest will not be leviable on the recovery. However, to what extent a refund can be claimed is also a subject matter of dispute, especially whether the time-barring provisions u/s 54 would apply to such refund claims or not? This is an important question as such instances of the wrong classification of the place of supply would arise only during audits, which take place much after the 2-year time limit prescribed u/s 54.

CONCLUSION

GSTR-3B was a temporary arrangement until the functionality to file GSTR-2 and 3 was enabled. However, the temporary arrangement soon became permanent, and a burden for both, the Government as well as taxpayers as is evident from the above. The further attempt to dictate the manner of disclosure of input tax credit/ place of supply in apparent disregard to the stated provisions means that the way ahead will be rocky. Perhaps, it is high time that the original process of filing GSTR-2 and 3 be reintroduced. This will ensure a proper trail for taxpayers and authorities and ensure smooth compliance and accurate filing.

shailesh.kwebmaker

Critical Analysis

A recent decision of the Supreme Court in All India Haj Umrah Tour Organizer Association Mumbai vs. UOI¹ (‘AIHUTO’ case) did not prima-facie seem to unsettle legal positions framed over the history of indirect tax legislation. Probably, the limited macro scope failed to generate enough traction for the decision to be scrutinised further. Yet, a more critical analysis of the decision would suggest a missed opportunity to decide on certain basic tax principles which could have resolved fundamental issues of the law. To appreciate this viewpoint, we may delve into the details and respectfully examine the missed pointers.

BACKGROUND

The issue cropped up on account of a tax exemption being granted to Haj pilgrims who availed services through the ‘State Run Haj committees’ and hence having a visible saving compared to the services being offered by Private Tour Operators (HGOs/PTOs). The simple grievance of the PTOs was that they are being discriminated against despite all the services provided by Haj Committees and PTOs being identical. The PTOs approached the Courts on this matter and were rightly directed to the GST council for making appropriate representations on such policy matters, which was rejected by the GST council based on the recommendation of the Fitment committee. Petitions were filed by PTOs before the Apex Court challenging the said decision.

CASE SUMMARY

PTOs render Haj package services to pilgrims, which involve (a) return air ticket booking; (b) hotel accommodation at Saudi Arabia; (c) catering activity during the Haj; (d) ancillary services such as foreign exchange, local travel, etc. India and Saudi Arabia, through a bilateral agreement, agreed to regulate the Haj pilgrimage for smooth conduct of the Haj by Indian pilgrims. A limited quota of families is permitted to perform the Haj on a yearly basis based on the bilateral arrangement. Internally, India has enacted the Haj Committee Act, 2002 and set up the Haj Committee to allocate the seats to the Haj and assign licenses to PTOs to render private tour operator services based on their allotted quota. Haj Committee itself provides Tour operator services on a nonprofit basis to pilgrims through a lottery system, thereby enabling pilgrims to perform their Haj. The only difference between the tour operator services provided by Haj Committee and PTOs is that while the former is a non-profit organisation, the latter conducts business with the profit motive.

1. 2022-VIL-39-SC

CONCLUSION

The Court held as follows:

– Question of whether the service is extra-territorial cannot be examined as the matter is pending before another Bench;

– The list of decisions on the beneficial or strict interpretation of exemptions need not be examined since there is no ambiguity on the scope of the exemption. The exemption is limited to either (a) religious ceremonies or (b) a specified list of organisations; Tour operator services do not fall into either of the above;

– Exemptions being a matter of policy, the exclusion of other organisations (PTOs in this case) from the exemption list does not make the law discriminatory; and

– Tour operator services are not ‘event-based/ performance-based services’, and the place of supply is based on the default rule of ‘ordinary residence of recipient’, and hence a domestic service.

OUR ANALYSIS

The decision could be analysed under four heads (a) Extra-territoriality, (b) Place of Supply, (c) Discrimination, and (d) Scope of exemption. Detailed arguments under each of these heads have been documented below. The relevant legal provisions are extracted for ready reference:

GST exemption entry² under contention was as follows:

Heading
9963;

9972;
9995;

Services
by a person by way of- (a) conduct of any religious
ceremony ………..

Heading
9991

Services
by a specified organisation in
respect of a religious pilgrimage facilitated by the Government of India,
under bilateral arrangement.

Place of Supply (‘POS’) Entry – The relevant POS entries before the Court:

Default Rule – (2) The place of supply of services, except the services specified in sub-sections (3) to (14), …………. shall be the location of the recipient

Event Based Rule – (7) The place of supply of services provided by way of,—

(a) organisation of a cultural, artistic, sporting, scientific, educational or entertainment event including supply of services in relation to a conference, fair, exhibition, celebration or similar events; or

(b) services ancillary to organisation of any of the events or services referred to in clause (a), or assigning of sponsorship to such events:
…………
(ii) to a person other than a registered person, shall be the place where the event is actually held and if the event is held outside India, the place of supply shall be the location of the recipient.

Passenger Transportation Service – (9) The place of supply of passenger transportation service to, ………..

(b) a person other than a registered person, shall be the place where the passenger embarks on the conveyance for a continuous journey

2. Service Tax exemption entry in Notification 25/2012-ST dt. 20.06.2012 is pari materia with GST exemption entry except to the extent of SAC numbering and inter-relation with the SAC schedule.

Extra-territoriality

The taxpayer contended that Haj Pilgrimage commences from India; involves organising the activity of the Haj at an overseas location; is substantially performed outside India, and hence extra-territorial in nature. The Bench declined to consider this argument since a similar issue was pending before another Bench.

One may perceive that the Court could have addressed this submission to a certain extent since this would have formed the foundation of the entire decision. Alternatively, the Court could have kept the matter pending until the referred Bench resolved the territoriality issue. A tax levy can be crystallised only after crossing the jurisdictional threshold. The Court has ventured into ‘place of supply’ provisions oriented towards ascertainment of India’s tax jurisdiction. Deciding on the place of supply after settling the territoriality subject may have induced some more robustness into the decision.

We know that Article 269 provides levy and collection of taxes on goods or services supplied in the course of inter-state trade or commerce, including the importation into India. Parliament has been empowered to formulate the principles for ascertainment of supply which takes place in inter-state trade or commerce. One could interpret the provisions of sections 7 to 13 to ascertain the place of supply (i.e. legal situs) for ascertainment of India’s taxing jurisdiction. The overall fabric of the provisions indicates that the taxes would be payable depending on the likely consumption of goods or services. Time and again, Courts³ and Government FAQs have stated that GST/ service tax is intended to be a ‘destination-based consumption tax’ – implying that the attempt should be to reach the destination of consumption of the economic activity proposed to be taxed.

3. AIFTP vs. UOI 2007 (7) S.T.R. 625 (S.C.); AL&FS vs. UOI 2010 (20) S.T.R. 417 (S.C.)

In the present facts, the Court could have considered applying this principle to tour operators whose services are conducted across jurisdictions. The special feature of a tour operator service is that while the service could be agreed upon in India, the actual performance and benefit of the service taxes place both in and outside India. Thus, such services have the possibility of multiple situs for each element (e.g. boarding/ catering outside India, overseas travel, etc.).

The Act has already adopted the attribution mechanism in certain cases. Special provisions have been made for attribution of value of Government advertisement contracts to each state to which the advertisement relates. The IGST Rules have attempted to closely approximate the consumption based on certain public information – e.g. advertisement through internet has been guided by TRAI⁴ published information of internet subscribers in concerned states; television has been guided by BARC⁴ published subscriber base; and train advertisements are apportioned based on distance travelled in each state and published by Indian Railways. The target consumers in each state have been adopted as the basis of likely consumption in a State. Moreover, the GST council, in its 47th meeting, made changes in the rate notification by acknowledging that tour operators rendering services to foreign tourists are liable to be taxed only on the appropriate portion of the tour conducted in India.

Thus, there was reasonable guidance within the law to apportion the consumption of a single service into various jurisdictions based on reasonable parameters. While the law has provided similar parameters for a limited category of services (such as immovable property, event-related and some performance-based services), the provisions do not address the entire gamut, especially the services which are governed by the default rule (i.e. place of recipient).

The taxpayer’s expectation from the Court is whether a direction could have been made to the Council to develop logical parameters or alternatively mandate the taxpayer to provide a reasonable parameter for examination, subject to approval by the Revenue. This would have formed a precedent of approximating the value of service rendered at multiple locations and limiting the powers of a state to tax activities only within its geographical jurisdiction. Other sectors would have benefitted from an established principle and taken a cue to adopt reasonable parameters to affix the place of supply of such multi-locational services.

The extra-territoriality issue could also have been addressed based on the decision in the recent Mohit Mineral’s case⁵. In that case, the Court adopted the presence of ultimate beneficiary of ocean freight service and/or destination of import goods as having sufficient nexus with India to extend its tax net. The Court went on to state that the recipient of service should be understood in the backdrop of the location of consumption of the goods/ services and not by strict application of contractual understanding of the recipient. The Court implied that economic consumption of a service should be identified based on location of the person who benefits from the service rather than the person who has demanded the service (which could be different persons). Thus, the Apex Court itself enforced the consumption principle through a nexus theory and diluted the literal definition of ‘recipient’ under law.

4. Telecom Regulatory Authority of India; Broadcast Audience Research Council
5. 2022 (61) G.S.T.L. 257 (S.C.) UOI vs. Mohit minerals Pvt. Ltd.

In the current case, the Court could have relied upon the said theory and ascertained whether the transaction between Indian residents (Tour operator and pilgrim) for services/ events occurring substantially outside India is liable to tax ‘entirely’ in India. Though section 12 of the Act applied to such transaction, the fact of rendition of service outside India (e.g. lodging, catering, local travel) could have had a bearing on the consumption of the service. Applying the analogy from Mohit Mineral’s case, the interpretation of the recipient and its locational benefit across multiple jurisdictions could have been taken up with the Court. The perspective of cross-border dual taxation on account of foreign jurisdiction taxing them as per local laws could have also been examined (refer to subsequent discussions under POS). Either way, the taxpayers would have rejoiced with answers to these issues for application in their respective sectors.

Place of Supply

This issue is a fall-out from the extra-territorial subject, and its analysis would have two facets – (i) Whether the Court could have elaborated on the ‘location of recipient’ and ‘POS rule’; and (ii) Whether certain important concepts could have been addressed prior to applying the POS rule.

The taxpayer contended that substantial activities in respect of the Haj were performed outside India. Since the event was for unregistered persons, the location of the recipient ought to be ascertained at the time of performance of the Haj, which is outside India. The recipient’s location at the time of consumption of the service plays an important role in fixing the location and assess the territoriality of the subject. The literal wording of the definition of ‘location of recipient’ fixes the situs to the ‘usual residence’ of the person. Section 12 does not address cases where supplier and recipient contract to render/ receive a service at a foreign location. It merely fixes the location of both parties and assumes that in all cases that the service is rendered at the usual place of residence in India. Similarly, section 13(6) artificially taxes the entire services in India despite a minuscule proportion of the service being rendered in India and a substantial portion being outside India.

The Counsel may have persuaded the Court to assess the provisions in the context of the type of service being rendered. Consumption of certain one-time services (such as catering, foreign travel, etc.) at foreign location would be misconstrued by mere literal application of wordings. The preceding rules of location of service recipient and provider attempt to identify the location in multi-locational entities to the establishment which is consuming the service (directly concerned). If this is the case, then in a hierarchical provision, the residual rule ought to have also been interpreted in the same light. The Court could have been persuaded to look through the literal wordings to address the consumption principle underlying the law.

The Counsel probably hinted at the larger impact of such a literal application. Foreign jurisdictions would apply the consumption principle and tax those services in their jurisdiction, while India would simultaneously tax the same on the residence principle. While direct tax laws applied the source/ residence principle, they were protected through the double taxation agreements, which minimised dual taxation; VAT laws across nations are not governed by such bilateral arrangements. It is therefore even more imperative to be guided strictly by source / consumption rules so that tax economies do not trespass each other’s territories. These critical concepts (on economic double taxation, fixation of situs, etc.) could have formed part of the reasoning of the Court.

On certain other arguments, the Court rejected the application of the event-based rule on the ground that ‘religious events’ are not specified in the list therein. The Court stated that even by application of the rule of ejusdem generis, the performance of Haj is not an ‘event’ and hence not falling within the domain of event-based rule. The default rule would be applicable since the individual is a resident of India, and the location of such service recipient would necessarily be in India. The taxpayers cannot dissect each step or service task and claim that the location of the recipient during the Haj is outside India and the place of supply is outside India.

The rule of ejusdem generis is applicable when a term is not specified in the series of terms but is intended to be encompassed in a more generic term. It attempts to identify a common thread in a series of terms under a common family. An event (sports, cultural, etc.) is generally a congregation of persons with a common purpose. Haj is a religious event when Muslims across the world visit the holy place, offering their prayers at the said location. Respectfully, the Court could have made a liberal conclusion to the generic term under this rule. However, it turned out that the Court stated that ‘religious events’ are not specified in the provision, and hence the rule of event-based activities cannot be applied to such Haj ceremonies.

While one may be critical of the Court rejecting the event-based rule to religious events, the end conclusion seems to be correct in the overall scheme. The appropriate rationale of the Court could have been that the provisions of event-based services are applicable only to ‘Event organisers’ and not to associated persons who provide services to the participants. PTOs are neither organisers of the event nor render services to the organisers of the event. They render services only to the participants of the events. Eventually, the rule would be held inapplicable but with a different analogy. Going by the current analogy, Revenue may contend even in cases of ‘Event organisers’ of religious events, that they are entirely out of the said event-based rule and hence liable to tax under the residence rule.

The intriguing concept which could have been placed before the Court was the interplay of composite supply with the POS provisions. The Court relied on the default rule and the passenger transportation rule for ascertainment of the POS for the tour operator service. Now section 8 of CGST law r.w.s.20(ii) of the IGST Act clearly directs the tax liability to be ascertained based on the concept of composite/ mixed supply (i.e. either principal supply or highest taxed rate supply, respectively). Tour operator services are classifiable as an individual supply under HSN 99855 though it involves elements of travel, accommodation and other ancillary services. The POS provisions are not strictly aligned with the HSN scheme of classification and adopt a more descriptive approach to services.

Therefore, two contrasting theories could exist while interplaying the POS and composite supply provision (A) one theory could be that composite supply principles are applicable for the entire enactment and once the principal supply has been identified, all legal consequences including POS would follow the principal supply with other ancillary supplies being irrelevant – applying this analogy, the Court rightly applied the default rule of location of recipient since tour operator services are not specifically mentioned in the subsequent rules; (B) the other theory could be that composite supply principles are independent of POS, the POS should be examined independently for identifiable elements (i.e. travel, accommodation, etc.) and the transaction should be segregated for each of these elements. While this dissection would certainly create some chaos on valuation, taxability and other procedural challenges, it would represent an accurate application of the consumption theory. The Counsel pursued this argument, but the Court rejected any kind of dissection of the tour package.

There appears to be a simultaneous application of both theories in the decision. The Court, after application of the residence rule, also went ahead with applying the POS rule for passenger transportation services. It conveys that both theories could be applied simultaneously for ascertaining the POS of services, i.e. once as a Tour operator under the default rule and another as passenger transportation activity (being an ancillary element of the tour operator activity). This gives the reader an impression that elements of a service could be dissected, and POS provisions could be applied independently to them. The Court could have addressed this concept with some more detail to assist the entire trade on this critical subject.

Discrimination

This has probably been the most vehemently argued point of the taxpayer. The exemption was applicable only to tours conducted by Haj Committee, being the ‘specified organisation’ under the entry. Consequently, PTOs which also operated under the same enactment were denied this exemption since they did not feature in the specified list. The PTO’s main contention was that all the tour activities organised by them and the Haj Committee in respect of Haj pilgrims are identical, except to certain minor features such as pricing, catering and proximity of boarding to the Haj. These activities not being significant in the whole scheme of the tour and by themselves do not disentitle them from the exemption. The points of similarity recorded in the decision were:

a. The tours were conducted by both organisations under the Bilateral arrangement with Saudi Arabia.

b. 70% quota was allotted to be organised by Haj Committee, and the balance 30% was allotted to PTOs.

c. All sub-activities of the Haj are identical (i.e. travel, accommodation, tour planning, etc.).

d. Haj ceremony was common under the Holy Quran, and both organisations were to abide by the entire procedure.

Thus, being an indirect tax legislation, the object of the entry is to provide cost-effective travel to the Haj Muslims and this object would be defeated if exemption is limited only to Haj Committees and not extended to PTOs. Hence, the said exemption entry was violative of Article 14 of the Constitution.

The Court provided a very thorough reasoning to refute this line of argument. The Court examined the Haj Act and the roles / responsibilities assigned to the Haj Committee under the enactment. It was acknowledged that the said committee operated with a democratic set-up with the objective of a smooth Haj operation under the bilateral arrangement and overall welfare of the pilgrims. Though Haj Committee operated as tour operators, other responsibilities were entrusted upon them, and the funds generated from such tour operations were to be used for the very same purpose. PTOs, on the other hand, operated as a commercial venture as against Haj Committees, which were non-profit organisation under the control and supervision of the Government. Thus, the Government was justified in limiting the exemption only to specified service providers rather than giving a blanket exemption. There was clearly an intelligible differentia in classifying the Haj committee under a separate basket and limiting the exemptions only to Government controlled entities or instrumentalities. The GST council’s deliberation established a rational basis of differential treatment and could not be found fault with. The legislature and/ or the Government have wider latitude on economic matters, and the ‘sufficiency of the satisfaction’ of the Government in granting exemption in the public interest is not the domain of Courts and is a policy matter left best to the Government to decide.

The question of discrimination is a constitutional issue and could have multiple facets. For tax laws, benefits could be extended by law on account of nature/composition of activity, the status of supplier/ recipient, location of the supply, end use etc. Each benefit could be touching upon a particular facet of the service. In the subject exemption entry, the taxpayer vehemently argued that the taxation being on the service activity, discrimination based on the class of service provider is not permissible and amounts to treating equals as unequal. The Counsel probably implied that supply being the core subject matter, differential treatment based on other parameters such as status of the supplier, etc. would be discriminatory treatment.

The Court rightly stated that the Government has the prerogative to decide the organisation to which the exemption is granted, especially if there is an intelligible differentia and reasonable classification has been attributed to the said decision. In the context of Haj committees, the Court relied upon a decision of the Customs law which upheld the exemptions to State Trading houses and denied the same to other importers. The Court upheld that PTOs and the Haj Committee as separate classes since the latter were Government controlled organisations with a non-profit motive and aimed at furthering the cause of the statute under which they were constituted.

Another discriminatory point which could have been placed before the Court was whether an Indian resident availing services through an operator for hotel accommodation by making a booking from India vis-à-vis the very same Indian resident availing the accommodation services at the hotel counter, be treated differently. This differentiation will be applicable to all overseas services which are booked from India. The service provider, nature of service and location of the service are identical in both scenarios. Yet, the mode of booking makes the former taxable and the latter nontaxable in India. Similarly, the GST council has recently proposed the introduction of a mechanism to assess the tax only on a portion of the tour of foreign tourists conducted in India. This apportionment has not been extended to converse scenarios where an Indian tourist makes a foreign tour which is naturally conducted outside India. Couldn’t this be a point of discrimination to an Indian tourist who conducts a tour outside India and yet taxed on the entire overseas leg?

One may note that while taxpayers can raise these as grievances of discrimination, the Court has been sceptical on this subject. Ideally, a ruling considering the overall economic and legal impact may have paved for some clarity on this principle. The takeaway has been that Article 14 cannot be adopted in a straitjacket manner, and persistent inclination to argue discrimination should be cautiously adopted in tax legislations.

Scope of Exemption

The taxpayer argued that the exemption should be interpreted to state that Haj is a religious ceremony and hence the consumer should not bear the burden of tax. It was also submitted that Supreme Court’s decision in Dilip Kumar’s case⁶ was placed in the right perspective in the latter decision in Mother Superior Adoration Convent⁷. The Supreme Court in Dilip Kumar’s case, did not just state that exemption entries are an exception and hence should be interpreted strictly. The Court also acknowledged that the beneficial purpose should not be lost sight of while interpreting such entries. The taxpayer argued that the entire activity was being conducted with the ultimate objective of performing a ‘religious ceremony’. Since all the services are directed towards this religious ceremony, the exemption entry should be accordingly extended to preparatory activities including Haj tours. A tax impost would be passed on to Haj pilgrims; therefore, the object of granting exemption and reducing the financial burden on religious pilgrimage, would not be fulfilled. Beneficial exemptions are to be interpreted to further achieve the beneficial object of performing the religious ceremony. Thus, the exemption should be granted to PTOs who were assisting in the entire Haj tour.

6. 2018 (9) SCC 1 – 2018-VIL-23-SC-CU-CB

7. 2021 (5) SCC 602 – 2021-VIL-43-SC

The Court subtly acknowledged that beneficial exemption entries should be examined from the perspective of the beneficial object. But this approach should be adopted only when the exemption entry is ambiguous, leading to alternative interpretations. Where the exemption entry itself is restrictive, it would be impermissible for the Court to expand the said entry. In the current case, the exemption entry is crystal clear that the same would be limited to ‘specified organisations’. If the intention and object were to provide an exemption to services provided by PTOs in respect of religious pilgrimage, the notification would have specifically provided so. Moreover, the exemption as regards ‘religious ceremony’ has been confined only to persons conducting the ceremony, and PTOs are not rendering the service of ‘conducting religious ceremony’. They are assisting in making a travel package and completing the Haj but are not themselves conducting the religious ceremony. Thus, the exemption entry was targeted to a particular ‘service provider’ rendering a ‘specific service’. Both conditions were essential ingredients of the exemption, and the Court rightly rejected any attempt to dilute the former condition. There did not exist any ambiguity in the exemption entry for one to seek applying the beneficial object principle cited in earlier decisions of the Court.

CONCLUSION/ WAY FORWARD

To reiterate, the outcome of the decision may have been commensurate with the overall position in law. Courts are burdened with a huge pendency, and matters reach finality only after certain decades. In this scenario, taxpayers expect legal clarity rather than falling victim to ambiguity. The never-ending dilemma of applying literal wordings or legal intent has haunted taxpayers and professionals. With such a background, it is generally expected that any opportunity of clarifying the law should not be missed and a decisive verdict be rendered so that Courts/ businesses are not further burdened with litigation on tax demands.

shailesh.kwebmaker

QUAGMIRE OF EMPLOYER – EMPLOYEE RELATIONSHIP

UNDERSTANDING THE DISPUTE
In a landmark decision, the Larger Bench of the Hon’ble Supreme Court has dealt with the issue of taxability of secondment transactions under service tax in the case of Commissioner vs. Northern Operating Systems Private Limited (NOS) [2022-VIL-31-SC-GST].

The brief facts of the case were that NOS is a company incorporated in India to provide various back-office support services to its group companies across the globe on a cost-plus basis, for which separate agreements are also entered into. In the course of providing the said services, NOS requests its group company to “second” skilled managerial and technical personnel to assist in NOS’s business activities under a secondment agreement entered into with its foreign group companies. This is a separate agreement between the two parties, important terms of which are summarised below (as referred to in the judgment):

a. Upon request from NOS, the foreign group company shall select employees who possess the expertise required by NOS based on the description of skills and competencies required by NOS.

b. Foreign group company shall second the employees to NOS for the time period.

c. The employees seconded to NOS shall continue to be remunerated through the payroll of foreign group company only for the continuation of social security, retirement and health benefits. However, for all practical purposes, NOS shall be the employer.

d. Foreign group company shall ensure that during the secondment period, the employee shall act in accordance with the instructions and directions of NOS and devote their time, attention and skills to the duties of their secondment.

e. The seconded employees shall be reportable and responsible to NOS, and all the responsibility and risk for work undertaken by the employees shall remain with NOS during the secondment period.

f. NOS shall have the right at any time to approve or reject the employee selected for secondment and to request the foreign group company the replacement of any employees who, in their opinion, are not qualified or do not meet the necessary requirements to fulfil their secondment.

g. During the period of secondment, the terms and conditions of employment between the foreign group company and the seconded employee shall cease to be in force, and the terms and conditions, as stated in the employment agreement, between the employees and NOS will remain in force.

The consideration clause of the above agreement is equally important. Apart from specifically mentioning that during the secondment period, the role of the foreign group company shall be restricted to that of a payroll service provider only, it requires NOS to reimburse foreign group company the following amounts:

a. All remuneration of employees, including but not limited to salary, incentives and employment benefits paid by the foreign group company.

b. All out-of-pocket expenses incurred by the seconded employees and reimbursed by the foreign group company, including but not limited to business travel expenses and other miscellaneous expenses directly related to the secondment of the employee.

c. In addition, NOS shall also pay the administrative cost to the foreign group company, which shall be 1% of actual costs incurred.

NOS believed that an employer – employee relationship existed with the seconded employees, and NOS exercised control over them. The employees also devoted all their time and efforts under the direction of the assessee and their remuneration was also fixed by NOS.

Further, NOS was also of the opinion that the above activity could be taxed under ‘manpower supply services’ only if the same was provided by a manpower recruitment or supply agency, which the foreign group company was not. They were engaged in providing personal financial services and corporate and institutional services along with investment products. Therefore, the foreign group company could not be considered a ‘manpower supply agency’.

Therefore, the reimbursement made to the foreign group company, to the extent of payroll costs and OPE reimbursement, was not a ‘manpower supply service’ (upto June, 2012) and a service (post July, 2012), and therefore, there was no liability to pay service tax under the reverse charge mechanism.

The above view was supported by the following decisions of the CESTAT, affirmed by the High Court on a couple of occasions:

a. In Arvind Mills Ltd. vs. CST, Ahmedabad [2014 (34) STR 610 (Tri. – Ahmd.)], the Tribunal had set aside the demand of service tax on employee cost recovery from domestic group companies on the grounds that the assessee was not a ‘manpower supply agency’. This view was affirmed by the HC in 2014 (35) STR 496 (Guj), wherein the HC not only upheld the Tribunals’ view that the assessee was not a manpower supply agent to be liable to pay service tax, it also held that the deputation was in the interest of the assessee and they did not exclusively work under the direction or supervision or control of the subsidiary. Further, the HC also observed that since the actual cost incurred was recovered from the group companies, there was no profit element or financial benefit.

b.   In a case involving similar facts where the salary to seconded employees was paid by the foreign company, the Tribunal had in the case of Volkswagen India (Pvt.) Ltd. vs. CCE, Pune [2014 (34) STR 135 (Tri.-Mum.)] held that in such cases also, the seconded employees were working as employees and an employer – employee relationship existed, and therefore, there was no liability to pay tax under reverse charge. An appeal filed against this decision was dismissed by the Supreme Court, though not on merits, but on non-condonable delay, as reported in 2016 (42) STR J145 (SC).

c.   The Delhi Bench of Tribunal has in the case of Computer Science Corporation India Pvt. Ltd. vs. CST, Noida [2014 (35) STR 0094 (Tri. – Del.)] held that no service tax was liable even in cases where the salary was paid directly to the seconded employees and only the social welfare expenses incurred by the foreign company were reimbursed to the foreign company. This decision was also upheld by the Allahabad HC as reported in 2015 (037) STR 0062 (All).

d.   The Tribunal again in Nissin Brake India Pvt. Ltd. vs. CCE, Jaipur [2019 (24) GSTL 563 (Tri. – Del.)] again dealt with a similar issue. In this case, the Tribunal held that merely because the payment of salary and perks was made by the foreign company would not alter the fact that an employer – employee relationship existed between the seconded employee and the domestic employer. An appeal filed against this decision has also been dismissed by the Supreme Court on grounds that the same was without any merits as reported in 2019 (24) GSTL J171 (SC).

e.   In Ivanhoe Cambridge Investment Advisory (India) Private Limited vs. CST, Delhi [2019 (21) GSTL 553 (Tri. – Del.)], the Tribunal dealt with the levy of service tax under RCM in a transaction involving cross-border secondment where the seconded employees were paid the salary by the domestic company. In this case, the Tribunal held that there was an employer – employee relationship between the domestic company (assessee) and the seconded employee, and therefore, no service tax was payable under reverse charge. An appeal against this decision is pending before the Supreme Court.

CESTATS’ TAKE ON THE ABOVE ARRANGEMENT
This matter first reached before the Hon’ble CESTAT, Bangalore, wherein vide judgment reported in 2021 (52) GSTL 292 (Tri. – Bang.), the Tribunal allowed their appeal on the following grounds:

There existed an employer – employee relationship between NOS and the seconded employee. The Tribunal relied on its decision in the case of Honeywell Technology Solutions Pvt. Ltd. vs. Commissioner [2020-TIOL-1277-CESTAT-BANG.].

The method of disbursement of salary cannot determine the nature of the transaction, as held in Volkswagen India Pvt. Ltd. vs. CCE, Pune-I [2014 (34) STR 135 (Tri. – Mumbai)] and upheld 2016 (42) STR J145 (SC). In this case, facts were similar as the salary to the seconded employees was paid by the foreign company and reimbursed by the assessee.

The Tribunal also relied on the decision in the case of Computer Sciences Corporation India Pvt. Ltd. vs. Commissioner of Service Tax, Noida [2014 (35) STR 94 (Tri. – Del.)] and affirmed in [2015 (37) STR 62 (All.)].

The Tribunal also followed the decision of Gujarat HC in the case of Arvind Mills Ltd. [2014 (35) STR 496 (Guj.)], wherein the Court has held that even if the actual cost incurred by the appellant in terms of salary remuneration and perquisites is only reimbursed by group companies, there remains no element of profit or finance benefit. The arrangement is that of the continuous control and the direction of the company to whom the holding company has deputed the employee, and such an arrangement is out of the ambit to be termed ‘manpower supply service’.

REVENUE APPEAL AGAINST SUPREME COURT DECISION
Being aggrieved by the above Tribunal Order, the Revenue had preferred an appeal before the Supreme Court. The primary ground raised by the Revenue was that the conclusion of the Tribunal that there existed an employer – employee relationship merely because the domestic company exercised control over the seconded employees was erroneous. They highlighted on various decisions wherein it has been held that the existence of control is not the conclusive factor in determining whether an employer – employee relationship exists or not, key being the decision in the case of Silver Jubilee Tailoring House vs. Chief Inspector of Shops & Establishments [1974 (1) SCR 747] and the recent decision in the case of Sushilaben Indravadan Gandhi vs. New India Assurance Co Ltd [(2021) 7 SCC 151].

The Revenue further emphasised the fact that the terms of the secondment were also decided by the foreign company, including salary, allowances, the duration of secondment, etc., and that upon completion of the assignment, the seconded employees were to revert to their original positions in the parent company. Therefore, the control, if any of NOS was for a very limited period which also did not enable NOS to take actions against the seconded employee, if it was unsatisfied with his/ her performance. The only recourse available with NOS in such a case was to terminate the secondment of such employees who would return to their original positions upon termination. In view of the same, the Revenue concluded its argument that the entire transaction of secondment agreement was to provide service by the foreign company to NOS and therefore, it was a taxable service.

COUNTER SUBMISSION ON BEHALF OF NOS
The position of law, prior to June, 2012 and post July, 2012 as well was the same. The category of supply of manpower by an agency covers those cases where the manpower so supplied comes under the direction and control of the recipient without contractual employment, a view clarified by CBIC vide circulars B1/6/2005-TRU dated 27th July, 2005 and Master Circular No. 96/7/2007-ST dated 23rd August, 2007. It was also reiterated that the intention of the legislature, not only in India but also globally was to not levy indirect tax on employer – employee relationship.

It was also argued that an employer – employee relationship existed between NOS and the seconded employees on account of the following:

The seconded personnel are contractually hired as NOS’s employees.

Control over them is exercised by NOS.

The employees devote their time and effort exclusively to NOS, under the direction of NOS.

The remuneration of employees is also fixed by NOS.

The employees are required to report to NOS’s designated offices and are accountable to NOS.

The various decisions of the Tribunals on a similar issue were relied upon. Emphasis was placed on the decisions of the Tribunal in the case of Nissin Brake and Volkswagen India, revenue appeals against which were dismissed by the SC.

It was also argued that the foreign group company were not in the business of supply of manpower and, therefore, cannot be considered a ‘manpower supply agency’.

The following alternate arguments were also raised:

The salary costs were reimbursed to foreign group company, and therefore, relying on the decision in the case of UOI vs. Intercontinental Consultants & Technocrats Private Limited [2018 (10) GSTL 401 (SC)], the amounts reimbursed as salary cost was to be excluded from the gross value of taxable services provided.

The ground of revenue neutrality was also raised, and reliance was placed on the decision in the case of SRF Ltd. vs. Commissioner [2016 (331) ELT A138 SC] and CCE vs. Coca Cola India Private Limited [2007 (213) ELT 490 (SC)]. It was highlighted that if the tax was paid under reverse charge, they would have been eligible to claim as CENVAT credit and, further, claim the same as a refund.

SUPREME COURT DECISION
The Supreme Court has summarized the issue to determine who should be reckoned as the employer of the seconded employee? While doing so, the Court has resorted to a co-joint reading of the two agreements between NOS and the foreign group company to discern the true nature of the relationship between the seconded employees and the assessee, and the nature of service provided by the foreign group company to NOS.

In determining this question, the Court has first referred to the decision in the case of Director Income Tax vs. Morgan Stanley & Co. Inc [(2007) 7 SCC 1]. The Court has also referred to the decision in the case of Commissioner of Income Tax vs. Eli Lily & Co India Pvt. Ltd. [(2009) 15 SCC].

The Court has then referred to various decisions which dealt with the issue of determining whether an employer – employee relationship existed or not in the following order:

Firstly, the Court has referred to the decision in the case of Dharangadhara Chemical Works Ltd. State of Saurashtra [1957 SCR 158], wherein the Supreme Court has held that it was well settled that the prima facie test of such relationship was the existence of the right in the employer not merely to direct what work was to be done but also to control the manner in which it was to be done, the nature or extent of such control varying in different industries and being by its nature, incapable of being precisely defined. The correct approach, therefore, was to consider whether, having regard to the nature of the work, was there due control and supervision of the employer or not?

The Court then referred to the decision in the case of D C Dewan Mohideen Sahib & Sons vs. Secretary, United Beedi Workers Union [1964 (7) SCR 646] in a matter pertaining to the applicability of Factories Act, 1948 as the decision where the control test was diluted by the Courts while determining the existence of employer – employee relationship.

The Court has then referred to the decision in the case of Silver Jubilee Tailoring House vs. Chief Inspector of Shops & Establishments [1974 (1) SCR 747], wherein the Court has diluted the applicability of the test of control while determining the existence of employer-employee relationship and held that it cannot be used as a conclusive factor while deciding on the same.

The Court then referred to its recent decision in the case of Sushilaben Indravadan Gandhi vs. New India Assurance Co Ltd [(2021) 7 SCC 151], wherein the decision in the case of Silver Jubilee was reiterated, and it was held that the test of control was not a determining factor for employer-employee relationship and referred to the Courts’ observations at para 24 to this effect.

Basis this, the Court has arrived at a conclusion that the control test is not the decisive factor for employer – employee relationship and proceeded to determine if the foreign group company has provided any services to NOS.

The Court has then proceeded to analyse all the agreements in totality by concluding that an overall reading of the agreement and its effect is to be seen by the Courts. This means that the two agreements between NOS and the foreign group company, i.e., the service agreement and the secondment agreement, are read collectively while determining the nature of the transaction in the secondment agreement. The Court has, thereafter, concluded that the foreign group company has a pool of highly skilled employees at their disposal and are seconded to the group companies for the use of their skills. This deployment is in relation to the business of the foreign group company. Lastly, the Court has held that there is a quid pro quo in the secondment agreement, wherein NOS has received the benefit of experts for a limited period for a consideration being paid to the foreign group company in the form of reimbursement.

The Court also rejected the reliance placed on the decisions in the case of Volkswagen India (where revenue appeal on a similar issue was rejected) and SRF Limited (on revenue neutrality) on the grounds that there was no independent reasoning in this judgment and therefore, the same had no precedential value. The Court has, however, held that the extended period of limitation was not invocable in this case as there was a substantial question of law involved.

IMPORTANT POINTS EMANATING FROM THE JUDGMENT

Implications on reading multiple agreements jointly

The decision very succinctly brings out the journey of factors which needs to be looked into while determining the existence of an employer – employee relationship. It also explains the need to look into the agreements as a whole, and at times, the need to read the agreements together to determine the intention of the transacting parties. However, such an approach may have a direct bearing on the recent decision of the Gujarat HC in the case of Munjaal Manish Bhatt vs. Union of India [2022-TIOL-663-HC-AHM-GST], wherein the HC had refused to link two separate agreements, one for sale of developed land and another for construction of bungalow on the said land and held that only the later was to be included for the purpose of determining the value of supply.

Dual employment: Which contract is superior?

However, when one looks into the intention of the parties, it is apparent that this is a case where NOS intended to use the services of employees employed by foreign group company and therefore, the flow of contract somewhere stood as under:

1) Employment contract between the the foreign group company and the employee.

2) Letter of secondment to be issued by foreign group company to its employee selected for secondment.

3) Letter of Understanding between NOS and the seconded employee.

The above events occur sequentially and if the agreement at 1 fails, the resultant agreements also become void. In other words, though the seconded employee would be under dual employment, his agreement with the foreign group company always remains superior as compared to the agreement with NOS, which was more of a nature of understanding with the seconded employee of the terms of the secondment. An important point which also needs to be kept in mind is that NOS had no right to dismiss an employee. The only right available with NOS was to terminate the secondment, which would mean that the employee would revert to the foreign group company, his original and perhaps, the full-time employer. More importantly, even in the event of misconduct of an employee, this is the only recourse which would have been available with NOS. The right to fire the employee would vest only with the foreign group company.

Morgan Stanley case

The SC has in this judgment relied on the decision in the case of Morgan Stanley, though in the context of Income-tax, wherein it has been held as under:

15. As regards the question of deputation, we are of the view that an employee of MSCo when deputed to MSAS does not become an employee of MSAS. A deputationist has a lien on his employment with MSCo. As long as the lien remains with the MSCo the said company retains control over the deputationist’s terms and employment. The concept of a service PE finds place in the U.N. Convention. It is constituted if the multinational enterprise renders services through its employees in India provided the services are rendered for a specified period. In this case, it extends to two years on the request of MSAS. It is important to note that where the activities of the multinational enterprise entails it being responsible for the work of deputationists and the employees continue to be on the payroll of the multinational enterprise or they continue to have their lien on their jobs with the multinational enterprise, a service PE can emerge. Applying the above tests to the facts of this case we find that on request/requisition from MSAS the applicant deputes its staff. The request comes from MSAS depending upon its requirement. Generally, occasions do arise when MSAS needs the expertise of the staff of MSCo. In such circumstances, generally, MSAS makes a request to MSCo. A deputationist under such circumstances is expected to be experienced in banking and finance. On completion of his tenure he is repatriated to his parent job. He retains his lien when he comes to India. He lends his experience to MSAS in India as an employee of MSCo as he retains his lien and in that sense there is a service PE (MSAS) under Article 5(2)(l). We find no infirmity in the ruling of the ARR on this aspect. In the above situation, MSCo is rendering services through its employees to MSAS. Therefore, the Department is right in its contention that under the above situation there exists a Service PE in India (MSAS). Accordingly, the civil appeal filed by the Department stands partly allowed.

(emphasis added)

The above decision was followed by the Delhi HC in the case of Centrica India Offshore Private Limited vs. Commissioner of Income Tax [W.P. (C) No. 6807/2012], wherein it has been held as under:

35. The concept of a legal and economic employer, as considered by Vogel (relied upon by CIOP), is when “a local employer wishing to employ foreign labour for one or more periods of less than 183 days recruits through an intermediary established abroad who purports to be the employer and hires the labour out to the employer.” In this case, the temporal element of the three-way employment relationship is crucial. The secondees were – originally – employees of the overseas entities. They were not hired by that entity as a false façade, whose productivity is to be ultimately traced to CIOP. Rather, the secondees were regular employees of the overseas entities. There is no dispute with this fact. They have only been seconded or transferred for a limited period of time to another organization, CIOP, in order to utilize their technical expertise in the latter. The secondment agreement between CIOP and the overseas entity, and the agreement WP(C) No. 6807/2012 Page 41 between CIOP and the employees, envisages an end to this exception, and a return to the usual state of affairs, when the secondees return to the overseas entities. The employment relationship between the secondee and the overseas organization is at no point terminated, nor is CIOP given any authority to even modify that relationship. The attachment of the secondees to the overseas organization is not fraudulent or even fleeting, but rather, permanent, especially in comparison to CIOP, which is admittedly only their temporary home. Today, CIOP attempts to cast that employment relationship as a tenuous link because, for the duration of the secondment, CIOP pays the salary of these. Even here, the salary is ultimately paid through the overseas entity, which is not a mere conduit. Crucially, the social security, emoluments, additional benefits etc. provided by the overseas entity to the secondee, and more generally, its employees, still govern the secondee in its relationship with CIOP. It would be incongruous to wish away the employment relationship, as CIOP seeks to do today, in the face of such strong linkages. Whilst CIOP may have operational control over these persons in terms of the daily work, and may be responsible (in terms of the agreement) for their failures, these limited and sparse factors cannot displace the larger and established context of employment abroad.

The SLP against the above decision was dismissed by the Supreme Court. It, therefore, appears that the Supreme Court has already settled the dispute in the context of secondment transactions that there does not exist an employer – employee relationship between the domestic company and the seconded employee, but rather it is a contract for service between the foreign company and the domestic company.

Interestingly, very recently (after the decision in the case of NOS was pronounced), the Karnataka HC has in the case of Flipkart Internet Private Limited vs. Dy. Commissioner of Income Tax [2022-VIL-156-KAR-DT] dealing with secondment transactions, held as under:

37. Accordingly, the findings in the impugned order and the conclusion regarding the employer-employee relationship is based on a wrong premise and is liable to be set aside. As observed by this Court in Director of Income Tax (International Taxation) vs. Abbey Business Services India (P.) Ltd.((2020) 122 Taxmann.Com 174 (Kar)), “it is also pertinent to note that the Secondment Agreement constitutes an independent contract of services in respect of employment with assessee.” Hence, the DCIT in the impugned order has missed this aspect of the matter and has proceeded to consider the aspect of rendering of service as to whether it was ‘FIS’.

(emphasis added)

In this case, the HC has distinguished the NOS judgment as under:

(x) It needs to be noted that the judgment rendered was in the context of service tax and the only question for determination was as to whether supply of manpower was covered under the taxable service and was to be treated as a service provided by a Foreign Company to an Indian Company. But in the present case, the legal requirement requires a finding to be recorded to treat a service as ‘FIS’ which is “make available” to the Indian Company.

It, therefore, remains to be seen if the decision in Flipkart survives before the Supreme Court or not on appeal, if preferred by the Revenue.

Valuation: Does pure agent apply?

The decision is also glaringly silent on the valuation point raised by NOS. It was argued on behalf of NOS that the costs reimbursed to the foreign group companies should be excluded from the value of taxable service in view of Rule 5 of Service Tax (Determination of Value) Rules, 2005. They had also relied upon the decision in the case of Intercontinental Consultants.

It is imperative to note that in the current case, NOS makes the following payments to the foreign group company:

a) Reimbursement towards various payments made to the seconded employees by the foreign group company at cost.

b) Administrative cost, being 1% of the total payment made by the foreign group company to the seconded employees.

As such, there is a strong basis to argue that the value of service, if any provided by the foreign group company, should have been restricted to 1% of the service fees and the reimbursement component should have been excluded from the value of taxable supply, especially for the period upto 13th May, 2015.

The conclusion in the case of Centrica Offshore on the valuation front may also bear relevance to the current case. The SC has held as under:

38. The mere fact that CIOP, and the secondment agreement, phrases the payment made from CIOP to the overseas entity as reimbursement? cannot be determinative. Neither is the fact that the overseas does not charge a mark-up over and above the costs of maintaining the secondee relevant in itself, since the absence to mark-up (subject to an independent transfer pricing exercise) cannot negate the nature of the transaction. It would lead to an absurd conclusion if, all else constant, the fact that no payment is demanded negates accrual of income to the overseas entity. Instead, the various factors concerning the determination of the real employment link continue to operate, and the consequent finding that provision of employees to CIOP was the provision of services to CIOP by the overseas entities triggers the DTAAs. The nomenclature or lesser-than-expected amount charged for such services cannot change the nature of the services. Indeed, once it is established, as in this case, that there was a provision of services, the payment made may indeed be payment for services – which may be deducted in accordance with law – or reimbursement for costs incurred. This, however, cannot be used to claim that the entire amount is in the nature of reimbursement, for which the tax liability is not triggered in the first place. This would mean that in any circumstance where services are provided between related parties, the demand of only as much money as has been spent in providing the service would remove the tax liability altogether. This is clearly an incorrect reasoning that conflates liability to tax with subsequent deductions that may be claimed.

One may interpret the above as under:

a) If the reimbursement is on a pure cost basis, without there being any element of charges for the “service” rendered, the claim of reimbursement may fall through.

b) However, if there is a service charge levied along with the reimbursement of cost, a taxpayer may claim the benefit of excluding such reimbursement from the scope of value of supply provided the pure agent conditions are satisfied to do so.

Other points

The judgment is also silent on the reliance placed on the decision in the case of Nissin Brake, where the revenue appeal was dismissed as being without merits. While admittedly, the Volkswagen India appeal was delayed on account of delay in filing, which was not condoned and, therefore, could not be said to have precedential value, the same logic may not extend to the Nissin Brake decision.

IMPLICATIONS UNDER GST
Coming to GST, the first question that may arise is the applicability of this decision under GST. This may need analysis from the perspective of cross-border transactions as well as domestic transactions.

In the case of cross-border transactions, it can be said that the decision in the context of NOS will squarely apply since the provisions under service tax and GST, so far as pertaining to the import of service, are identical. Further, it should be kept in mind that the SC has dismissed the plea of revenue neutrality, i.e., tax paid under RCM was eligible for credit, and therefore, demand fails. In such a circumstance, when a person is entitled to claim credit, a prudent tax position would be to pay tax under reverse charge and claim credit, even if the same leads to a temporary cash flow issue.

When it comes to domestic transactions, there are two scenarios which may prevail, one being inter-company and the second being intra-company in view of the deeming fiction provided under Schedule I, Entry 2, which deems supply of services between related persons or distinct persons as supply, even if made without consideration. This deeming fiction creates a liability on the supplier to pay tax on the value to be determined as per the prescribed Rules. However, not all cases will fall under secondment in the case of domestic transactions.

For example, a holding company handles the administrative aspect of all its group companies through its staff. This may not be treated as “secondment” or “deputation”. When can the case of “secondment” arise may be understood with the help of the following example.

A hospital chain, having a presence in multiple states, may deploy its specialist doctor who is based in a particular state (say Maharashtra) to its hospital in another state (Gujarat) for an emergent case and returns after completion of treatment. This may not qualify as manpower supply service, but rather health care services. However, when an employee stationed in Maharashtra is sent to Gujarat for a specified period and treats all the patients there, it may be said that the Maharashtra branch has actually supplied manpower to the Gujarat branch, and the same may be perhaps treated as manpower supply services. The following decisions under service tax may be relevant for this discussion:

a) In Future Focus Infotech India (P) Ltd. vs. CST, Chennai [2010 (18) STR 308 (Tri.-Che.)], the Tribunal has, while determining if a particular service constitutes manpower supply service or IT Software Service, held as under:

11. The learned special counsel further points out that the manpower supplied have to work under the guidance and control of TCS and Infosys. The appellants have no mandate to execute any work independently as normally a consulting engineer would do. He also brings it to our notice that if a person leaves, the appellants are required to provide suitable substitute. This indicates that the appellants are responsible only for supplying manpower, and they are not responsible for completion of any software project per se.

13. No doubt there are clauses relating to deliverables and quality of work in the contracts but these by themselves do not indicate that the appellants are providing information technology software services to TCS and Infosys. Any person or organization obtaining skilled personnel has to ensure that such men deliver work of standard quality. No one would employ a person who is not skilled enough and no one would pay for shoddy work even if done by a skilled man. The relevant clauses in the contract in this regard on which much emphasis was sought to be put by the learned senior counsel for the appellants have to be viewed in the light that TCS and Infosys are merely seeking to obtain personnel from the appellants with necessary skill who will work diligently on the projects undertaken by TCS and Infosys.

b) Interestingly, on the very same day, the same bench has in another case, Cognizant Tech Solutions (I) Pvt. Ltd. vs. Commissioner, Chennai [2010 (18) STR 326 (Tri.-Che.)], has held in a case involving slightly different facts, that services provided would not constitute manpower supply services, as under:

10. We find force in the contentions made by the appellants that the work force recruited and retained by the appellants are required to work under a project manager appointed by the appellants who has to act as single point of contact being responsible for overall management of the project. From the arguments advanced from both sides, it is clear that the learned special counsel for the Department is not disputing that in the second stage of the project, the appellants would be providing functional service to Pfizer. It is also not in dispute that such functional service relating to data management, bio statistics and reporting will be provided through the very same manpower which has been recruited, retained and trained during the first phase. It has to be appreciated that recruitment and training precedes provision of specialized services. If it is accepted that the same manpower will be providing specialized functional services to Pfizer in the second phase of the contract, it is logical to conclude that the manpower has been retained with the appellants during the first phase and not supplied to Pfizer though recruitment of manpower has no doubt been done at the instance of Pfizer. The assistance in recruitment provided by Pfizer to select suitable personnel and subsequent training provided by Pfizer is also understandable considering the strict standards Specified by FDA of USA, the export market for the pharmaceutical products of Pfizer. The assistance in recruitment and imparting of specialized training for the recruited personnel cannot be held against the appellants’ claim that they have not supplied the manpower but have merely recruited and retained the same for providing specialized services to Pfizer utilizing such manpower. Moreover, we find that the nature of services required to be provided by the appellants are in the nature of information technology services as the same relates to data management. Consequently, we hold that the appellants are not liable to pay Service tax in respect of the services provided by them to Pfizer under the impugned contract. Therefore, we also hold that they are eligible for the small scale exemption in respect of the small value of services provided by them to M/s. SAP LABS India Pvt. Ltd. which is below the exemption limit of Rs. 4 lakhs.

c) Lastly, in a recent decision, the Supreme Court dealt with the issue of whether a particular activity constituted job-work or manpower supply in the case of Adiraj Manpower Services Private Limited vs. CCE, Pune [2022-VIL-12-SC-ST] and held as under:

16. The substratum of the agreement between the appellant and Sigma deals with the regulation of the manpower which is supplied by the appellant in his capacity as a contractor. The fact that the appellant is not a job worker is evident from a conspicuous absence in the agreement of crucial contractual terms which would have been found had it been a true contract for the provision of job work in terms of Para 30(c) of the exemption notification.

There is a complete absence in the agreement of any reference to:

(i) the nature of the process of work which has to be carried out by the appellant;

(ii) provisions for maintaining

(a) the quality of work;

(b) the nature of the facilities utilised; or

(c) the infrastructure deployed to generate the work;

(iii) the delivery schedule;

(iv) specifications in regard to the work to be performed; and

(v) consequences which ensue in the event of a breach of the contractual obligation.

It can always be argued in the case of intra-company supplies that the employer – employee relationship exists between the employee and the legal entity, and therefore, even if there is intra-company secondment, the same cannot be treated as supply. However, it should be noted that for the purpose of GST law, the branches in different states/ UT of the same entity are deemed to be distinct persons. Generally, for the purpose of accounting as well as profession tax compliances, an employer is required to tag each employee to a particular branch. Therefore, if an employee in one branch is deputed to another branch, there would be a supply, and therefore, if the cost is booked in one branch, the same should also be factored in determining the value of intra-branch supplies. This aspect has also been clarified by AAAR in the case of Columbia Asia Hospitals Private Limited [2019 (20) GSTL 763 (AAAR-GST-Kar.)]. However, when the benefit of proviso to Rule 28 is available, i.e., the receiving branch is entitled for full input tax credit, since the transaction value is to be accepted, inclusion/exclusion of employee cost from the value of supply may not matter.

CONCLUSION
With the Supreme Court negating the revenue–neutrality argument, which was considered a strong response to demands for cases where credit was available, this decision will trigger the need to re-look at positions not only in the case of cross-border transactions, but also in domestic transactions, where the GST law deems existence of a supply and need to pay tax. Especially, where the input tax credit is available, it is always prudent that businesses pay the tax upfront and avail the credit, rather than awaiting a confrontation with the tax authorities.

shailesh.kwebmaker

GOODS AND SERVICES TAX (GST)

I. HIGH COURT

21 Sleevco Traders vs. Additional Commissioner, Commercial Tax [2022] 138 taxmann.com 424 (Allahabad) Date of order: 17th May, 2022

In a “bill to purchaser – ship to consignee” transaction, once the validity of the e-way bill is generated by the sender (i.e. supplier of the supplier), the fact that the supplier has not taken delivery of the goods during transit and that the goods mentioned on the tax invoice issued by the supplier to the ultimate customer and the goods being transported under the e-way bill are not disputed, there cannot be said to be a contravention of the law on the ground that the tax invoice issued by the supplier is not covered by another e-way bill

FACTS
The petitioner is in the business of purchase and sale of PVC Resin. The petitioner received a purchase order from a customer in U.P. In turn, the petitioner placed its purchase order on a vendor in Maharashtra. The vendor shipped the goods directly to the said customer in U.P. under the cover of a tax invoice which was billed to the petitioner as the buyer and consigned to the customer in U.P. Further, the e-way bill was also generated where the sender’s name was mentioned as that of the vendor in Maharashtra and as purchaser, the name of petitioner was mentioned and under the “ship to” column, the U.P. customer’s name was mentioned. While the said consignment was thus transported from Maharashtra to U.P., it was detained and SCN under section 129 was issued on the ground that the tax invoice issued by the petitioner to the customer at U.P. was not supported by E-Way Bill.

HELD
The Hon’ble Court observed that the goods were being sent directly from the petitioner’s vendor’s place in Maharashtra to the petitioner’s customer’s place in U.P. and that they were supported by the tax invoice issued by the vendor and e-way bill prepared by him, which specifically mentioned the name of the petitioner and it was also provided that the goods transported to U.P. while in transit, on entering U.P., without taking delivery of the goods, the petitioner handed over the tax invoice after charging C.G.S.T. and S.G.S.T. The Court further noted that it is not the case of the department that the goods which were coming in pursuance of the purchase order of the petitioner from Maharashtra which was to be delivered to the buyer of the petitioner in U.P. are different than the goods mentioned in the tax invoice given by the petitioner. The Court, therefore, held that once before starting the journey, the e-way bill was generated from Maharashtra and ending at U.P. at the place of the ultimate purchaser was mentioned and once the fact that petitioner has not taken delivery of the goods during transit is not disputed by the department, it cannot be said that there was any contravention of the provisions of the
Act. The Court decided the matter in favour of the petitioner and also imposed a cost of Rs. 5,000.

22 Aathi Hotel vs. AC (ST) (FAC) Nagapattinam [2022 (61) GSTL 343 (Mad)] Date of order: 8th December, 2021

When credit is wrongly transitioned not utilized and is reversed, penalty under section 74 of Tamil Nadu GST Act not imposed. Only token penalty was to be imposed

FACTS
Though the petitioner filed TRAN-I and claimed credit of Rs. 3,86,271, it was never utilized. Hence, though the petitioner failed to respond to the show-cause notice, the entire credit was reversed in the monthly returns in January 2020.

According to the revenue, interest was consequential and the penalty in terms of Section 74 of TNGST Act, 2017 was also consequential.

HELD
Distinguishing the Hon. Supreme Court in Union of India vs. Ind Swift Laboratories Ltd 2011 (265) ELT 3 (SC), it was held that the fact is that in the instant case, the credit was not utilized. Further, the Court observed that if the show cause notice issued was to be considered a notice under section 74 of the TNGST Act, 2017 (the Act), it should have specifically invoked Section 74(1) of the Act. Mere statement that due to unavailability of documents to prove admissibility of the ITC does not meet the requirement of Section 74(9) of the said Act. The proper officer had to ascertain whether the credit was wrongly availed and wrongly utilized. It was specifically held that though proceedings can be initiated under section 73(1) and Section 74(1) of the Act for mere wrong availing of ITC, followed by the imposition of interest and penalty under section 73 or under section 74, they stand attracted only when such credit availed is also utilized for discharging tax liability. Hence, the petitioner is not liable for penalty. Since the attempt was made to wrongly avail credit, a token penalty of Rs.10,000 is imposed and thus, the order is partly quashed.

shailesh.kwebmaker

OCEAN FREIGHT – HITS & MISSES

The Hon’ble Supreme court in a recent case of UOI vs. Mohit Minerals Private Limited (CA 1390/2022) (Mohit Mineral’s case) examined the validity of imposition of IGST under Reverse charge provisions (RCM) on ocean freight incurred during importation of goods into India. The appeals were filed by the Revenue pursuant to Gujarat High Court’s decision to strike down an entry in the RCM notification on the grounds of being ultra-vires the parent enactment. The limited issue for consideration before the Courts is whether the RCM is imposable on the Indian importer in respect of ocean freight paid by the overseas supplier to foreign liner for transportation of goods (CIF arrangements).

ECONOMIC BACKGROUND
Prior to 1st June, 2016 (Budget 2016-17), the services of transportation of goods in a vessel from a place outside India up to the customs station of clearance in India was excludible from service tax. As a result, the Indian shipping lines were unable to avail input tax credit (ITC) paid on the input goods and services and such tax formed a part of their transportation costs. Government’s objective was to create a level playing field between Indian liner and foreign liner. In addition, the Government also believed that freight element ought to be ‘taxable as a service’ despite the same being included as a component of the overall value of imported goods for customs duty purposes. Hence, necessary legal changes were attempted under the service tax law which carried forward into the GST law as well.

SERVICE TAX HISTORY
Originally, services of transportation of goods from a place outside India up to customs port to India was included in a ‘negative list’. This disentitled Indian liners from claiming CENVAT credit of input services resulting in tax cascading. In 2016, the Finance Act omitted the entry under the negative list and included the same in the exemption notification, thereby expressing its intent to expand the scope of its levy. Service tax was imposed for the first time in 20171 on international ocean freight up to customs clearance in India. Consequential amendments were made in RCM notification and service tax rules for collection of taxes from the ‘importer on record2’ in all scenarios of international ocean freight. Therefore, even in cases where the importer had not engaged/ received the services directly from the foreign liner, the literal wordings of law mandated the said person to discharge the service tax on RCM, being the ultimate beneficiary of such ocean freight. Initially the RCM was imposed on the vessel owner/ shipping agent but was quickly amended and fastened onto the Indian importer. This is despite that fact that the importer in CIF consignments would not be privy to the price of ocean freight charged on a particular consignment. To remove this anomaly, law incorporated an option to discharge service tax on a notional value of the consignment (1.4%) as RCM. The challenge to these notifications, in the context of CIF contracts, were made before Gujarat High Court3. Such challenge by tax-payers was upheld as follows:

• Extra-territoriality – Overseas supplier has appointed the foreign liner for transportation up to Indian customs station and the said service is rendered by the liner to the overseas supplier prior to reaching of goods to the Indian land mass and hence entirely consumed outside India;

• Delegated legislation – Parent enactment can take shelter of extra-territoriality operation of law but the delegated legislation cannot seek to impose tax on such extra-territorial services without the authorization of the parent enactment and hence ultra-vires;

• Person liable to tax – Indian importers are not the persons receiving “sea transportation service”, because they receive only the “goods” contracted by them, and they have no privity of contract with the shipping line nor make any payment to them; hence liability cannot be fastened onto such importers. The law envisages tax to be either collected from the service provider or the recipient and not any other person;

• Charging provisions – Strict interpretation ought to be given to the charging provisions and one cannot extend the taxation to ‘indirect receipt of services’ or ‘beneficiary of services’;

• Valuation – Section 67 does not permit rules to supplant notional values. Charging provisions fail since machinery provisions under parent enactment do not provide for deemed valuation in hands of a third person;

The Revenue has appealed against the above decision before the Supreme Court and the matters are currently pending.

___________________________________________________________

1 Notification 1/2017-ST dated 12^th
January, 2017

2 Notification 2/2017-ST, 3/2017 dated 12^th
January, 2017 originally on the shipping agent of vessel owner/ Indian liners
and later amended to importer on record vide Notification 15/2017 dated 13^th
April, 2017

3 Sal steel ltd. vs. Union of India 2020 (37)
G.S.T.L. 3 (Guj.)

GOODS & SERVICE TAX PROVISIONS
During this challenge, the saga continued under the GST regime as well. Article 286 entrust the IGST law to tag transactions as either ‘inter-state’ or ‘intra-state’. GST laws were to operate to the whole of India. Section 5(1) of the IGST Act levied tax on all the inter-state supplies of goods or services or both. GST on goods imported into India is being levied and collected in accordance with the provisions of Section 5(1) r/w Section 3 of the Customs Tariff Act, 1975, on the value as determined under the said Act at the point when the duties of customs are levied on the said goods under section 12 of the Customs Act, 1962. Section 7(4) of the IGST Act provides that supply of services imported into the territory of India shall be treated to be a supply of services in the course of the inter-state trade or commerce.

Section 13(9) of IGST Act states that the place of supply of services of transportation of goods other than by way of mail or courier, shall be the place of destination of such goods. The said law characterised the international ocean freight services under the place of supply provisions as follows:

• Services by an Indian liner to an Indian importer are considered as domestic services (Section 12), and hence treated as ‘inter-state’ or ‘intra-state’ depending on the location of the supplier and recipient – FOB contract

• Services by an overseas liner to the Indian importer are considered as international services (Section 13) and treated as import of services and hence assigned an inter-state character and governed by the IGST levy itself – FOB contract

• No specific provision was inserted to address classification of services by an overseas liner to an overseas supplier (extra-territorial services) – CIF Contract

Notification 10/2017-IGST(R) dated 28th June, 2017 imposed tax on the importer under RCM provisions. This was on the premise that the service qualifies as an import of service under section 2(11) of IGST Act, specifying the following cumulative conditions:

• Service provider is located outside India

• Service recipient is located in India

• Place of supply of service is in India

Testing the above requirements for import of services in the context of CIF contracts, the prima-facie conclusion which emerged was as follows:

Test 1 – Location of service provider

Service provider is the one who is ‘supplying the service’ i.e. – contractually liable to render the ocean freight services right from the loading port to the destination port. In simple words, the foreign liner who is consigned with the goods and issues the bill of lading for having received the goods for transportation would be the supplier of services. In terms of Section 2(15) of the IGST law, the foreign liner having its fixed establishment outside India, from where the booking was made, would be located outside India. This condition was satisfied.

Test 2 – Location of service recipient

Service recipient is generally understood as the person receiving the service – contractually seeking the service from the service provider. Section 2(93) of CGST Act r.w 20 of IGST Act would treat a person who is ‘liable to pay the consideration’ as the service recipient. In other words, the person who is contractually obligated to make the payment of consideration for the ocean freight services would be treated as the service recipient. After identification of the person, the location of such recipient would be understood with reference to Section 2(14) of the IGST Act to be the location of the fixed establishment. In the subject scenario of CIF contracts, the overseas supplier would strictly be termed as the ‘service recipient’ of the ocean freight service from the foreign liner and hence treated as located outside India. Hence this condition was not satisfied.

Test 3 – Place of Supply

Place of supply is critical to ascertain the inter-state/intra-state character of a supply. In simple terminology, it is a proxy for the economic consumption of goods/services in a VAT chain. Section 13 fixed the place of supply of ocean freight services as the destination of goods, which in the current facts, is destination port in India. This condition was satisfied.

Combining the above three tests, once reached the conclusion that the ocean freight services rendered by the foreign liner to the overseas supplier is not an ‘import of services’ into India. Consequently one needn’t have to examine the relevant RCM/ rate notifications.

Delegated Provisions

Yet dispute arose on account notifications4 were introduced to impose a levy of GST on ocean freight services. Entry 9(ii) of the GST Rate notification read as follows:

9.
Heading 9965 (Goods transport services)

(ii)
Transport of goods in a vessel including services provided or agreed to be
provided by a person located in non-taxable territory to a person located in
non-taxable territory by way of transportation of goods by a vessel from a
place outside India up to the customs station of clearance in India.

Provided
that credit of input tax charged on goods (other than on ships, vessels
including bulk carriers and tankers) used in supplying the service has not
been taken

Explanation:
This condition will not apply where the supplier of service is located in
non-taxable territory.

Please
refer to Explanation no. (iv)

Explanation 4. Where the value of taxable service provided by a person located in non-taxable territory to a person located in non-taxable territory by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India is not available with the person liable for paying integrated tax, the same shall be deemed to be 10 % of the CIF value (sum of cost, insurance and freight) of imported goods.

_____________________________________________________________

4 Notification No. 8/2017-Integrated Tax
(Rate), dated 28^th June, 2017 and Entry 10 of the Notification No.
10/2017-Integrated Tax (Rate), dated 28^th June, 2017

Gujarat High Court’s decision

The Gujarat High Court in Mohit Minerals case5 laid down the following legal propositions:

• Vivisection – importation of goods on CIF basis encompasses the freight, insurance etc which are bundled into the said importation. It would be impermissible to artificially vivisect the same into separate components and tax them once again as an independent element;

• Person liable to pay tax – Section 5(3) unequivocally states that only the recipient of goods or services are liable to pay tax on reverse charge basis. Section 2(98) r.w 2(24) which defines reverse charge and recipient also recognizes this fundamental GST principle. Notification attempting to tax a third person (importer) on the ground of being a beneficiary or indirect recipient bearing the burden of ocean freight is not in consonance with the legal provisions;

• Extra-territoriality – The provision of ocean freight services between foreign supplier and foreign liner is neither inter-state supply, intra-state supply nor import of services (under section 7(5)(a)) in terms of the literal provisions. Section 7(5)(c) cannot be interpreted as a residual basket to tax anything and everything and should operate within the confines of the territoriality. Express wordings are required in 7(5)(c) to tax a supply after satisfying the condition that it takes place in India. Place of supply principles are artificial provisions fixing the legal situs of supply and must be used only where the law directs on to identify the place of supply. Section 7(5)(c) does not make any such reference to such place of supply provisions. The phrase ‘supply of goods or services or both in the taxable territory’ shall mean a supply, all the aspects, or majority of the aspects, of which takes place in the taxable territory and which cannot be covered under the rest of the provisions of Section 7 or Section 8 of the IGST Act. In any case, there is no provision for determining the place of supply where both the location of the supplier and the location of the recipient is outside India. The scheme of the IGST Act only contemplates transactions of intra-state supply, inter-state supply and exports & imports;

_______________________________

5 2020 (33) G.S.T.L. 321 (Guj.)

• Chargeability vs. Exemption – The exemption granted to exclude services provided from non-taxable territory to person in a non-taxable territory is on the misbelief that tax is imposable on such transactions;

• Machinery provisions – The machinery provisions (time of supply, valuation, input tax credit, etc.) would fail if the contention of the revenue that persons other than the direct recipient can also be fastened with the RCM liability;

• Scope of Supply – From the importers perspective, the ocean freight supply is neither an inward supply nor an outward supply. Hence tax cannot be fastened onto the importer.

PREFACE TO SUPREME COURT’S DECISION
It would be important to understand the backdrop of the core issue emerging from the above sequence of events. Multiple perspectives were presented before the Supreme Court (analysed below) and the core issue rested on the identification of ‘recipient’ of ocean freight services. In contradistinction to the service tax legislation, CGST law has defined the same in clear terminology as follows:

“(93) “recipient” of supply of goods or services or both, means–

(a) where a consideration is payable for the supply of goods or services or both, the person who is liable to pay that consideration;

(b) where no consideration is payable for the supply of goods, the person to whom the goods are delivered or made available, or to whom possession or use of the goods is given or made available; and

(c) where no consideration is payable for the supply of a service, the person to whom the service is rendered,

and any reference to a person to whom a supply is made shall be construed as a reference to the recipient of the supply and shall include an agent acting as such on behalf of the recipient in relation to the goods or services or both supplied;”

The said definition identifies the person ‘who is liable to pay the consideration’ for the services as the ‘recipient of services’. The liability to pay consideration emerges from the contract for rendition of services. Generally, the person at whose behest the service is rendered takes up the liability to pay the consideration to the service provider, and such person has been termed as the legal recipient of service. In many circumstances, the service may actually be delivered/ rendered to third person identified by the contracting parties. Yet the clear wordings direct that the contracting party who is ‘liable to pay the consideration’ would be the legal recipient.

Separately, the definition also identifies cases in which no consideration may be payable. In the absence of a consideration, the law mandates that the person to whom the service is delivered/ rendered would be termed as the ‘recipient of service’ i.e. it is only in the absence of a consideration would one have to find out the person to whom the service is rendered. The distinction in the approach of identifying the recipient in a case where consideration is payable with a case where the consideration is absent should not be lost sight off while examining SC’s observation.

It would be pertinent to mention that the law is not alien to the concept of ‘receipt of service’ and ‘recipient of service’. Section 16(2) acknowledges that a service could be said to be ‘received’ by a person even though it is directly delivered/ rendered to a third person on the direction of the first mentioned person. Similar provisions are also contained in “Bill to Ship to” for goods under the place of supply as well the input tax credit provisions. While the immediate benefits of a service (so called receipt of service) may be to the third person, the law only recognizes the person who is liable to pay the consideration as the ‘recipient’ of service.

One may also appreciate that even during the erstwhile service tax regime where recipient was not specifically defined under law, Tribunals6 in multiple cases have identified the contractual recipient as the person recipient and barred the revenue from extending it to the ultimate beneficiary of the services. Therefore, the position in law has been consistent on the identification of the recipient and this appeared to be a fairly straight forward issue to be addressed by the Apex Court.

SUPREME COURT’S DECISION
Yet, the Court unravelled certain unexpected interpretations to this settled concept having far reaching implications on the subject matter. The entire decision can be examined under specific heads as follows:

_______________________________________________________________________

6 Paul merchants ltd. V. CCE 2013 (29) S.T.R.
257 (Tri. – Del.) & Vodafone Mobile Services Limited vs. CST Delhi 2019
(29) G.S.T.L. 314 (Tri-Del)

Constitutional Framework & GST Council’s Recommendations

Revenues’ contention

Taxpayer’s defence

Court’s observations

Recommendations of the
GST Council are binding on the legislature and the executive

The GST Council’s
recommendation need to be implemented by either amending the CGST Act or the
IGST Act or by issuing a notification. However, notifications issued cannot
be ultra vires the parent legislation

Article 279A does not
make recommendations mandatory on the Legislature. Only delegated
legislations are bound by GST council’s recommendations

Functions and role of
the GST Council are unique and incomparable to other constitutional bodies –
Power of the Parliament and the State Legislature under Article 246A and the
power of the GST Council under Article 279A must be balanced and harmonised,
such that neither overrides the other

The principles of
cooperative federalism are not relevant in this case as they were not
adjudicated before the High Court. The appeal must test the correctness of
the impugned judgment without expanding its scope. Interpretation of Article
279A of the Constitution was not an issue before the High Court and the present
appeal should be restricted to the validity of the impugned notification

Unlike the Concurrent
list where repugnancy in Central & State laws would tilt in favour
Central Laws, GST is legislated through a simultaneous exercise of power. Recommendations
of the GST Council must be interpreted with reference to the purpose of the
enactment i.e. create a uniform taxation system

Extra-Territoriality

Revenues’ contention

Taxpayer’s defence

Court’s observations

There is sufficient territorial
nexus for the purpose of taxation since the importer is the final beneficiary
of a service provided by a foreign shipping line by way of transportation up
to the customs station of clearance in India

No provision for
deeming the said service as taking place in India. Only nexus with India is
that the service results in the import of goods into India. This activity is
already subject to IGST under the Customs Act

A two-fold connection
is present – destination of the goods is India; and beneficiary of services
in India. An Indian importer could also be considered as an importer of the
transportation service, if the activity falls within the definition of
“import of service” for the IGST Act

Charge of Tax – Taxable event vis-à-vis Composite Supply

Revenues’ contention

Taxpayer’s defence

Court’s observations

GST and customs duties
are not mutually exclusive. GST is a destination-based tax – IGST is imposed
on the ‘supply of service’ and not on the goods. Customs is an anterior
taxation – separate aspect are being taxed, hence it cannot be termed as
overlapping

Freight component
embedded in the IGST taxation as part of proviso to Section 5(1) of IGST Act
r/w Customs Act

In CIF, fact that
consideration is paid by the foreign exporter to the foreign shipping line
would not stand in the way of it being considered as a “supply of service”.

CIF transaction and
IGST on ocean freight are two independent transactions, entitled to suffer
independent levies and do not qualify as a composite supply

Freight is part of the
importation of goods and no contractual service provider-recipient
relationship – taxable as supply of goods and not service

Composite supply play
a specific role i.e. ensure that various elements not dissected and the levy
is imposed on the bundle of supplies altogether. Intent of the Parliament was
that a transaction which includes different aspects of supply of goods or
services and which are naturally bundled together, must be taxed as a
composite supply

Charge of Tax – Taxable Person vs. Recipient

Revenues’ contention

Taxpayer’s defence

Court’s observations

Reverse charge is
applicable on recipient, and he becomes person liable to tax and 5(3)/ 5(4)
are applicable to Importers – RCM notification specifically identifies the
taxable

Section 5(3) only
permits specification of the categories of supply of goods or services or
both on which RCM is applicable. – Government cannot specify the person
liable

Neither Section 2(107)
nor Section 24 of the CGST Act qualify the imposition of reverse charge on a
“recipient of service” and broadly impose it on “the persons who are required
to

(continued)

person and Section
2(107) includes a taxable person who is liable to be registered on account of
RCM applicability

Statute has not
identified the person liable

to tax and hence
impugned notification identifying such person is legitimate exercise

(continued)

to pay service tax on
a reverse charge basis or define a recipient in a notification

(continued)

pay tax under reverse
charge”. Since the

impugned notification
10/2017 identifies the importer as the recipient liable to pay tax on a
reverse charge basis under Section 5(3) of the IGST Act, the argument of the
failure to identify a specific person who is liable to pay tax does not stand

If Parliament’s
intention were to designate certain persons for reverse charge, irrespective
of them being the recipient of such goods and services, it must make a
suitable amendment to confer such power for exercise of delegated legislation

RCM does not make two independent
contracts as a composite contract. The contract between the foreign shipping
line and the foreign exporter is distinct and independent of the contract
between the foreign exporter and the Indian importer

Supply of service is
an ‘inter-state supply’ under Section 7(3) or ‘intra-state supply’ under
Section 8(2) of the IGST Act depends on the location of the supplier and the
place of supply. In case two recipients are identified for a single supply,
it would lead to absurdity in a transaction being treated as inter-state as
well as intra-state supply.

The deeming fiction of
treating the importer as a recipient must be found in the IGST Act. As it
currently stands, Section 5(3) of the IGST Act enables the delegated
legislation to create a deeming fiction on categories of supply of
goods/services alone.

Importer is recipient in CIF
because

– Ultimate beneficiary of service

– Contextual interpretation to
include beneficiary in recipient definition

– A supply can be made to ‘a
person’, ‘a registered person’ and ‘a taxable person’ and such a supply shall
be construed to be a supply to a recipient (2(93)).

– Notifications under section 5(4)
permits specification of class of registered persons on whom RCM could apply

– Though Time of Supply specific
provisions are directed towards the person making payment but residual
provision factor other recipient’s case

The only place where a
person other than a supplier or recipient is made liable to pay tax is under
section 5(5) of the IGST Act, where an electronic commerce operator through
whom supply is made is taxed – In case the Parliament desired the tax to be
collected from a person other than a supplier or recipient, it would have
expressly provided so in the legislation.

Question of who the
beneficiary of the supply is or who has received the supply are irrelevant in
determining the ‘recipient’ under Section 2(93) of the CGST Act;

RCM would be
applicable to all recipients liable for reverse charge under Sections 5(3)
and 5(4) of the IGST Act. Ineffectiveness of a tax collection mechanism under
Section 24(iii) of the CGST Act cannot be argued to obfuscate the concept of
a “recipient” of a good or service

Therefore, both the
IGST and CGST Act clearly define reverse charge, recipient and taxable
persons. Thus, the essential legislative functions vis-à-vis reverse charge
have not been delegated

Two recipient theory
only creates
absurdity in domestic transactions but in
the case on hand in international transactions this does not annihilate the
concept of recipient

The ultimate
benefactor of the shipping service is also the importer in India who will
finally receive the goods at a destination which is within the taxable
territory of
India. Thus, the meaning of the term “recipient” in the IGST Act will have to
be understood within the context laid down
in the taxing statute (IGST and CGST Act) and not by a strict application of
commercial principle

This conclusion is in
line with the philosophy of the GST to be a consumption and destinated based
tax. The services of shipping are imported into India for the purpose of
consumption that is routed through the import of goods.

Charge of Tax – Valuation

Revenues’ contention

Taxpayer’s defence

Court’s observations

Deemed valuation is
permitted through delegated legislation under section 15(4)/15(5)

Section 15 does not
permit a deemed valuation in the hands of a third person who is not privy to
the contract

Necessary statutory
framework is available for valuation under Rule 31 of the CGST Rules which
are consistent with the principles Section 15

Impugned notification
8/2017 cannot be struck down for excessive delegation when it prescribes 10%
of the CIF value as the mechanism for imposing tax on a reverse charge basis

In summary, the key takeaways from the decision are as follows:

(i) The recommendations of the GST Council are not binding on the Union and States and only recommendary in nature:

(ii) Import of goods by a CIF contract constitutes an “inter-state” supply which can be subject to IGST where the importer of such goods would be the recipient of shipping service;

(iii) Specification of the recipient in notification is only clarificatory. The Government did not specify a taxable person different from the recipient prescribed in Section 5(3) of the IGST Act for the purposes of reverse charge;

(iv) Section 5(4) of the IGST Act enables the Central Government to specify a class of registered persons as the recipients, thereby conferring the power of creating a deeming fiction on the delegated legislation;

(v) The impugned levy imposed on the ‘service’ aspect of the composite supply is in violation of Section 2(30) r/w Section 8 of the CGST Act.

ANALYSIS
Though the decision was on the narrow point of applicability of RCM on CIF contracts, the conclusions of the Court could have extensive implications. The same could be analysed herewith:

Beneficiary vs. Recipient – The case revolved around the three phrases ‘recipient’, ‘reverse charge’ and ‘taxable person’. Recipient definition has been examined previously. Reverse charge (under section 2(98)) has been defined as a liability to tax on the recipient of services instead of the supplier of services under section 5(3)/5(4) of IGST Act. Taxable person (under section 2(107)) has been defined as person who is registered or liable to be registered on account of a tax liability under section 22 or 24. The logical sequence of interpretation would be to first identify the ‘recipient of a service’ and then examine whether the ‘reverse charge liability’ could be fastened on such recipient thereby creating a ‘taxable person’ in the eyes of law. In the context of ocean freight services, the contractual recipient would be the overseas supplier who is liable to pay the consideration and by corollary the reverse charge provisions would be applicable only on such foreign supplier and not on the Indian importer. Thereby, the notification could not have fixed the Indian importer as the taxable person on such a sequential interpretation.

The court seemed to have taken a circuitous route against logical flow of terminology. In para 91 the court stated that since the notification has identified the importer as the ‘recipient’ of service, it makes such person a ‘taxable person’ in law and hence the reverse charge provisions are triggered on account of such tax liability. Further in para 102 r/w 106, the court has invoked a very extreme interpretation to hold that the phrase ‘consideration’ recognises payment of consideration from ‘any other person’ and not merely the recipient. Attributing a narrow meaning to recipient as being the ‘only person’ who is liable to pay consideration would obstruct the scope of the definition of consideration and hence a wider meaning is to be granted to the phrase ‘recipient’ rather than a narrow construct as is being proposed in the arguments.

This appears to be contradictory to para 115 where court has stated that merely because Section 24 mandates a person to seek registration in case of reverse charge liability does not extend the concept of recipient to every person specified in the notification. Reverse charge liability arises from 5(3)/5(4) and not from registration provisions under section 24. The following observation clearly overturns its previous observations:

“Section 2(98) of the CGST Act, which defines “reverse charge” reiterates that it means the “liability to pay tax by the recipient of supply of goods or services or both instead of the supplier…”. It cannot be construed to imply that any taxable person identified for payment of reverse charge would automatically become the recipient of such goods or service. The deeming fiction of treating the importer as a recipient must be found in the IGST Act. As it currently stands, Section 5(3) of the IGST Act enables the delegated legislation to create a deeming fiction on categories of supply of goods/services alone.

116 Interpreting the term “by the recipient” vis-à-vis the categories of goods and services identified in Section 5(3) of the IGST Act should necessarily be governed by the principles governing the definition of “recipient” under section 2(93) of the CGST Act.” Contrary to the arguments of the Union Government, such an interpretation would not annihilate the mandate of compulsory registration under Section 24(iii) of the CGST Act …….. ”

After having clearly appreciated the issue in the aforesaid paragraph, the court observed that this interpretation would be relevant only in case of inter-state supplies within the territory of India. Accordingly, cross border services could take a deviation in view of the place of supply provisions. Section 13(9) of IGST Act r/w 2(93)(c) of the CGST Act enable identification of recipient different from the contracting parties. Section 13(9) fixes the place of supply of transportation of services as the destination of goods in India. To give effect to this provision, recipient under section 2(93) is to be expanded to include a person in India who is benefitting from the transportation of goods to India and not merely the contractual recipient of transportation services.

Curiously the court has invoked clause (c) of Section 2(93) of the CGST Act which applies only in cases of an absence of consideration. The court appears to have missed that consideration is in fact payable, albeit by overseas supplier to the foreign liner. Possibly the court invoked this clause to overturn the argument of taxpayers that no consideration is payable by the Indian importer to the foreign liner. By invoking Section 2(93)(c), court implied that an Indian importer, who is not privy to the ocean freight activity, falls into the clutches of 2(93)(c) on account of being the person to whom transportation services is rendered. This overlooks the fact that an absence of consideration obliterates the very charge of GST on supply under section 7(1)(a) r/w 7(1)(b)7. Section 2(93)(c) is applicable only to limited cases where the charge of tax on supply survives despite the absence of consideration (say Schedule I transactions). Invocation of clause 2(93)(c) in this context appears to respectfully erroneous and subject matter of review before the said court. The court ultimately held that recipient could also include a beneficiary of services ascertained from the destination based consumption principle and not necessarily by contractual/ commercial obligations.

From a macro perspective, the contextual meaning attributed to the phrase ‘recipient’ to include a beneficiary of service, fails to consider that GST is levy on a transaction-based VAT chain. The transacting parties are the person who drive the value addition of goods or services right up to the point of consumption. Any artificial deviation at an intermittent stage would impact this VAT chain since a beneficiary of service may not carry forward the subsequent value-added activity and hence fall foul to the fundamental VAT principle. In simpler words, certain training services rendered to employees (beneficiaries) of the company (contractual recipient) does not make the employees the taxable recipient of the service. It is the company which consumes this service for a subsequent commercial activity that should be termed as the recipient. Presuming that the service is consumed by the employees and there is no further economic activity would lead to tax cascading and a distorted picture about the consumption of goods/ services.

Composite Supply – The Supreme Court was not impressed with the grievance of the assesse of a dual burden of GST on freight component (as customs duty and as import of service). It is intriguing that the Supreme Court acknowledged the argument of the revenue that there would not be any economic disparity since credit would be available. Though detailed observations were not made, the proviso to Section 5(1) ought to have been analysed in its literal sense to remove this duality. The silver lining however has been that the court barred the revenue from vivisecting elements at different stages of taxation even though there is a single contractual flow of activities between the supplier and recipient. The court fairly observed that the phrase ‘composite supply’ under section 8 directed one to only examine the principal supply and ignore the rest of the elements of supply for purpose of taxation. Ocean freight being admittedly a part of the composite supply cannot be artificially vivisected and taxed as a service once again under RCM provisions. However, this observation was itself overturned by the court in para 144 by creating two leg for a single transaction and viewing them separately (one as an import of goods and two as a supply of transportation of service). The court stated that both are independent transactions and the second leg of the transaction ought to be taxed as a supply of service. The see-saw continues in para 144 where the court states that the Union cannot treat the transactions as ‘connected’ while examining import of goods and treat them as ‘independent’ while examining import of services. The climax however ends at Section 8 where the court observed that the liability to tax has to be ascertained on the plank of principal supply of goods and not otherwise. Yet the court stops shy of reading down the notification extending itself to importers by stating that it is merely clarificatory and would operate when the importer is otherwise recipient of service.

____________________________________________________

7 Supply of goods or services (including import
of services) is said to take place only in cases where there is a consideration

GST Council’s Recommendations – The court categorically upheld the federal principles and the independence of the Centre and State Legislatures to legislate laws and not bound by GST Council’s recommendations. While stating this, the court also held that the Centre and the State are now operating under a cooperative federalism under which both are enforcing their powers simultaneously. This implies that while the GST council’s recommendations cannot bind the legislative function, the function ought to be exercised by the Centre and State in a harmonious manner. It would not be permissible for the Centre or State to single out and deviate from the GST structure when the others have toed a particular line. This important observation may still continue to bind State legislatures to reach out to the GST Council for any State specific exception/ deviation from the overall GST structure and restrain them from taking a unilateral action.

Extra-territoriality – The Court validated the notification on extra-territoriality by holding that the importer is an ultimate beneficiary of the service. That would be far-fetched as it would enable the revenue authorities to tax overseas transaction merely on the surmise that benefit is accruing to a person in India. Take for example a global brand campaign conducted a multinational enterprise (MNE) would have indirect benefits to the sales of the brand in India. The MNE may not have conducted this activity for India exclusively but the revenue may claim that India has been a beneficiary of the service and even in the absence of a transaction of supply between the MNE and its Indian counterpart, GST may stand imposed on such global activities. This theory may open a pandora’s box of issues to the Indian trade. Taking this feature ahead, States may also claim territorial nexus that the beneficiary resides in their state even-though the contractual recipient would be present in other States. Ideally, court ought to have attached additional weightage to Article 286 and place of supply provisions before reaching this conclusion.

Valuation – Section 15 clearly mandates that tax ought to be levied on transaction price except in areas susceptible to under-valuation (such as related parties, side arrangements, etc.). The court has validated the contentious issue of whether notional valuations could be adopted by completely disregarding the contractual price and the threshold tests specified in Section 15. This would empower governments to issue notifications fixing notional values and which may not reflect the true value of the economic activity. Revenue is certainly going to cite this decision when the matters on notional valuation, as decided by the Gujarat High Court in case of Munjaal Manishbhai Bhatt8, is examined by the Supreme Court.

In summary, the decision certainly has some hits and misses for the assesse. The court’s observations would certainly influence the course of the law in days to come. The revenue is certainly pondering over expanding the scope of the RCM provisions to recipients and other third persons for tax collections. We could see certain amendments to Section 5(3)/5(4) empowering the scope of delegation for RCM purposes. Governments should acknowledge that RCM results in a credit chain distortion and should be resorted to as an exception rather than as a rule.

______________________________________

8 2022-TIOL-663-HC-AHM-GST

shailesh.kwebmaker

GST ON CONSTRUCTION CONTRACTS INVOLVING SALE OF LAND

BACKGROUND

Under the legacy indirect tax regime, taxation of works contracts presented significant challenges due to the limited powers of taxation available to the States and the Centre. Essentially States could tax only sale of goods whereas the Centre could invoke the residuary power to tax services. Therefore, attempts were made to vivisect such composite works contracts into materials and services. Whether a composite works contract can be vivisected in such a fashion and based on such vivisection, whether the respective jurisdictions could impose the taxes and what would be the fetters for such taxation? We have seen a fair share of constitutional amendments, legislative amendments and judicial pronouncements trying to settle and unsettle the answers to these controversies.

Before the controversies on the front of taxability of composite works contracts could really settle, agreements for sale of an under-construction unit by a developer became the next bone of contention on the interpretation that such agreements essentially represent work contracts. The complications increased in this situation since such agreements would involve three elements – one representing the value of the land or undivided interest therein being transferred, one representing the value of the materials being transferred and one representing the services being rendered.

Under the GST regime, the bifurcation of value between goods and services becomes redundant. However, sale of land continues to be excluded from the purview of GST. Therefore, para 2 of the notification 11/2017 – CT (Rate) dated 28th June, 2017 (as amended from time to time) provides that in order to determine the value of construction services, a 1/3rd abatement will be provided towards the value of land. This is a deeming fiction, i.e., there is no exception provided for cases where the value of land is determinable separately.

The said notification resulted in indirectly taxing the value of the land. Hence, the legality of the deeming fiction was challenged before the Hon’ble Gujarat HC, which has in the case of Munjaal Manish Bhatt vs. Union of India [2022-TIOL-663-HC-AHM-GST] held as under:

• Para 2 of the notification is ultra vires the provisions as well as the scheme of the GST Acts.

• The application of mandatory uniform rate of deduction is discriminatory, arbitrary and violative of Article 14 of the Constitution of India (COI).

• However, the above conclusion is only specific to the cases where the value of land is ascertainable. If the same is not ascertainable, the same can be permitted at the option of taxable person.

• In other words, para 2 of the notification is not mandatory and it shall be optional for the taxpayer as to whether he intends to avail the benefit of the deduction or not.

• Refund was also granted to the petitioner, as recipient of service to the extent tax was paid on value over and above the construction value. This reiterates the principle under GST that even a recipient can claim refund of tax borne by him.

This decision is likely to have far reaching implications in the real estate sector. In this article, we have discussed the controversy which prevailed during the VAT/ service tax regime, the basis on which the Hon’ble HC has reached the above conclusion and some issues which originate from the current decision.

CONTROVERSY UNDER SALES TAX
The first controversy arose w.r.t levy of sales tax on the above contracts. While the States wanted to levy tax on such transactions treating it as sale of goods, the Supreme Court in the landmark decision in the case of State of Madras vs. Gannon Dunkerley & Co (Madras) Ltd [(1958) 9 STC 353] held that this was not a contract for simpliciter sale of goods. The property in goods does not pass as chattel pursuant to sale and therefore, the same could not be treated as sales under the Sale of Goods Act, 1930. The Court therefore held that the States did not have legislative competence to levy tax on such contracts.

This triggered the 46th amendment to the Constitution, by virtue of which clause 29A was inserted to Article 366 and the concept of deemed sales was introduced giving powers to the State to levy tax on such composite contracts. Even after the 46th constitutional amendment, the matter again reached the Supreme Court, albeit in a different form. This time, the issue was relating to value on which tax was to be paid as the consideration charged for such contracts was towards both, value of goods as well as value of labour. In this case, the Supreme Court held that tax could be imposed only on the value of goods incorporated in the works contract and the labour expenses (including profit on the same) was to be excluded for the purpose of levy of sales tax. For ascertaining the value of goods, it was held that either the books of account of the assessee could be referred to and when it was not possible to ascertain from therein, the States would prescribe a formula on the basis of fixed percentage of value of contract.

The above principle continued even under the VAT regime, where the MVAT Act, 2002 and the rules framed thereunder provided for determination of value of goods, either on actual basis or by standard deduction for value of labour or composite rates prescribed for levy of tax on such contracts by way of notification.

Before the dust could completely settle, the controversy around the levy of VAT on sale of under construction structures (residential/ commercial) was ignited. The Supreme Court in K. Raheja Development Corporation vs. State of Karnataka [2006 (3) STR 337 (SC)] held that so long as the agreement for sale is executed before completion of construction, it would be treated as works contract and therefore liable to sales tax.

The above principle was further reiterated by the Larger Bench decision in the case of Larsen & Toubro Limited vs. State of Karnataka [2014 (34) STR 481 (SC)]. In this case, the Larger Bench at para 115 held that the activity of construction undertaken by the developer would be works contract only from the stage the developer enters into a contract with the flat purchaser. The value addition made to the goods transferred after the agreement is entered into can only be made chargeable to tax by the State Government.

CONTROVERSY UNDER SERVICE TAX
The levy of tax on construction of residential complex services was first introduced in 2005 vide insertion of clause (zzzh) and tax on construction services (commercial or industrial) was introduced in 2004 vide insertion of clause (zzq). However, the charging sections did not provide any reference as to the tax being levied on composite contracts and therefore, the levy was challenged before the Supreme Court in the case of Larsen & Toubro Limited [(2015) 39STR 913 SC]. In the meanwhile, tax was introduced on “works contract services” w.e.f 1st July, 2007 by way of insertion of clause (zzzza). This further supported the view that prior to 2007, there was no legislative competence to levy service tax on works contract, which included the service of construction of residential / commercial complexes.

This view was ultimately confirmed in the above case wherein it was held that the above provisions introduced w.e.f 2004/ 2005 levied service tax only on contracts simpliciter and not composite indivisible works contracts. The Court further held that there was no charging section specifically levying service tax on works contracts.

This triggered amendment to clause (zzzh), wherein by way of explanation, it was clarified that the tax under this section would also cover construction of a complex which is intended for sale, wholly or partly, by a builder or any person authorised by the builder before, during or after construction (except in cases for which no sum is received from or on behalf of the prospective buyer by the builder or a person authorised by the builder before the grant of completion certificate by the authority competent to issue such certificate under any law for the time being in force) shall be deemed to be service provided by the builder to the buyer.

VALUATION ISSUE
Apart from determination of value of goods involved in such contract, the activity of sale of a structure (residential/ complex) had one particular challenge being the determination of the value of land when included in the agreement for sale of such structure. Under service tax, while there was an abatement provided for, under notification 26/2012-ST dated 20th June, 2012 (as amended), the service provider also had an option to determine the valuation u/r 2A of Valuation Rules, 2006. However, the said rules provided for deduction only of the value of goods involved in the execution of works contract. There was nothing in the said rules which provided for deduction on account of value of land included in the consideration charged by the service provider.

Therefore, when the valuation mechanism was challenged before the Delhi HC in the case of Suresh Kumar Bansal vs. Union of India [2016 (043) STR 0003 Del], the Hon’ble HC held that neither the Act nor the Rules framed therein provided for a machinery provision for excluding all components other than service components for ascertaining the measure of service tax. The Court further held that abatement to the extent of 75% by a notification or a circular cannot substitute the lack of statutory machinery provisions to ascertain the value of services involved in a composite contract.

In other words, the Hon’ble HC held that there was lack of statutory machinery provisions to ascertain the value of services involved in composite contract and therefore relying on CIT vs. B C Srinivasa Shetty [(1981) 2 SCC 460] and others, the Court held that though a service was provided by the builder, service tax was not payable as the value of service could not be appropriately determined.

PROVISIONS UNDER GST
With the introduction of GST, while there is dual power with the Central and State Government to levy GST on supply of goods or services or both, the power to levy tax on land & building still exclusively vests with the State Governments only. Therefore, Schedule III, which declares certain activities or transactions to be treated neither as supply of goods or services or both, specifically provides that “sale of land, and subject to clause (b) of paragraph 5 of Schedule II, sale of building”.

Para 5 (b) of Schedule II deems the following activity as supply of service under GST:

5. Supply of services

The following shall be treated as supply of services, namely:—

(b) construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier.

Explanation—For the purposes of this clause—

(1) the expression “competent authority” means the Government or any authority authorised to issue completion certificate under any law for the time being in force and in case of non-requirement of such certificate from such authority, from any of the following, namely:—

(i) an architect registered with the Council of Architecture constituted under the Architects Act, 1972; or

(ii) a chartered engineer registered with the Institution of Engineers (India); or

(iii) a licensed surveyor of the respective local body of the city or town or village or development or planning authority;

(2) the expression “construction” includes additions, alterations, replacements or remodelling of any existing civil structure;

Further, the provisions relating to value of supply, which are governed u/s 15 of the CGST Act, 2017 provide that the same shall be the transaction value, i.e., price actually paid or payable for the said supply of goods or services or both where the supplier and recipient are not related and price is the sole consideration for the supply. Further, section 15(4) provides that if the value cannot be determined u/s 15(1), the same shall be determined in the manner as may be prescribed. Section 15(5) empowers the Government to notify such supplies where the value shall be determined in the manner as may be prescribed.

The introduction of GST does not take away the essential characteristics involved in a transaction of sale of under-construction structure, i.e., value of land being recovered in the overall sale value. However, the method to determine the same has not been prescribed in the Rules. Instead, the rate notification [11/2017-CT (Rate) dated 28th June, 2017] notifies the method for determination of the value of land/ undivided share of land and deems it to be 1/3rd of the total amount charged for such supply.

GENESIS OF THE CURRENT PETITION
A writ petition was filed under Article 226 before the Hon’ble Gujarat HC (Munjal Manish Bhatt vs. Union of India). The facts of this particular case were that the Petitioner had entered into an agreement with a Developer. The agreement was for purchase of a plot of land and construction of bungalow on the said plot of land by the Developer. In this agreements, separate and distinct consideration was agreed upon for both the activities, i.e., sale of land and construction of bungalow on the said land.

The developer informed the petitioner that GST would be levied on the entire consideration, i.e., including on the consideration charged for sale of land. This resulted in higher GST outflow for the petitioner, as the formula prescribed in Para 2 of notification 11/2017-CT (Rate) dated 28th June, 2017 resulted in the petitioner being required to pay higher tax, contrary to the tax which was otherwise leviable only on the construction activity. Therefore, the petitioner had filed the writ petition before the Hon’ble Gujarat HC.

The HC framed the following question for its’ consideration:

Whether the impugned notification providing for 1/3rd deduction with respect to land or undivided share of land in cases of construction contracts involving element of land is ultra-vires the provisions of the GST Acts and/or violative Article 14 of the Constitution of India?

In the following table, we have tabulated the submissions of the petitioner and UOI and Courts’ conclusion on the same.

arguments made by the Writ
Petitioner

Arguments made by the Union of
India

Conclusion of the Court

The tax liability by
virtue of deeming fiction by way of delegated legislation far exceeds the tax
liability computed in accordance with the provisions of the statute, which is
otherwise impermissible. It is a settled position of law that delegated
legislation cannot go beyond the scope of parent legislation.

The Government had
express power to determine the deemed value of such supply on recommendation
of the GST Council, basis which the same has been ascertained to be 1/3rd of
the total amount charged for such supply. Therefore, the contention that the
determination by sub-ordinate legislation was ultra vires section 15 (5) of
the CGST Act, 2017 does not hold ground.

There is no intention
to impose tax on supply of land in any form and it is for this reason that it
is provided in Schedule III to the GST Acts that the supply of land will be
neither supply of goods nor supply of services.

The deliberations made
prior to the issuance of notification creating deeming fiction was only in
the context of sale of flats/ apartments and not in respect of transactions
where land was sold separately, and its’ value was specifically available.

The contention that
the deemed value of land to be deducted for the purpose of arriving at the
value of construction service is beyond the scope of delegation u/s 9 (1) and
has no legal basis at all.

When entry 5 of
Schedule III refers to sale of land, it refers to land in any form.
Therefore, when the agreement was entered into with the buyer when the land
was already developed, the exclusion under entry 5 of Schedule III will be
available.

Sale of any land,
whether or not developed, would not be liable to tax under GST and the tax
liability must be restricted to construction undertaken pursuant to the
contract with the prospective buyer. If that be so, then deduction of entire
consideration charged towards land has to be granted and the same cannot be
restricted to 1/3rd of total value. (Reliance on L&T’s
case)

The notification in question was not
violative of Article 14 of the COI. It was argued that Government is
empowered to levy tax, prescribed conditions/ restrictions. It enjoys wide
latitude in classification for taxation and is allowed to pick and choose
rates of taxation. Reliance was placed on the decision of SC in the case of VKC
Footsteps India Private Limited [AIR 2021 SC 4407].

On the valuation part,
where the specific value for land and for construction of bungalow is
available, the court held that notification cannot provide for a fixed
deduction towards land. The tax has to be paid on such actual value. Deeming
fiction could be applied only when such value is not ascertainable, relying
on the 2^ndGannon Dunkerley case and 1^st
Larsen case.

There needs to be a
specific statutory provision excluding the value of land from the taxable
value of the works contract and mere abatement by way of notification is not
sufficient. The said condition was complied with under service tax also by
way of retrospective amendment to Valuation Rules, 2006. (Relying on Suresh
Kumar Bansal’s case)

As per the agreement,
the transaction is for purchase of residential plot together with a bungalow/
apartment and access to various amenities, facilities, common area, etc., to
be developed by the developer. None of these components can be separated and
are integral to the transaction. Further, the buyer was to be subjected to
many conditions, limitations, prohibitions and restrictions, except without
the consent of the Developer and the concerned local authority.

Basis the above, the
Court held that mandatory application of deeming fiction of 1/3^rdof
total agreement value towards land even though the actual value of land is
ascertainable is clearly contrary to the provisions and scheme of CGST Act,
and therefore ultra vires the statutory provisions.

Deeming fiction was
discriminatory as a person purchasing a bungalow along with the land, where
predominantly consideration is attributed towards the cost of land, gets the
same deduction as a person buying a flat/ apartment who only gets an
undivided

Reliance was further
placed on the decision in the case of Narne Construction P. Ltd. vs.
UOI [(2012) 5 SCC 359] wherein in the context of Consumer Protection
Act, it was held that sale of a Developed Plot is not sale of land only, it
is a different transaction than

The Court further held
that para 2 was arbitrary in as much as the same is uniformly applied
irrespective of the size of the plot of land and construction therein. The
Court further referred to the fact that there was no distinction between a
flat and bungalow in

(continued)

share in the land where
the major consideration is attributed towards the cost of construction
resulting in tax being levied indirectly on the value of land as well.

(continued)

a mere sale of land.
Therefore, even the proposed transaction could not be said to be a separate
transaction of sale of land and construction service, but rather a single
transaction covered under entry 5 (b) of Schedule II.

(continued)

the notification,
despite the fact that in case of flat, there is a transfer of undivided share
in land while in the case of bungalow, there is a transfer of land itself.
The Court also referred to the minutes of the 14th GST Council meeting
wherein apprehensions were raised as to whether such provision would
withstand judicial scrutiny or not? The Court therefore held that the deeming
fiction led to arbitrary and discriminatory consequences and therefore, was
violative of Article 14 of the COI.

Reference was made to
the valuation provisions and rules therein and it was contended that since
detailed valuation mechanism is available in the Statute, which is primarily
based on the actual consideration, such provisions cannot be ignored by
simply providing ad-hoc and arbitrary abatement of land by way of a
notification.

The separate value
declared for both the transactions, i.e., sale of land and construction of
building thereon could not be accepted “as is”, as the consideration is only
for the purpose of calculating the final consideration and nothing beyond
that, on which stamp duty shall also be paid.

The Court further held
that the arbitrary deeming fiction also resulted in the measure of tax not
having nexus with the charge. The Court held that while the charge of tax was
on supply of goods or services or both, the same was measured on land as
well, which was not the subject measure of the levy. The Court relied on the
decision in the case of Rajasthan Cements Association [2006 (6) SCC
733].

Value of land cannot
be prescribed u/s 15 (5) of the CGST Act since the same deals only with value
of goods or services or both and not land (which is neither goods nor
services).

As an alternative, if
the separate value for land and construction activity was accepted, the same
would lead to absurdity as to save tax, the parties might agree that 99% of
the value shall be towards land and 1% shall be towards the construction
activity, which may lead to huge losses to the public exchequer and against
the basic concept of tax. Reference was made to the Stamp Duty, where though
the duty was payable on transaction value, a minimum value is taken as deemed
value of the transaction and in cases where the transaction value is less
than the minimum value, duty was payable on the minimum value. It was
therefore argued that the value of developed land cannot be left to be
decided / declared by the parties to the transaction.

The Court further
negated the submissions made by the UOI that para 2 was in consonance with
provisions of section 15 (5). However, the Court held that section 15 (5)
empowers the Government to prescribe the manner in which the value may be
determined, and the same has to be by way of rules and not notification.

There is a distinction
between prescription and notification. Prescription has to be by way of rules
while in the current case, abatement was provided for by the notification,
which is incorrect.

For the tagged
petitions, since the same were against orders passed by the Appellate
Authority for Advance Rulings, the writ application under Article 226 was not
maintainable.

The Court further held
that where a delegated legislation is challenged as being ultra vires
the provisions of the CGST Act as well as violating Article 14 of the
Constitution, the same cannot be defended merely on the ground of
Governments’ competence to issue such delegated piece of legislation.

The measure of tax
must have a nexus with the subject matter of tax.

The Court also
rejected the apprehensions as to artificial inflation of price of land to
reduce GST liability. The Court firstly held that in the current case, the
value adopted by the petitioner was not challenged by the UOI. The Court
further held that even if it is found that the value of construction service
declared by the supplier is not correct in as much as indirect consideration
has been received, the value of such indirect consideration would then need
to be determined as per the

(continued)

Valuation Rules, i.e.,
Rule 27-31. In other words, the revenue is not remediless even in cases where
the correctness of the value assigned in the contract is doubted. If it is
established that such value was not the sole consideration for the service,
valuation rules should be resorted to arrive at the value of service.

Once a consideration
was agreed between the two parties for sale of land, it was not open for
taxing authorities to rewrite the terms of the agreement, especially when
such terms were decided at arms’ length and there was no allegation of
collusion between them and that the commercial expediency of the contract was
to be adjudged by the contracting parties as to its’ terms.

The Court further
referred to the Delhi HC decision in the case of Suresh Kumar Bansal
and the subsequent retrospective amendment to Valuation Rules, 2006 to
provide for deduction on value of land, where available. The Court held that
when such mechanism was already available under the earlier regime, the same
ought to have been continued even under the GST regime.

The term “land” was
meant to included developed land and reliance was placed on the definition of
land as per section 3 (a) of Land Acquisition Act, 1894.

The Court further held
that entry 5(b) of Schedule II was not relevant to determine the validity of
the notification. The Court held that the purpose of Schedule II is not to
define or expand the scope of supply, but only to clarify if a transaction
will be a supply of goods or service if such transaction qualifies as
supply.

Even if para 2 of the
notification was not held ultra vires, the same was required to be read down
in cases where the value of land was ascertainable .

The High Court further
held that the decision in the case of VKC Footsteps referred
above is also not applicable to the current case as the same dealt with a
case where a valid rule was sought to be invalidated on account of minor
defects in the formula. However, in the current case, the notification itself
was contrary to the provisions and scheme of the GST and therefore, was
arbitrary and violative of Article 14 of the COI.

The High Court further
held that the reliance placed on the decision of Narne Construction
referred above was also misplaced as the same pertained to a dispute under
the Consumer Protection Act, 1986 and therefore, was inapplicable when
interpretating a tax statute.

ANALYSIS

What will be the implications in case the value of land is not identifiable separately?

While the judgment deals with scenarios where a separate value was assigned for land and construction activity, there are many cases where separate values are not assigned, though by virtue of the agreement, there is transfer of land along with the constructed premise to the buyer. The question that remains is how to deal with the determination of value of land in such cases, especially when the cost incurred by the supplier towards purchase of land is more than 1/3rd of the total value, an apprehension which was also raised in the GST council meeting as well as explained in the judgment at para 101.

Some indication to the above situation can be found at para 110-116 of the judgment. While rejecting the UOIs submission regarding artificial inflation of value of land, the Hon’ble HC held that where the value of supply of goods or services or both could not be determined u/s 15(1), the same could be determined as per the rules prescribed u/s 15(4), i.e., under Rule 27 – 31. Infact, the HC has at para 114 referred to Rules 30/31 and held that the value can be determined either on the basis of cost plus 10% (Rule 30) or using reasonable means consistent with principles and general provision of section 15 as well as the valuation rules. The Court further held that since a detailed mechanism was available for determining the value of service, the deeming fiction could not be justified.

The question that remains is how to determine the applicability of Rules 30/31. Let us first look at Rule 30 which provides that the value of service shall be cost plus 10%. Undoubtedly, while determining cost, one would need to include the value of goods/ services as well. The question remains is determining whether a particular expense is towards land cost or construction cost? For example, can it be said that expense incurred towards FSI/TDR which increases the construction potential on a land can be attributed towards land cost or construction cost? While the assessee may argue that FSI/TDR being an immovable property (as discussed later), the same needs to be appropriated towards cost of land, the Department may contend that the same is incurred for undertaking construction activity and has no direct relation with the land and therefore, should be treated as cost of construction.

The second option available for determination of the value will be under Rule 31, wherein a taxpayer would have an option to determine the value of service using reasonable means consistent with principles and general provision of section 15 as well as valuation rules. An appropriate option would perhaps be to reduce the ready reckoner value of the land from the total value. This is because the ready reckoner value is something which is actually government defined, and therefore any dispute of artificial inflation or otherwise may not sustain before the Court.

Will the judgment apply when there is transfer of Undivided Share in Land along with the sale of constructed structure?

It is important to note that the current decision discusses a scenario involving bungalows having a direct relation between the land and building. It does not discuss similar issue in case of buildings, being apartments, flats, etc., where the ownership of land is not synchronous with the ownership of the apartment/ flat. For example, when one buys a flat, he gets a share in the ownership of the underlying land, commonly known as “Undivided Share in Land” or UDS by becoming a member of the society formed after the construction is completed, to which the ownership of land is conveyed.

The question remains is whether a taxable person can claim the reduction on account of value of such UDS in land, i.e., where land is not transferred separately? It may be noted that in some states, it is a practice to enter into two different agreements, one for transfer of UDS in land and another for carrying out construction activity.

The first question that would need to be looked into is whether UDS can be treated as share in land itself? Section 2 (26) of General Clauses Act, 1897 defines the term “immovable property” to include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth. Also, the Constitutional Bench of Supreme Court in the case of Anand Behera vs. State of Orrisa [1956 AIR 17] has held that any benefit which arises out of land is an immovable property and therefore, such benefit is also to be treated as immovable property only.

This view has also been followed in the context of Service Tax where the Tribunal has in DLF Commercial Projects Corporations vs. CST, Gurugram [2019 (27) GSTL 712 (Tri – Chan)] held that immovable property includes benefits arising out of land. Further, the Tribunal has in the case of Amit Metaliks Limited vs. Commissioner of CGST, Bolpur [2020 (41) GSTL 325 (Tri – Kol)] again held that development rights, being a benefit arising out of immovable property, cannot be liable to tax as there was no service involved.

While the above cases deal with development rights, an UDS in land is actually a share in land, and not some right emanating from the said land. Therefore, there is a strong basis to opine that UDS is nothing but land itself.

Once such a view is arrived at, the next question that arises is how to determine the value of UDS in land, which is included in the consideration charged for providing the construction services but not separately identified? Let us look at an instance where there is a single agreement with single consideration for sale of unit in an under-construction building. Without doubt, such consideration would also include consideration towards the UDS in land on which the building is constructed. Therefore, the question arises is how to identify the value of land/ UDS?

The powers to frame rules relating to valuation of supply are contained u/s 15 (4) and it is under these powers, that Rules 28-31 have been prescribed. A plain reading of Section 15 in toto would indicate that the same applies to determination of value of goods or services or both. Therefore, the need would be to determine the value of construction services in such contracts, which may be done under either of the following options:

In case Valuation Rules are not amended:

• Follow Rule 30. A taxable person may actually
determine the cost incurred towards construction activity (i.e., goods and services procured for construction purposes) and discharge GST on a value being cost plus 10% mark-up.

• Follow Rule 31, reduce the cost incurred towards land/ UDS in land (plus the margin – one may refer to 2nd Gannon Dunkerley decision which provided for reduction of labour cost and margin thereof, the same principles may be applied here also for land) and pay GST on the balance amount.

In case Valuation Rules are amended:

• If a Rule is prescribed for determining the value of land/UDS in land which does not sufficiently provide for excluding the value of land in a particular case, the same may be again challenged. Even the HC order refers to the discussions held during the GST Council meeting wherein the State Finance Minister had expressed that the cost of land is substantially higher in cities of Maharashtra, and even within cities, there can be disparity. Therefore, even if after the Rules are amended to provide for valuation of land/ UDS in land, it is likely that taxpayers in such areas may challenge the validity of the Rules. This judgment also refers to the decision in the case of Rajasthan Cements Association [2006 (6) SCC 733] wherein it has been held that measure of tax cannot be contrary to the nature of tax.

• There can also be a second scenario. The Government may, instead of further litigating the matter, amend the Rules in a manner similar to amendment done to Valuation Rules, 2006 under Service Tax post Delhi HC judgment in Suresh Kumar Bansal’s case, i.e., para 2 is rephrased and introduced as Rule in the Valuation Rules, 2006. What would be the recourse available to a taxable person in such a case depends on the outcome of the appeal filed against the Delhi HC verdict.

Since the current discussion is revolving around valuation aspect, it is important to refer to the decision of the Larger Bench of SC in the case of Union of India vs. Mohit Minerals Private Limited. The issue before the SC was the validity of entry 10 of notification 10/2017 – IT (Rate) dated 28th June, 2017 which requires an importer to pay tax under reverse charge on services supplied by a person located in non-taxable territory by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India. Further, the rate notification also prescribed the method to determine the value of service, where not available, as under:

Where the value of taxable service provided by a person located in non-taxable territory to a person located in non-taxable territory by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India is not available with the person liable for paying integrated tax, the same shall be deemed to be 10% of the CIF value (sum of cost, insurance and freight) of imported goods.

Though the ultimate conclusion of the SC is in the favour of taxpayers, certain observations are contrary, which may have a bearing on the current decision of the Gujarat HC. A plea was raised before the Hon’ble SC that the mode of determination of value of supply could not have been notified. It should have been prescribed as provided for in the rules. The SC has rejected the same at para 94, citing it as “unduly restrictive interpretation” and held as under:

94. The respondents have urged that the determination of the value of supply has to be specified only through rules, and not by notification. However, this would be an unduly restrictive interpretation. Parliament has provided the basic framework and delegated legislation provides necessary supplements to create a workable mechanism. Rule 31 of the CGST Rules 2017 specifically provides for a residual power to determine valuation in specific cases, using reasonable means that are consistent with the principles of Section 15 of the CGST Act. This is where the value of the supply of goods cannot be determined in accordance with Rules 27 to 30 of the CGST Rules 2017. Thus, the impugned notification 8/2017 cannot be struck down for excessive delegation when it prescribes 10 per cent of the CIF value as the mechanism for imposing tax on a reverse charge basis.

On the contrary, in the case of VKC Footsteps, the SC had held that the term “inputs” was to be defined strictly and therefore, refund of accumulated input tax credit was to be allowed only to the extent it pertained to goods (not being capital goods) and not services in case of Inverted Duty Structure.

IMPLICATIONS ARISING FROM THE CONCLUSION VIS-À-VIS ARTICLE 14
The Gujarat HC has at para 105 held that such deeming fiction leads to arbitrary and discriminatory consequences and is therefore, clearly violative of Article 14 of the COI. In doing so, the HC has rejected the reliance placed on the decision of SC in the case of VKC Footsteps wherein it has been held as under:

81. Parliament while enacting the provisions of Section 54(3), legislated within the fold of the GST regime to prescribe a refund. While doing so, it has confined the grant of refund in terms of the first proviso to Section 54(3) to the two categories which are governed by clauses (i) and (ii). A claim to refund is governed by statute. There is no constitutional entitlement to seek a refund. Parliament has in clause (i) of the first proviso allowed a refund of the unutilized ITC in the case of zero-rated supplies made without payment of tax. Under clause (ii) of the first proviso, Parliament has envisaged a refund of unutilized ITC, where the credit has accumulated on account of the rate of tax on inputs being higher than the rate of tax on output supplies. When there is neither a constitutional guarantee nor a statutory entitlement to refund, the submission that goods and services must necessarily be treated at par on a matter of a refund of unutilized ITC cannot be accepted. Such an interpretation, if carried to its logical conclusion would involve unforeseen consequences, circumscribing the legislative discretion of Parliament to fashion the rate of tax, concessions and exemptions. If the judiciary were to do so, it would run the risk of encroaching upon legislative choices, and on policy decisions which are the prerogative of the executive. Many of the considerations which underlie these choices are based on complex balances drawn between political, economic and social needs and aspirations and are a result of careful analysis of the data and information regarding the levy of taxes and their collection. That is precisely the reason why Courts are averse to entering the area of policy matters on fiscal issues. We are therefore unable to accept the challenge to the constitutional validity of Section 54(3).

This gives rise to the question of whether notifications where lower rate is prescribed along with a condition of non-eligibility to claim input tax credit can also be questioned on the same grounds, i.e., invoking Article 14? For example, for suppliers supplying restaurant services, the rate notified is 5%, subject to the condition that no input tax credit is claimed. Similar notifications have been issued for construction services as well. Whether such rate notifications restricting the benefit of input tax credit to a specific class of suppliers be said to be discriminatory or arbitrary?

In this regard, one may refer to the decision in the case of Indian Oil Corporation Limited vs. State of Bihar [2018 (11) GSTL 8 (SC)], wherein it has been held as under:

24. When it comes to taxing statutes, the law laid down by this Court is clear that Article 14 of the Constitution can be said to be breached only when there is perversity or gross disparity resulting in clear and hostile discrimination practiced by the legislature, without any rational justification for the same. (See The Twyford Tea Co. Ltd. & Anr. vs. The State of Kerala & Anr., (1970) 1 SCC 189 at paras 16 and 19; Ganga Sugar Corporation Ltd. vs. State of Uttar Pradesh & Ors., (1980) 1 SCC 223 at 236 and P.M. Ashwathanarayana Setty & Ors. vs. State of Karnataka & Ors., (1989) Supp. (1) SCC 696 at 724-726).

The question that remains to be seen is whether in cases where such restriction on claim of input tax credit has been imposed, does it result in any disparity or discrimination without rational justification? A justification for imposing the condition was that the taxpayers making the above supplies (restaurants/ builders) were not passing on the benefit of input tax credit to their customers by reducing their prices. Therefore, such condition was imposed. However, the same was not imposed on all restaurants/ builders.

For example, in case of stand-alone restaurants, the notified tax rate is 5% with no input tax credit. However, restaurants services supplied from a hotel premise satisfying certain conditions attract tax at 18%. This is without any justification that restaurants operating out of such hotels had actually reduced their rates. Similarly, in case of construction services, input tax credit is denied when the services related to residential units. However, in case of commercial units, input tax credit is allowed.

This means that a stand-alone restaurant service provider will have a higher cost of providing service compared to a restaurant supplying similar service from a hotel (and satisfying the conditions). The question that remains is whether it can be said that there exists perversity / disparity resulting in discrimination in the legislature? In this regard, reference may be made to the decision in the case of Assistant Commissioner of Urban Land Tax vs. Buckingham and Carnatic Co Ltd [(1969) 2 SCC 55] wherein it has been held as under:

“10…The objects to be taxed, the quantum of tax to be levied, the conditions subject to which it is levied and the social and economic policies which a tax is designed to subserve are all matters of political character and these matters have been entrusted to the Legislature and not to the Courts. In applying the test of reasonableness it is also essential to notice that the power of taxation is generally regarded as an essential attribute of sovereignty and constitutional provisions relating to the power of taxation are regarded not as grant of power but as limitation upon the power which would otherwise be practically without limit.

Reference may also be made to the decision in the case of Federation of Hotel & Restaurant Association of India vs. Union of India [(1989) 3 SCC 634] wherein it has been held as under:

46. It is now well settled that though taxing laws are not outside Article 14, however, having regard to the wide variety of diverse economic criteria that go into the formulation of a fiscal policy legislature enjoys a wide latitude in the matter of selection of persons, subject-matter, events, etc., for taxation. The tests of the vice of discrimination in a taxing law are, accordingly, less rigorous. In examining the allegations of a hostile, discriminatory treatment what is looked into is not its phraseology, but the real effect of its provisions. A legislature does not, as an old saying goes, have to tax everything in order to be able to tax something. If there is equality and uniformity within each group, the law would not be discriminatory. Decisions of this Court on the matter have permitted the legislatures to exercise an extremely wide discretion in classifying items for tax purposes, so long as it refrains from clear and hostile discrimination against particular persons or classes.

47. But, with all this latitude certain irreducible desiderata of equality shall govern classifications for differential treatment in taxation laws as well. The classification must be rational and based on some qualities and characteristics which are to be found in all the persons grouped together and absent in the others left out of the class. But this alone is not sufficient. Differentia must have a rational nexus with the object sought to be achieved by the law. The State, in the exercise of its governmental power, has, of necessity, to make laws operating differently in relation to different groups or classes of persons to attain certain ends and must, therefore, possess the power to distinguish and classify persons or things. It is also recognised that no precise or set formulae or doctrinaire tests or precise scientific principles of exclusion or inclusion are to be applied. The test could only be one of palpable arbitrariness applied in the context of the felt needs of the times and societal exigencies informed by experience.

Both the above decisions were relied upon recently by the SC in VKC Footsteps while setting aside the Gujarat HC verdict that Section 54 (3) (ii) was in violation of Article 14 while denying the refund of input services in case of Inverted Duty Structure.

While this issue was not for consideration before the Gujarat HC, it remains to be seen how the Court interprets such conditional rate notifications in future.

VALIDITY OF RATE NOTIFICATIONS SUBJECT TO CONDITION OF NO INPUT TAX CREDIT
While on this topic, it may also be relevant to look at the validity of such notifications, which notify lower tax rates subject to the condition that input tax credit is not taken.

Firstly, let us analyse whether the Government has powers to issue blanket restriction on claim of input tax credit. The enabling provision relating to claim of ITC are covered u/s 16 of the CGST Act, 2017. Section 16 (1) thereof, which deals with claim of input tax credit specifically provides that the same shall be subject to conditions and restrictions, as may be prescribed. As per notification 46/2017- CT (Rate) dated 28th June, 2017, it is by virtue of this powers that a blanket restriction on claim of input tax credit by suppliers supplying restaurant services/ construction services has been notified. However, the fact is that such restriction could have been imposed only in the manner prescribed, i.e., by way of Rules. However, this restriction is imposed by notification.

One may argue that whether the restriction is imposed by Rules or notification may not be relevant, especially in view of decision in Mohit Minerals case. It may however be important to note that the SC dealt with the issue of value of supply, for which specific powers have been provided u/s 15(5) to determine the value of supply. However, in the current case, the claim of the input tax credit is sought to be denied. Section 16 (1), though provides that the claim of the input tax credit shall be subject to restrictions, the term “restriction” cannot be treated at par with “exclusion”, which the above notifications actually do by denying the claim of input tax credit to the specified class of suppliers.

In this regard, one may also refer to the decision in the case of Kunj Bihari Lal Butail vs. State of HP [AIR 2000 SC 1069] wherein it has been held as under:

We are also of the opinion that a delegated power to legislate by making rules ‘for carrying out the purposes of the Act’ is a general delegation without laying down any guidelines; it cannot be so exercised as to bring into existence substantive rights or obligations or disabilities not contemplated by the provisions of the Act itself, For the foregoing reason, the appeal is allowed.

Therefore, validity of notifications restricting claim of input tax credit is going to be an open issue. Of course, industry has adapted to this restriction on claim of input tax credit.

APPLICABILITY OF 1ST L&T DECISION UNDER GST REGIME:
The Gujarat HC judgment also refers to the 1st L&T decision of the Supreme Court wherein it has been held as under:

115. It may, however, be clarified that activity of construction undertaken by the developer would be works contract only from the stage the developer enters into a contract with the flat purchaser. The value addition made to the goods transferred after the agreement is entered into with the flat purchaser can only be made chargeable to tax by the State Government.

The interpretation of the above decision is that the supply starts only after the construction is started. Let us take an example of an agreement for sale entered into with respect to a flat in an under-construction building. 50% of the construction activity is concluded and therefore, at the time of booking itself, the buyer is required to make payment of 50% of the agreed consideration. Balance consideration is payable as per the agreed slabs.

The effect of the above extracts of 1st L&T decision would be that no GST is payable to the extent of 50% of the consideration, since till that point of time, the works contract does not commence. In other words, apart from reducing the value of land/ UDS in land, a developer may also have an option to claim a deduction to the extent construction was completed at the time of entering into the agreement on the grounds that the service began only after the agreement was entered. Interestingly, such a view would also complicate determination of tax liability under RCM for FSI/ TDR payments since the same provides for payment of tax on a proportionate basis to the extent of area sold after OC.

CONCLUSION
The judicial history of levy of indirect tax has always been litigative, be it under sales tax, VAT or service tax. This litigation has also seen substantial amendments, at times prospective and at times, retrospective. It, therefore, remains to be seen as to what action the Government takes post the current judgment, i.e., whether it challenges it in the Supreme Court or retrospectively amends the valuation rules. One thing is certain, the controversy under real estate is not going to settle soon.

shailesh.kwebmaker

VIRTUAL REALITY

INTRODUCTION

The 21st Century is constantly experiencing disruptions, with the latest one being the emergence of Crypto Trade (Virtual currency). VC (Bitcoin being the first) is based on the modern philosophy of ‘self-empowerment’ rather than operating on a ‘trust-based central bank system’. While there is an environment of uncertainty on the legality of trading in such alternative currencies by individuals on a peer-to-peer basis and by-passing the established banking systems, taxation laws are only concerned with the contractual obligations emerging therefrom. Hence, it is necessary that the tax obligations on such arrangements are ascertained. Pseudo ‘Satoshi Nakamoto’ developed the Bitcoin1 as a chain of encrypted digital signatures, functioning as an electronic coin, with a record of the ownership being placed in a public registry maintained under the distributed ledger technology (DLT/ blockchain).

TYPES OF VIRTUAL CURRENCIES
1. Closed virtual schemes – generally termed as ‘in-game schemes’, these operate only in the virtual world (such as gaming) wherein the participants earn coins and are permitted to use those coins to avail goods or services in the virtual world. These coins are not exchangeable with fiat currency.

2. Uni-directional virtual scheme – virtual currency can be purchased with fiat currency at a specific exchange rate but cannot be exchanged back to the original currency. The conversion conditions are established by the scheme owner (e.g. Facebook credits can be purchased with fiat currency and utilized for services on the Facebook portal)

3. Bi-directional virtual scheme – users can buy and sell virtual money according to exchange rates with their fiat currency. The virtual currency is similar to any other convertible currency with regard to its interoperability with the real world. These schemes provide for the purchase of virtual and real goods or services (e.g. Bitcoins).

LEGALITY VS. ILLEGALITY
This concept is of limited relevance under tax laws, but it may be important in understanding the nature of VC transactions. Though the Finance Minister’s speech2 lauded the development of blockchain technology, it stated that VCs are not legal tender. Hence, measures ought to be taken to eliminate the use of such VCs in illegitimate and illicit activities3. Subsequently, RBI4 enforcing its powers under various laws, through a circular, barred financial institutions from engaging with persons engaged with VC trade. This Circular was challenged in the Apex Court in Internet Mobile & Mobile Association of India5 which finally observed that Governments and money market regulators have come to terms with the reality that VCs are capable of being used as ‘real money’ but they do not have the legal status of money. As an obiter it stated as follows:

“But what an article of merchandise is capable of functioning as, is different from how it is recognized in law to be. It is true that VCs are not recognized as legal tender, as it is true that they are capable of performing some or most of the functions of real currency” …. RBI was also caught in this dilemma. Nothing prevented RBI from adopting a short circuit by notifying VCs under the category of “other similar instruments” indicated in Section 2(h) of FEMA, 1999 which defines ‘currency’ to mean “all currency notes, postal notes, postal orders, money orders, cheques, drafts, travelers’ cheque, letters of credit, bills of exchange and promissory notes, credit cards or such other similar instruments as may be notified by the Reserve Bank.” After all, promissory notes, cheques, bills of exchange etc. are also not exactly currencies but operate as valid discharge (or the creation) of a debt only between 2 persons or peer-to-peer. Therefore, it is not possible to accept the contention of the petitioners that VCs are just goods/ commodities and can never be regarded as real money..
(emphasis supplied)

1 Bitcoin: A Peer-to-Peer Electronic Cash System sourced from
www.bitcoin.org

2 Budget 2018-19

3 Incidentally, the Government is proposing to table “The
Cryptocurrency and Regulation of Official Digital Currency Bill, 2021” to
regulate Crypto trade including banning all private virtual currencies

4 Circular Dt. 05-04-2018 issued under 35A read with Section
36(1)(a) and Section 56 of the Banking Regulation Act, 1949 and Section 45JA
and 45L of the Reserve Bank of India Act, 1934 and Section 10(2) read with Section
18 of the Payment and Settlement Systems Act, 2007

5 WP 528/2018 dt. 04.03.2020

Subsequently, the Court affirms that unregulated VCs could jeopardise the country’s financial system and RBI is within its powers to regulate VCs thereby rejecting the ground that VCs are goods/ commodities not falling within RBI’s purview. In addition, while responding to the challenge under the Payments & Settlement Systems Act, the Court observed the definition of ‘payment system’, ‘payment instruction’ or ‘payment obligation’ and held that RBI has the power to regulate banks with respect to such payment transactions.

VC AS MONEY, GOODS, SERVICES, SECURITIES, ACTIONABLE CLAIM OR VOUCHERS?
The following features thus emerge in a bi-directional VC scenario:

• Clearly not ‘money’ in a legal sense since yet to be recognised as legal tender by RBI.

• Has the characteristics of ‘money’ in economic sense: (a) a medium of exchange; and/or (2) a unit of account; and/or (3) a store of value6.

• No tangible underlying but merely a set of digital signatures and a central DLT registry maintaining a record of ownership.

• Certainly, it falls under RBI’s regulatory powers but is yet to be termed as illegal.

• Digital representation of value.

6 FATF report in June 2014

A) Whether Money?
The meaning of ‘money’ may be different in an ‘economic/social sense’ and ‘legal sense’. There is no doubt that VCs are money based on the characteristic features – medium of exchange, store of value and unit of account. The difficulty arises on account of the definition of money (u/s 2(75)), which is limited to legal tender currency and other recognised instruments recognized by RBI as used as settlement of payments. Interestingly, Service tax law also contained a definition of money (u/s 65B(33)) which seemed to cover all instruments which were used for payments (though not recognised by RBI for such purposes) as money. Therefore, on a comparative basis, the GST law seems to be narrower and unless courts consciously widen the literal wordings, VCs do not seem to be falling within the meaning of money.

B) Whether Goods?
Goods have been defined u/s 2(52) as ‘every kind of movable property’ other than money and securities. It would be appropriate to notice the definition of ‘property’ under the Transfer of Property Act, 1882 (TOPA) – which reads: ‘property’ means general property in goods, and not merely a special property.” The phrase ‘property’ has been consistently interpreted by Courts in a fairly expansive manner and sufficient enough to include any right over which a person can exercise dominion over, thereby including VCs in the present case.

In the context of central excise, the Apex Court in UOI vs. Delhi Cloth & General Mills7 held that goods refer to an article which can ordinarily be bought and sold in the market. In Tata Consultancy Services8, in the context of software, the Court laid down the principles for constituting ‘goods’ – though the tests are not finite, it reasonably covers the ingredients for treatment as goods:

“The term “all materials, articles and commodities” includes both tangible and intangible/incorporeal property which is capable of abstraction, consumption and use and which can be transmitted, transferred, delivered, stored, possessed etc. The software programmes have all these attributes.”

Test

Application to VCs

Abstraction

Capable of being mined by miners

Consumption & Use

Capable of being used for purchase of other
goods/ services

Transmitted, Transferred & Delivered

Though ownership of the coin is anonymous,
it is capable of being transferred

Stored & possessed

Capable of being possessed in electronic
wallet and record of ownership present in DLT which is reported in an
electronic wallet

7 1977 (1) E.L.T. (J 199) (S.C.)

8 2004 (178) E.L.T. 22 (S.C.) – 5 Judge Bench

The above tabulation depicts good grounds for classification of VCs as ‘goods’. Ultimately, Courts are also converging on the proposition that transferrable software is per se in nature of goods. Courts could interpret VCs as being a transferrable code through a system of digital signatures.

A deeper examination of the Customs HSN schedule adopted to fix tax rates should also be tested to support this proposition. On first blush, there does not seem to be any entry depicting a resemblance to VCs. The rate schedule containing residual goods entry (No. 453) specifies that goods classifiable under ‘any chapter’ (HSN) would fall within this entry. While there could always be a debate on the HSN classification most akin to VCs, the settled law on residual entries undeniably places a very large onus on the taxpayer to establish that VCs are even not falling within the residual entry. Since this task is significantly onerous for taxpayers to overcome, it would be reasonable to reconcile that VC’s are goods.

C) Whether Vouchers?
Vouchers u/s 2(118) are also instruments which are acceptable as a consideration in respect of the supply of goods or services. There is a developing debate on whether vouchers by themselves are goods. Be that as it may, the Supreme Court, in IMMA’s decision (supra) recognizes that VCs are a form of settlement of payment obligations and not goods or services (refer to extracts above). RBI was permitted to regulate the payments through VCs as such payments were part of the country’s financial system.

The phrase ‘consideration’ u/s 2(31) refers to any payment made in money or ‘otherwise’ in response to a supply of goods or services. The phrase ‘otherwise’ is significant as it intends to consider forms of payment which is not money. Loyalty points/ vouchers fall within the scope of this phrase. As mentioned above, loyalty points/ air miles are also a form of closed VC usable for the purchase of goods or services under conditions of the issuer. Unidirectional VCs represent entitlements emerging from real money and usable against specified goods or services. The fact that this is not an instrument recognized by RBI (e.g. cheques, drafts, etc.) does not disentitle them from being termed as payment instruments. Applying this analogy, Bidirectional VCs (being inter-operable with fiat currency) may also have a good case of being characterized as vouchers.

D) Whether Securities?
Like money, securities also have a very definite connotation u/s 2(101) of GST law. Section 2(h) of Securities Contracts (Regulation) Act, 1956 adopted for GST, has been defined inclusively to include traditional instruments (such as shares, stocks, bonds, etc.), derivatives of such instruments, units of collective investment schemes and any other instrument recognized by Government as ‘securities’. Securities, in the traditional sense, are means of securing finance and are represented by underlying assets. VCs do not fit this understanding on account of a lack of an underlying asset and any legal recognition as securities.

E) Whether actionable claim?
Section 2(1) of GST law r.w.s 3 of TOPA defines an actionable claim as a claim to any debt (other than a secured debt). Actionable claims are goods under GST law but are specifically excluded from the GST levy under Schedule III. For something to be termed as an actionable claim, there must be an unsecured debt, and one must have a claim of that unsecured debt. In the context of VCs, there does not exist any pre-existing debt between the transferor and the transferee. There is a mutual exchange of virtual currency with fiat currency. Therefore, bi-directional VCs do not seem to fall within the scope of actionable claims. In the case of closed virtual schemes or uni-directional schemes, the entitlement to claim a specific list of goods or services in exchange for the VCs is driven by contractual obligations and does not result in a debt claimable in money and hence may not satisfy the definition of actionable claim.

F) Whether Services?
This ensuing analysis is relevant only on the assumption that VCs are not goods. Services u/s 2(102) refers to anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode from one form, currency or denomination to another form, currency or denomination. ‘Anything other than goods’ does not solve the issue of whether VCs are services. Services should be understood in its general sense as an activity performed for consideration. The activity could be any value-added activity for which a person is willing to pay the price. The phrase ‘anything other than goods’ is really to prevent an overlap in classification between goods and services (largely prevalent in the legacy laws). Therefore, if one were to contend that VCs are not goods, it does not automatically result in a situation of being covered as services. The fundamental feature of being an ‘activity for consideration’ is still a sine-qua-non for something to be termed as service. Applying this analogy, VCs do not seem to fall within the first part of the definition as a service as understood in the general sense.

It is very plausible for the revenue to state that VCs are not goods, and hence services falling within the definition of ‘Online-information database access and retrieval services’ (OIDAR) which are being performed through an electronic commerce operator. Consequently, such services would be liable to tax in India, and the E-commerce operator ought to impose TCS provisions at the time of exchange of funds. The revenue may also mandate implementation of the TCS provisions even where the exchanged currency is virtual and not in money form leaving the exchange in an absurd valuation position. Overall, the revenue is certainly starting reaching out to exchanges for such imposts.

THE EU PERSPECTIVE
Interestingly, the European Court of Justice ruling in Skatteverket vs. David Hedqvist9, was examining whether transactions to exchange a traditional currency for the ‘Bitcoin’ virtual currency or vice versa were subject to VAT. The opinion of the court was to the effect that:

(i) Bitcoin with bidirectional flow which will be exchanged for traditional currencies in the context of exchange transactions cannot be categorized as tangible property since virtual currency has no purpose other than to be a means of payment.

(ii) VC transactions do not fall within the concept of the supply of goods as they consist of exchange of different means of payment and hence, they constitute supply of services.

(iii) Bitcoin virtual currency being a contractual means of payment could not be regarded as a current account or a deposit account, a payment or a transfer, and unlike debt, cheques and other negotiable instruments, Bitcoin is a direct means of payment between the operators that accept.

(iv) Bitcoin virtual currency is neither a security conferring a property right nor a security of a comparable nature.

(v) The transactions in issue were entitled to exemption from payment of VAT as they fell under the category of transactions involving ‘currency and bank notes and coins used as legal tender’.

(vi) Article 135(1)(e) EU Council VAT Directive 2006/112/EC is applicable to nontraditional currencies i.e., to currencies other than those that are legal tender in one or more countries in so far as those currencies have been accepted by the parties to a transaction as an alternative to traditional currency

9 Case C 264/14 DT. 22.10.2015

Germany is one of the first EU jurisdictions that introduced a definition of ‘crypto assets’ under its financial regulatory law10.

“a digital representation of value which has neither been issued nor guaranteed by a central bank or public body, does not have the legal status of currency or money but,
on the basis of an agreement or actual practice, is accepted by natural or legal persons, as a means of exchange or payment or serves investment purposes and that can be transferred, stored and traded by electronic means.”

Therefore, the EU has taken a stand in the context of their law that VCs are not goods. It falls prey as a ‘service’ but exempted as a form of acceptance of a payment obligation or a means of exchange akin to money and hence per se, not taxable. Whether the framework within which this ruling has been delivered would deliver a persuasive value in the Indian context, is a slippery issue. Hence, the ruling per se should not be considered as having a precedential value in India.

RECENT INCOME TAX AMENDMENTS
Finance Act, 2022 has inserted a new concept termed as ‘virtual digital asset’ which has been defined as follows:

(a) any information or code or number or token (not being Indian currency or any foreign currency), generated through cryptographic means or otherwise, by
whatever name called, providing a digital representation of value which is exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account and includes its use in any financial transaction or investment, but not limited to, investment schemes and can be transferred, stored or traded electronically

10 Sec. 1 (11) sent. 4 of the German Banking Act (KWG)

(b) A Non Fungible Token or any other token of similar nature, by whatever name called

This omnibus definition attempts to tax the investment profit/ gains arising from holding and transferring of crypto/ virtual assets. The Government has specified its intent to treat them as an asset but has failed to narrow down the cases to only bi-directional tokens. Be that as it may, the intent is very clear that until Cryptos are not banned/ regulated, the Government would like to build an information trail and collect the tax revenues therefrom.

Summary
The wide amplitude of the definition of ‘goods’ seems to be a formidable barrier to overcome. Until then, VCs ought to be treated as goods, and an arguable case on it being a voucher for discharge of consideration is worth examining.

APPLICATION OF THE ABOVE UNDERSTANDING
Taking forward the indication that VCs are goods, the incidental matters associated with this legal proposition may also be examined:

Whether one can say the supply of VC’s is in the course of furtherance of business?
One of the essentialities of supply is that the supplier should be engaging in any ‘business’. The definition is wide enough to include any trade, commerce or adventure, even if such activity is infrequent or lacks continuity. Business is otherwise generally understood as a systematic and periodic activity occupying the time of an individual. Trading in crypto is generally not systematic and purely dependent on public news. Cryptos are not purchased for holding or long-term investments but merely for profits in the near term. Moreover, unlike investments / trading in shares or securities performed after research studies, cryptos are clearly more erratic and impulsive trading.

In income tax, the constant argument is that in-frequent activities performed as an investment for capital appreciation from reserve funds indicate that they are ‘capital assets’ rather than stock in trade. CBDT11 has provided tests to examine whether investments in financial securities are for trading or investment purposes. Extending those tests here, VCs are always adopted for capital profit. Rarely has one claimed to be consuming/ trading in VCs for business purposes. Therefore, one may claim they are not chargeable as ‘supply’ u/s 7 of the GST law.

What would be the location of such VC’s for enforcing taxation?
Goods ought to be identified to a particular location for enforcing geographical jurisdiction over the same for taxation. While this concept is abstract, inference may be drawn from other intangibles (IPRs, etc.). As a matter of principle and practice, the owner’s location has been the guiding factor in locating the intangible goods. Therefore, VCs located in electronic wallets (whether in India or outside) should be understood as located at the place where the owner resides. Consequently, resident persons engaging in VC trade (whether indigenous or foreign) would be subjected to the scope of GST in India on account of their presence in India.

Characterization of Import/ Export?
Treating VCs as goods should flow seamlessly into other provisions. But the ‘anonymous’ nature of VCs poses a challenge in identifying the legal movement of such VCs. The buyer and/ or seller are anonymous to each other, and the transfer happens through instructions placed on the electronic wallet. The digital address assigned to a person helps identify the person behind the scenes. In India, stock exchanges have been directed to perform the KYC of the digital wallets holding VCs, and this would help in tracing the movement of goods. The exchanges are the only data source of information on the buyer and seller. The problem expounds when one has to comply with the definition of export /import of goods. The identity of the supplier and recipient is essential to establish this international trade. Exchanges may not be in possession of this data or may not be willing to share this with the VC owner. In the context of importation of goods, the lack of a customs channel/frontier for VCs may make the law in its current form practically impossible to implement for VCs. Therefore, one may have to take a cautious approach in reporting these transactions on the GST portal.

11 INSTRUCTION NO. 1827 dt. 31.08.1989, Circular 6/2016 dt. 29.02.2016 & No 4/2007 dt. 15-06-2007

Whether Input Tax Credit conditions are satisfiable?
Adding to the ambiguity, ITC provisions require the seller of VCs to report the recipient’s identity through its GSTIN. In a typical VC trade through stock exchanges, tax is impossible to be collectible from the end consumer. Tax invoice can only be issued under a B2C category since the transacting parties are only known through digital addresses. Therefore, even if tax is paid at the supplier’s end, the recipient of VCs would not have any proof of tax being paid on such a transaction. Moreover, the ownership in VCs is generally fractional in nature. In such cases, the factum of receipt of VCs would also be difficult to explain, apart from the fact that such fractional ownership is visible on the electronic wallet.

Whether services of converting money to Crypto or vice-versa (crypto-fiat trade) are liable to GST?
Crypto Exchanges provide the services of converting money to Crypto and vice-versa in consideration for a fee (as a percentage, fixed float or a fixed fee). The activity is clearly a service in its general sense and should fall within the wide ambit of ‘service’ u/s 2(102) of GST law. One may minutely examine the inclusive part of the said definition, which is limited only to activities relating to the use of ‘money’ from one form, currency or denomination to another form, currency or denomination. The essential ingredient to fall within the inclusive part of the definition is whether the subject matter of conversion is ‘money’ in some form. VCs, as discussed above, are not ‘money’ and one may probably canvass that since the conversion of money into a VC form is not envisaged herein, even the service activity relating to the conversion activity ought not to be included in the definition. This challenge will face the daunting task of overcoming the means part of the definition, which is wide enough to cover any and all service activity.

Whether services provided by Crypto-exchanges in Crypto-crypto trade are liable to GST?
In such trades, both ends of the transaction are in Cryptos (e.g., Bitcoins to WazirX or viceversa), and there is no conversion into real money. The electronic wallets would, after the trade, have ‘X’ tokens of the BitCoins instead of ‘Y’ tokens of WRX. Applying the same argument as discussed in Crypto-fiat trade, the services relating to the use of VCs for its conversion from one form to another do not find mention in the inclusive part of the definition of services. Nevertheless, the said activity is a service and may find itself to be covered under the primary part of the definition itself and hence taxable.

What is the place of supply of such services conducted by exchanges owned by entities outside India?
Crypto exchanges are in a completely digital format, and hence the location of such exchange is difficult to ascertain. Where the crypto exchanges are established by entities located outside India, the question for consideration is whether they are in the nature of OIDAR or in the nature of intermediary services. OIDAR services are applicable for any digital services which have a minimal human intervention. Crypto exchanges work in a platform which is automated entirely and meets this definition. Similarly, exchange related services which make buyers/sellers meet to effect a trade also fall within the scope of intermediary services. Both these classifications result in diametrically opposite place of supply – OIDAR results in place of recipient with the place of supply while Intermediary results in the place of supplier being the place of supply. In our view, the said services should not fall within the scope of OIDAR (though literal reading suggests otherwise) and should appropriately fall within the scope of Intermediary and hence outside the geographical scope of GST.

CONCLUSION
The emergence of such disruptions is certainly challenging the lawmakers and resulting in ambiguity which cannot be resolved overnight. Governments are indeed in a dilemma on the character to be assigned to these VCs. Even if this is performed, it opens up a pandora’s box when applying the machinery provisions of law drafted for traditional trade. Governments would generally attempt to collect their taxes at the focal point where the transaction takes place – i.e. crypto exchanges rather than reaching out to each trader.

Lawmakers have adopted a pragmatic approach in refraining from pursuing the matter against crypto traders. Crypto exchanges are undeniably rendering services and hence ought to discharge the GST on the transaction services being rendered. Until this cloud of uncertainty looms over the trade, one may want to pay heed to Mr Warren Buffet’s statement – “Cryptocurrencies basically have no value and they don’t produce anything. They don’t reproduce, they can’t mail you a check, they can’t do anything, and what you hope is that somebody else comes along and pays you more money for them later on, but then that person’s got the problem. In terms of value: zero”

shailesh.kwebmaker

BLOCKED CREDITS

The previous articles discussed the various restrictions imposed u/s 17 (5) on input tax credit claims. In this concluding article on blocked credits, we will discuss clauses (b) and (g) of Section 17 (5).

INTRODUCTION
The erstwhile CENVAT Credit Rules, 2004 permitted the claim of credit of tax paid on inputs, input services or capital goods. An inward supply was required to fall within the purview of the said terms, as defined u/r 2 thereof. The definition of inputs and input services provided therein specifically excluded the following goods/ services from being classified as inputs/ input services:

Exclusion from scope of inputs:

Exclusion from scope of input services:

(E) any goods, such as
food items, goods used in a guesthouse, residential colony, club or a
recreation facility and clinical establishment, when such goods are used
primarily for personal use or consumption of any employee; and

(C) such as those
provided in relation to outdoor catering, beauty treatment, health services,
cosmetic and plastic surgery, membership of a club, health and fitness
centre, life insurance, health insurance and travel benefits extended to
employees on vacation such as Leave or Home Travel Concession, when such
services are used primarily for personal use or consumption of any employee.

The above indicates that the legislature’s intention has always been to deny CENVAT credit in respect of such goods or services which have an element of being used primarily for personal use or consumption of any employee. This approach has been inherited under GST as well with two specific clauses – (b) and (g) u/s 17 (5) with clause (b) specifically restricting credit on specified inward supplies, subject to exceptions provided therein (nexus with outward supplies/ obligatory for an employer to provide the facilities) while clause (g) is more in the nature of a use-based restriction, as it restricts input tax credit on goods or services or both, used for personal consumption.

One important distinction in the provisions under the CENVAT regime and GST regime is that under the CENVAT regime, clauses (b) & (g) were under a single entry and therefore, the restrictions complemented each other, i.e., the specified goods/services were not eligible for CENVAT credit when used for personal consumption of an employee. However, under GST, the restriction is split into two different entries. Therefore, items covered under clause (b) shall not be eligible for input tax credit (subject to exceptions), irrespective of whether the same are used for personal consumption or not. However, when it comes to clause (g), there will be a need to identify and demonstrate ‘personal consumption’ first. Once the item is classified as meant for ‘personal consumption’, the input tax credit shall not be allowed, even if is covered within the exceptions under clause (b) or other sub-clauses.

Another distinction that needs to be noted is that under the CENVAT regime, the ineligibility to claim credit was attracted when the goods/ services were used for the personal consumption of the employees. However, under GST, the restriction applies only for personal consumption, which gives rise to the question as to whether it intends to refer to the personal consumption of the taxpayer/ the employees of the taxpayer. In this article, we have analysed both clauses.

CLAUSE (b) – SPECIFIC ITEMS COVERED U/S 17 (5)
Clause (b) is reproduced below for reference:

(5) Notwithstanding anything contained in sub-section (1)
of section 16 and sub- section (1) of section 18, input tax credit shall not be available in respect of the following, namely:—

(a) … …

(b) the following supply of goods or services or both—

(i) food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery except where an inward supply of goods or services or both of a particular category is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply;

(ii) membership of a club, health and fitness centre;

(iii) rent-a-cab, life insurance and health insurance except where–

(A) the Government notifies the services which are obligatory for an employer to provide to its employees under any law for the time being in force; or

(B) such inward supply of goods or services or both of a particular category is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as part of a taxable composite or mixed supply; and

(iv) travel benefits extended to employees on vacation such as leave or home travel concession;

AMENDMENT W.E.F 1st FEBRUARY, 2019
The above was amended w.e.f 1st February, 2019 by way of substitution as under:

(b) the following supply of goods or services or both—

(i) food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, leasing, renting or hiring of motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) except when used for the purposes specified therein, life insurance and health insurance:

Provided that the input tax credit in respect of such goods or services or both shall be available where an inward supply of such goods or services or both is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply;

(ii) membership of a club, health and fitness centre; and

(iii) travel benefits extended to employees on vacation such as leave or home travel concession:

Provided that the input tax credit in respect of such goods or services or both shall be available, where it is obligatory for an employer to provide the same to its employees under any law for the time being in force.

The effect of the above amendment is tabulated below for ease of reference:

Restriction for

Pre-amendment

Post-amendment

Sub-clause
(i)

Food & beverages

Restricted subject to condition that the
inward supply is used for making an outward supply of same category of goods
or services or both, or as a part of a composite or mixed supply

Restricted subject to two conditions:

• Inward supply is used for making an
outward supply of same category of goods or services or both, or as a part of
a composite or mixed supply

• Where it is obligatory for an employer to
provide such goods or services or both to its’ employees

Outdoor catering

Beauty treatment,
health services, cosmetic and plastic surgery

Leasing, renting or hiring of motor
vehicles, vessels or aircraft referred to in clause (a) or clause (aa)

–

Life insurance, health insurance

–

Sub-clause
(ii)

Membership of a club, health and fitness
centre

Blanket restriction

Restricted subject to two conditions:

• Inward supply is used for making an
outward supply of same category of goods or services or both, or as a part of
a composite or mixed supply

• Where it is obligatory for an employer to
provide such goods or services or both to its’ employees

Sub-clause
(iii)

Rent-a-cab

Restricted subject to condition that the
inward supply is used for making an outward supply of same category of goods
or services or both, or as a part of a composite or mixed supply,

when obligatory for employer to provide
such service to employees

Deleted as shifted to sub-clause (i)

Life insurance and health insurance

Deleted as shifted to sub-clause (i)

Sub-clause
(iv)

Travel benefits extended to employees on
vacation such as leave or home travel concession

Blanket restriction

Renumbered as sub-clause (iii) and
exception provided when it is obligatory on the part of employer to provide
such goods or services or both to its’ employees

We now proceed to discuss each item covered under clause (b).

FOOD AND BEVERAGES
The first item under clause (b) on which input tax credit is blocked is ‘food and beverages’. In our view, the following points need analysis:

• Whether the restriction would apply on receipt of goods, being food and beverages or even services with an element of food and beverages would be covered?

• What shall be the scope of the terms – ‘food’ and ‘beverages’?

• Whether the ‘and’ need to be read as ‘or’ while interpreting the restriction?

Clause (b), as reproduced above, applies to the supply of goods or services or both, of food and beverages. The first question which needs analysis is whether this restriction has to be applied when the food and beverages are being supplied as standalone goods, or as part of service and therefore, deemed as service in view of entry 6(b) of Schedule II? This is relevant because if it is the former, when food and beverages would be supplied as part of a service, the same would be deemed to be a supply of service and therefore, unless such food or beverages are supplied as a part of a service and specifically mentioned under the restrictive clause, the same would not be an ineligible input tax credit. One reasoning to support this view is that after food and beverages, clause (b) refers to outdoor catering. If the supply of food and beverage as a part of service was supposed to be covered within the first item, i.e., food and beverage, there was perhaps no need to specifically cover outdoor catering under the restriction list.

Per contra, it may be contended that a restaurant also supplies food and beverages, with the only distinction being that the food and beverages are not sold as such but are supplied by way of service. One may rely on the decision in the case of Northern India Caterers’ case [1980 SCR (2) 650] wherein the Hon’ble SC has held as under:

The appellant prepared and served food both to residents in its hotel as well as to casual customers who came to eat in its restaurant, and throughout it maintained that having regard to the nature of the services rendered there was no real difference between the two kind of transactions. In both cases it remained a supply and service of food not amounting to a sale. … … (only relevant extracts).

In other words, even in the case of restaurant service, there is a supply of food and beverage, though the same may not be sold in the restaurant itself owing to it being consumed. Therefore, a strong view prevails that the restriction under food and beverages extends to restaurant services as well.

Food & Beverages – scope

This takes us to the second question, i.e., the scope of the terms – ‘food’ and ‘beverages’ for the purpose of this clause. The general meaning of both the terms is something which is consumed by a person. Generally, food refers to something which can either be in solid/ semi-solid/ liquid stage, while beverages refer to liquid items for consumption. What constitutes food has been dealt with by the Hon’ble SC in the case of Swastik Udyog vs. Commissioner [2006 (198) ELT 485 (SC)] wherein the Hon’ble SC held that food is a substance which is taken into the body to maintain life and growth. Similarly, in the context of beverages, in the case of Hamdard (Wakf) Laboratories [1999 (113) ELT 20 (SC)], the SC has held as under:

5. Beverages, broadly speaking are liquids for drinking, other than water, which may be consumed neat or after dilution.

This takes us to the first issue, i.e., whether preparatory items used to cook such food and beverages can be treated as food/ beverages per se or not? For instance, whether coffee beans/powder used to make coffee can be treated as an item classifiable as ‘food’ or ‘beverage’ and therefore, input tax credit on the same is blocked? For instance, while dealing with the question of whether Rasna powder, which is used for preparing a beverage, can itself be treated as a beverage or is it a mere preparatory material to make the beverage? In the case of P. Sukumaran [(1989) 74 STC 185], the Delhi HC held that Rasna is only a concentrate and not a liquid. Therefore, it would not come within the ambit of the expression ‘beverage’. However, while dealing with the classification of Rooh Afza, the Hon’ble SC in the case of Hamdard (Wakf) Laboratories held as under:

7. The Tribunal would also appear to have concluded that the said sharbat was not a beverage but a preparation for the same. The fact that three table spoonfuls of the said sharbat have to be added to a glass of water to make it drinkable does not, in our view, make the said sharbat not a beverage but a preparation for a beverage. Were that so, many beverages which are classified as such, as for example, tea, coffee, orange squash and lemon squash would not be beverages. (See, for example, paragraph 5 of this Court’s judgment in the case of Parle Exports P.Ltd. [1988 (38) E.L.T. 741 (S.C.) = 1989 (1) SCC 345] and paragraph 12 et seq of the Tribunal’s judgment in the case of Northland Industries [1988 (37) E.L.T. 229]. It seems to us that the phrase `preparations for lemonades or other beverages’ in clause (j) of Note 5 of Chapter 21 was intended to refer to the industrial concentrates from which aerated waters and similar drinks are mass produced and not to preparations for domestic use like the said sharbat.

Of course, both the products are different in nature. While Rasna powder cannot be consumed as such, Rooh Afza can be consumed, as held by the Hon’ble Court, without mixing with any other liquid. However, a prudent view would be to not only treat such items which can be consumed directly as ‘food’ or ‘beverage’, but also such items, which with minimal process would result in the ‘food’ or ‘beverage’ being prepared, for instance, ready to eat meals, such as Maggi, soups, etc., Infact, such items were also referred to under the Central Excise Tariff as ‘food preparations’. Not doing so may defeat the intention of the legislature, which is to deny input tax credit on items that are meant for personal consumption.

‘And’ vs. ‘Or’

This takes us to the next question as to whether while analysing the first item, i.e., ‘food and beverages’, the ‘and’ needs to be read ‘as is’ or as ‘or’. In this regard, one may refer to the decision in the case of Kamta Prasad Aggarwal vs. Executive Engineer, Ballabhgarh [1974 (4) SCC 440] wherein the Hon’ble SC held that depending upon the context, ‘or’ may be read as ‘and’ but the Court would not do it unless it is so obliged because ‘or’ does not generally mean ‘and’ and ‘and’ does not generally mean ‘or’. In other words, the context needs to be looked into while determining if ‘and’ can be read as ‘or’.

In this regard, let us look into the intention of the legislature to understand the context behind the entry. The purpose of this entry is to restrict credit, i.e., deny a benefit to the taxpayer. In such a scenario, reading ‘and’ as ‘and’ instead of ‘or’ would deny the purpose of the entry. This is because the ‘and’ would necessitate both ‘food’ and ‘beverages’ to be present in a supply. This would mean the existence of two different supplies, one of food and another of beverage. However, such a situation would be theoretically impossible since both the supplies would be taxed independently as GST is a transaction-based tax and therefore, there cannot be a scenario where food and beverage are being supplied under a single contract. On the other hand, if the ‘and’ is read as ‘or’, the scope of the restriction entry would drastically expand, as the likelihood of a person receiving only food or only beverages in a single supply is higher. One may also refer to the service tariff entry, which also refers to the tax rate on supply of food and beverage. If the ‘and’ is read as ‘and’, the rate notification itself would also fail.

Lastly, it is an industry practice to refer to any person dealing in the food or beverage industry as a part of Food & Beverage Industry.

OUTDOOR CATERING
This takes us to the next restriction for outdoor catering. The first question that comes into mind is the need for specifically referring to ‘outdoor catering’ under clause (b), especially when food & beverages are also restricted in the same clause. The only probable reason is that outdoor catering is a wider activity as compared to the mere supply of food and beverages. This aspect has been dealt with by the Hon’ble SC in the Tamil Nadu Kalyana Mandapam Associations vs. UOI [2006 (3) STR 260 (SC)] wherein the Hon’ble SC held as under:

55. … … …

Similarly the services rendered by out door caterers is clearly distinguishable from the service rendered in a restaurant or hotel inasmuch as, in the case of outdoor catering service the food/eatables/drinks are the choice of the person who partakes the services. He is free to choose the kind, quantum and manner in which the food is to be served. But in the case of restaurant, the customer’s choice of foods is limited to the menu card. Again in the case of outdoor catering, customer is at liberty to choose the time and place where the food is to be served. In the case of an outdoor caterer, the customer negotiates each element of the catering service, including the price to be paid to the caterer. Outdoor catering has an element of personalized service provided to the customer. Clearly the service element is more weighty, visible and predominant in the case of outdoor catering. It cannot be considered as a case of sale of food and drink as in restaurant. … …

BEAUTY TREATMENT, HEALTH SERVICES, COSMETIC AND PLASTIC SURGERY
This restriction is directly borrowed from the definition of input services u/r 2 (l) of CENVAT Credit Rules, 2004. While what is meant by the above terms has not been defined under GST, the same were defined under the Finance Act, 1994, and it would therefore be appropriate to refer to the definitions provided therein to understand what may and may not get covered within it:

• ‘beauty treatment’ includes hair cutting, hair dyeing, hair dressing, face and beauty treatment, cosmetic treatment, manicure, pedicure or counselling services on beauty, face care or make-up or such other similar services.

• ‘health and fitness service’ means service for physical well-being such as, sauna and steam bath, Turkish bath, solarium, spa, reducing or slimming salons, gymnasiums, yoga, meditation, massage (excluding therapeutic massage) or any other like service.

• ‘any service provided or to be provided to any person, by any other person, in relation to cosmetic surgery or plastic surgery, but does not include any surgery undertaken to restore or reconstruct anatomy or functions of body affected due to congenital defects, developmental abnormalities, degenerative diseases, injury or trauma’.

As can be seen, the above terms actually refer to services that are personal in nature. However, clause (b) specifically does not restrict that the said services should only be used for personal consumption. Rather it imposes a general restriction with an exception where such supplies are used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply. In other words, either there is a direct nexus where the registered person supplies the same class of service, or such registered person is engaged in making a composite or mixed supply, i.e., more than one supply with one of the supplies being either beauty treatment, health services or cosmetic and plastic surgery.

This necessitates the need to understand the meaning of the terms ‘composite supply’ or “mixed supply”. The relevant definitions are reproduced below for reference:

(30) ‘Composite supply’ means a supply made by a taxable person to a
recipient consisting of two or more
taxable supplies of goods or services or both, or any combination thereof, which
are naturally bundled and supplied in conjunction with each other in the
ordinary course of business, one of which is a principal supply;

(74) ‘Mixed supply’ means two or more
individual supplies of goods or services, or any combination thereof,
made in conjunction with each other by a taxable person for a single price
where such supply does not constitute a composite supply.

Both the above terms indicate that there must exist more than one supply of goods or services or both being made in conjunction with each other. Therefore, it becomes necessary to understand what is meant by the phrase “two or more taxable supply of goods or services or both, supplied in conjunction with each other” for the purpose of this entry. Let us understand this with the help of an example. A company organizes a 4-day residential training course in a 5-star hotel charging a lump sum fee of Rs. 1,00,000 plus GST per participant. The same includes, apart from training charges, charges towards participants stay, food & beverage, travel arrangements (including hiring vehicles for airport/ railway station pick-up/ drop), one-time spa coupon, etc.,

There are more than two supplies involved in this case, such as training service, F&B, rent-a-cab services, health and fitness centre, etc. In this case, it can be said that there are two or more taxable supplies involved as the recipient of supply actually receives/consumes the said supplies. Therefore, the supplier will be eligible to claim input tax credit even of such specified items, as they are used for making a taxable supply of goods or services or both. It is imperative to note that each of the activities undertaken for the recipient is taxable in nature, and the same is undertaken in conjunction with each other while providing the main service of training.

However, even the above example can have some twists. If out of 100 participants, 70 participants have paid for the course, 20 are free participants, and 10 are employees of the organizer who also attend the seminar, the eligibility to claim input tax credit gets a bit changed. Free participants would imply no taxable supply as there is no consideration, and therefore, tax is not leviable. Since there is no taxable supply involved, the question of the inward supplies being used to make a composite or mixed supply does not arise and therefore, eligibility to claim input tax credit to the extent of 20 participants would be an issue. The same treatment would apply even when own employees are attending the course or organizing team members avail the same service. To the extent own employees are attending the course for free/employees of the team organizing the course are also using the said facilities, it cannot be said that the same is used for making an outward taxable supply and therefore, the input tax credit to that extent would not be eligible.

Similarly, there can be instances where though there are various activities undertaken by the supplier, the question of composite/mixed supply does not arise. For instance,

• A film producer undertaking production of a film has entered into an agreement for a lock-stock-barrel transfer of all rights in the movie, once the shooting is completed. GST is paid at the applicable rates on the outward supply, i.e., transfer of copyrights. In the course of shooting, the film producer incurs the expense of beauticians for the acting crew. The beauticians’ levy GST on their service charges. Can it be said that the film producer has actually further supplied the said service of beauticians to the distributor along with the main supply, i.e., transfer of copyrights or there is a single supply only, and therefore the question of mixed and composite supply does not arise?

• Similar example applies in the context of news channel/entertainment channel where the service provided is the sale of advertising slots. However, in order to create the content/ news broadcasting, expenses of beauty parlour are incurred, and GST is paid on the same. The same would also be covered under the blocked credit list,
and input tax credit would not be eligible on the same as well.

• Another example would be of an actor/ actress who has undergone cosmetic surgery with the intention of getting a new assignment and paid GST on the charges levied by the Doctor. Can the actor/actress claim input tax credit on the grounds that the services are used as a part of a composite / mixed supply? The answer to this is apparently negative.

We may also need to look into a scenario where the service recipient arranges for the material used in the delivery of the above service, and the supplier of service merely performs the said service. The question then remains whether the recipient can claim the input tax credit of GST paid on materials. Is a view possible that the restriction of beauty treatment, health services, cosmetic and plastic surgery is to be read in the context of the supply of services only? Such a view is possible for the simple reason that all the three terms refer to an activity done on another person, i.e., a service. However, such a view is likely to be litigative since the Revenue is going to interpret it strictly, and any expense which has a distant relation to the above items would be treated as blocked credits only.

MEMBERSHIP OF A CLUB, HEALTH AND FITNESS CENTRE
A plain reading of the entry would indicate that the restriction applies to membership of a club or membership of a health and fitness centre. This would mean that the restriction applies when there is an inward supply of service and not goods. This implies that if a taxable person has set up a health and fitness centre within his Place of Business and procures various equipment, the same would not get covered within the purview of health and fitness centre service and therefore, restriction might not apply. One may refer to the decision in the case of ITC Ltd. vs. Commissioner [2018 (12) GSTL 182 (Tri. – Kol.)] wherein the Hon’ble Tribunal had allowed the credit in respect of health and fitness centre opened in the premises of the taxpayer for the benefit of the employees. Similarly, if certain services are received with respect to such a centre, the restriction would not apply as the same applies only for membership services of a club or a health and fitness centre.

Let us first analyse the restriction w.r.t membership of a club. The term ‘club’ has not been defined under GST. However, the term ‘club or association’ was defined under service tax vide section 65 (25aa) as under:

“club or association” means any person or body of persons providing services, facilities or advantages, primarily to its members, for a subscription or any other amount, but does not include —

(i) any body established or constituted by or under any law for the time being in force; or

(ii) any person or body of persons engaged in the activities of trade unions, promotion of agriculture, horticulture or animal husbandry; or

(iii) any person or body of persons engaged in any activity having objectives which are in the nature of public service and are of a charitable, religious or political nature; or

(iv) any person or body of persons associated with press or media;

From the above, it is apparent that under the service tax regime also, the levy of service tax was on club or association service, but the claim of credit was restricted only to the extent of membership of a club. It, therefore, becomes necessary to understand the distinguishing factor between clubs and associations.

In layman’s terms, a club may be a for-profit/non-profit organization established with the end objective to provide various facilities to its’ members. A club can be in the form of a members’ club, such as CCI, Bombay Gymkhana, etc., or even non-member clubs, such as Club Mahindra, Country Club, etc. Such clubs offer services which are purely personal in nature and meant for consumption of the member. In the context of membership clubs providing services that are personal in nature/ meant for personal consumption, there has been substantial litigation on the same under the CENVAT regime before the amendment of the definition of input services, specifically excluding the same from its’ scope. In Racold Thermo Ltd. vs. Commissioner [2016 (42) STR 332 (Tri. – Mum.)], the Hon’ble Tribunal had allowed the CENVAT credit on annual club membership, concluding that the same was used to promote sales and purchase activity by attending to clients and holding conferences. On the contrary, for periods after 1st April, 2011, the Tribunal has consistently denied the CENVAT credit on club membership services [Cenza Technologies Pvt. Ltd. – 2017 (4) GSTL 150 (Tri. – Che.) and Marathon Electric India Pvt. Ltd. – 2016 (45) STR 253 (Tri. – Hyd.)].

On the other hand, an association is an organization, generally non-profit, established with the end objective of the collective benefit of members. Some examples of an association can be:

• a co-operative housing society which is an association of members/ owners of houses who have come together with the objective of benefiting the members by maintaining the building/ complex and its’ facilities.

• Trade associations, such as CII, NASSCOM, etc., are associations where industry participants join hands with a stated objective of representing the industry before various forums, working towards the welfare of the members, etc.

• Recently, a new organization called BNI has started its’ Chapters across various cities. It is nothing but a networking organization where different businesses can take annual memberships and get a chance to showcase their business offerings at the periodic meetings organized by the Chapter. The members can also transact between them through the BNI network, which is advertised as one of the key benefits of joining the BNI network.

As such, it can be said that a club is an organization that provides services personal in nature/ meant for personal consumption and not for the general welfare of all members. On the other hand, an association works towards the general cause for the benefit of all members with no element of personal nature/ personal consumption being involved. This aspect has also been recognized under the CENVAT regime wherein in the case of BCH Electric Ltd. vs. Commissioner [2013 (31) STR 68 (Tri. – Del.)], the Tribunal had allowed the CENVAT credit of service tax paid on membership fees of IEEMA, an association of engineering products manufacturers. Even after the amendment in 2011, in Commissioner vs. Zensar Technologies Ltd. [2016 (42) STR 570 (Tri. – Mum.)], the Tribunal had allowed the CENVAT credit on service tax paid on membership fees of CII. In essence, though there is no specific exclusion for membership services provided by professional associations, the same should not be covered under the blocked credit entry.

It should also be kept in mind that while under the pre-amendment regime, there was no exception provided for claiming input tax credit on such supplies, post-amendment, exception is provided when it is obligatory on the part of the employer under any law, for the time being in force, to arrange for such facilities for his employees.

RENT-A-CAB
This restriction has been discussed in detail in the previous article [BCAJ, March 2022], dealing with the restriction under clauses (a), (aa) & (ab) of Section 17 (5). Readers may kindly refer to the same.

LIFE AND HEALTH INSURANCE
The terms ‘life insurance’/ ‘health insurance’ has not been defined under the GST law. The general interpretation would be that policy instruments titled life insurance/health insurance shall be covered by the restriction provided u/s 17 (5) (b). However, when a business takes a life insurance/health insurance, it is generally for their employees, and at times because it is mandatory on such business to extend the insurance cover to the employees.

However, there are different types of policies that an employer takes for his employees. For instance, the Workmen Compensation Insurance Policy taken for construction workers to meet mandatory labour laws. In such policies, it is actually the employer who gets insured and not the employees, as it safeguards the employer in case of any untoward accident resulting in injury to the employee. It is an insurance policy where the risks of the employer are subsumed by the insurance company. In the context of such policies, the Hon’ble Karnataka HC in the case of Ganesan Builders Ltd. vs. CST, Chennai [2019 (20) GSTL 39 (Mad.)] had held that the CENVAT credit was allowable as the insurance policy was employer-specific and not employee-specific. This was despite the fact that the definition of input service did not provide any exception to cases where it was obligatory to provide insurance facilities to their employees. Also, under the CCR, 2004, the exclusion applied only when the said services were used for personal consumption of the employee, w.r.t which the HC has held to the contrary.

Of course, the restriction applies only to specific insurance policies and not for other policies such as travel insurance, fire insurance, etc., on which the input tax credit will be allowed.

TRAVEL BENEFITS EXTENDED TO EMPLOYEES ON VACATION
At times, employers themselves arrange for vacation travel of employees and their family members by booking them for a travel package or reimbursing the cost of travel. In such cases, the benefit of the input tax credit is specifically restricted subject to the exception that it is obligatory on the employer’s part to provide such facilities to the employee.

However, there are also other instances where an employer extends travel benefits to the employees, such as:

• Relocation – An employee working in one location may be transferred to another location, and the employer might arrange for travel of the employee/ his family members as well as transportation of their belongings.

• Joining – This is similar to relocation, with the only difference being that this occurs when a company hires an employee belonging to another city. As a joining incentive, the company arranges/bears the cost of relocation.

• Training – An employer might arrange for the employee to undergo certain training which necessitates the employee to travel to a different city/ country, and the cost incurred during such travel for training is borne by the employer.

• Marketing – In the course of employment, an employee might be required to travel extensively, especially when involved in a sales/ marketing role. The entire travel expenses are borne by the employer. In Ramco Cements Ltd. vs. Commissioner [2017 (5) GSTL 105 (Tri. – Che.)], the Tribunal has allowed the CENVAT credit of tax paid on air travel agency services /tour operator services used to book tickets for travel of employees for marketing/business promotion. In Netcracker Technologies Solutions India Private Limited vs. Chief Commissioner [2017 (4) GSTL 10 (Tri. – Hyd.)], the Tribunal had held that travel insurance of employees for business travel was eligible for CENVAT credit.

Though the above are in the nature of travel benefits, they cannot be categorized as being extended to employees on vacation. Therefore, the restriction to claim input tax credit cannot be extended to the above.

CLAUSE (g) – GOODS OR SERVICES OR BOTH USED FOR PERSONAL CONSUMPTION
This takes us to clause (g), which restricts the claim of an input tax credit on goods or services or both used for personal consumption. For the purpose of this clause, the scope of the term ‘personal consumption’ needs to be analysed.

Neither the term ‘personal consumption’ nor ‘personal’ has been defined under GST. Therefore, we need to refer to the dictionary meaning to understand the scope of the term ‘personal’. The Oxford Dictionary refers to ‘personal’ as “your own; not belonging to or connected with anyone else”.

At this juncture, we should also refer to section 37 (1) of the Income-tax Act, which specifically prohibits the claim of expenses that are personal in nature. While analysing the scope of section 37 (1), in the case of Galgotia Publications Private Limited vs. ACIT [ITA No. 1857/Del/2015], the Hon’ble Tribunal has held that there cannot be a nature of personal expenses when the assessee is a company, an entity recognized by law as a legal person and existing independently with its’ own rights & liabilities. Therefore, no element of personal expenses by Directors/ Office bearers can be attributed unless there is sufficient documentary evidence in support.

The above indicates that while interpreting the term ‘personal consumption’, it has to be referred to as the consumption of the taxable person in the context of whom the eligibility to claim input tax credit needs to be looked into. Owing to the decision of the ITAT, even expenses incurred for Key Managerial Personnel, i.e., directors, office bearers, etc., may be covered within the scope of personal expenses/ consumption. The question that therefore remains is if any expenses are incurred for the welfare of the employees and not covered under any other clauses of section 17 (5), whether the same would be hit by clause (g) or not?

For instance, a Mumbai based company has hired a new employee who will be relocating to Mumbai along with his family. As a facilitation measure, the company arranges for the travel of the employee and his family members and the transportation of their belongings to Mumbai. The company also arranges for temporary accommodation in a hotel for ten days to assist the employee in settling. The company also pays brokerage to a real estate agent for helping the employee find permanent accommodation. None of the expenses incurred by the employer in the above activities is specifically covered under any of the clauses of section 17 (5) – except perhaps the F&B expenses incurred during hotel stay for ten days.

The question that remains is whether this can be treated as a personal expense of the employer as it is consumed by the employee? It is important to note that such expense is allowable u/s 37 (1) as business expenses as this is nothing but personnel expenses, i.e., the expense incurred for the staff. However, the Bombay HC has, in the case of Commissioner vs. Manikgarh Cement [2010 (20) STR 456 (Bom.)] held that mere allowability of expense under income tax cannot be a yardstick to determine eligibility to claim the credit. A nexus between the input/input service has to be established with the business activity of the taxpayer in order to demonstrate eligibility to claim the credit.

While a strong view to suggest that such expenses are not covered u/s 17 (5) (g) would prevail, it is also important to note that the Authority for Advance Ruling (AAR) has held to the contrary. For instance, in Chennai Port Trust’s case [2019 (28) GSTL 600 (AAR-GST)], the Authority has held that input tax credit on expenses incurred (procurement of inputs/ capital goods/ services) for in-house hospital is for personal consumption of the employees and therefore covered u/s 17 (5) (g).

The entry can also be analysed from a different perspective, especially in the context of goods. Let us take an example of a company having constructed a housing colony for its’ employees. The company also acquires various household equipment, which are installed at each of the houses in the colony. As per entry 4 (b) of Schedule II, where, by or under the direction of a person carrying on a business, goods held or used for the purposes of the business are put to any private use or are used, or made available to any person for use, for any purpose other than a purpose of the business, the usage or making available of such goods is a supply of services. In other words, a view can be taken that the act of making available the goods at the houses in the housing colony for the personal use of employees is actually a supply of service, and therefore, the corresponding input tax credit cannot be denied. Of course, there would be implications on the same from an output liability perspective, in view of entry 2 of Schedule I.

The scope of clause (g), therefore, appears to be controversial, especially till the term ‘personal consumption’ is not defined/ analysed by the Judiciary to provide more clarity.

CONCLUSION
Be it Direct Taxes or Indirect Taxes, when it comes to allowing the benefit of expenses/tax paid on expenses where there is an element of personal nature, the legislature’s intention has always been to deny the same. The same is further implemented by overzealous tax officers who do not miss any opportunity to label a particular expense as being personal in nature and deny the benefit. Therefore, taxpayers always need to be very careful when claiming input tax credit in respect of goods or services where there is an element of ‘personal’ consumption prevailing. Clauses (b) and (g), both revolve around this mindset of the legislature, and therefore, the taxpayers need to tread cautiously when analysing the same.

shailesh.kwebmaker

CREDIT BLOCKADES FOR CONVEYANCES

INTRODUCTION

Global economies have banked on tax collections from the Mobility Industry, which has inevitably placed them at the higher end of the tax spectrum. In a VAT chain, taxes collected would be retained by Governments only when the input tax credit is blocked to the subsequent users. Socialist economies have always viewed motor vehicles as ‘luxury’, making the industry a soft target for tax collections. In addition, administrators are aware of the likely diversion of automobiles for personal use even though business enterprises own them. These ideologies have directed stringent tax provisions for motor vehicles and conveyances.

LEGISLATIVE HISTORY

Credit in respect of motor vehicles was blocked during the CENVAT regime. Motor vehicles were excluded from the definition of ‘inputs’ irrespective of the purpose for which they were used. As ‘capital goods’, credit was originally permitted to service providers only in limited cases – (a) tour operators, (b) courier agencies, (c) cab-rent operators, (d) outdoor caterers, (e) goods transporters, and (f) pandal or shamiana operators. In 2010, this list was extended to dumpers and tippers (registered in the name of service provider) used for site formation or mining activities. Components, spares, and accessories for the above listed motor vehicles were considered as permitted credits. In 2012, with the shift from a ‘positive list’ service taxation to a ‘negative list’ taxation, the entire provision was substituted by permitting credits on the basis of end-use (i.e. service description to which the said vehicles were put to use), delinking them from category-based eligibility. In addition, credit was permitted to manufacturers in respect of all motor vehicles, except the following HSNs:

8702

MOTOR
VEHICLES FOR THE TRANSPORT OF TEN OR MORE PERSONS

8703

MOTOR
CARS AND OTHER MOTOR VEHICLES PRINCIPALLY DESIGNED FOR THE TRANSPORT OF
PERSONS (OTHER THAN THOSE OF HEADING 8702), INCLUDING STATION WAGONS AND
RACING CARS

8704

MOTOR
VEHICLES FOR THE TRANSPORT OF GOODS

8711

MOTORCYCLES
(INCLUDING MOPEDS) AND CYCLES FITTED WITH AN AUXILIARY MOTOR, WITH OR WITHOUT
SIDE-CARS

In effect, goods carriers (i.e. dumpers and tippers), special purpose motor vehicles (such as Tractors, Crane Lorries, Concrete-Mixers lorries, Work Trucks, etc.) were permitted as ‘Capital Goods’ credit for manufacturers. This position continued until the sub summation of the Central Excise provisions. Some important observations emerging here are as follows:

(a) There has been a constant progression in granting credit to motor vehicles which have been directly used for value-added activity either by a manufacturer or a service provider.

(b) Passenger vehicles were blocked credits except where they were used as commercial passenger vehicles.

(c) HSN was adopted for describing the nature of motor vehicles that are eligible/ ineligible for CENVAT credit. Even if the ‘principal design’ of the vehicle met the description, credits were permissible.

(d) Under the HSN system, Motor-cycles were a distinct category from Motor-Vehicles.

(e) Use Test was not prominently visible in the provisions, and the reliance on HSN classification contained a presumption that the actual use and registered use were the same.

On the other hand, VAT laws permitted credits only if the goods were either re-sold or used as a direct input in manufacturing activity. In all other cases, Motor vehicles and conveyances were treated as ‘non-creditable goods’.

LEGAL CONTEXT – ORIGINAL LAW

Originally enacted section 17(5) blocked credit in respect of motor vehicles and conveyances (‘blocked conveyances’) except when they were used for making specified supplies (collectively referred to as ‘credit qualifying supplies’):

a) supply of such motor vehicles or conveyances

b) transportation of passengers

c) imparting training of such conveyances

In addition, such conveyances were eligible for credit when used for transportation of goods either on own account or as part of any supply (‘qualifying use’). The law was silent on the admissibility of input tax credit on ancillary costs (such as insurance, repair, maintenance, etc.) incurred in respect of such blocked conveyances.

2019 AMENDMENT
In 2018 (w.e.f. 1st February, 2019) the provisions were substituted resulting in the following:

(a) Blocked conveyances list was narrowed to passenger motor vehicles (below 13 capacity), vessels and aircraft. Other modes of conveyances were removed from the blocked list.

(b) Passenger motor vehicles and vessels/ aircraft fell under differently worded provisions.

(c) Clause specifying ‘qualifying use’ for motor vehicles was deleted and merged into the ‘blocked conveyances’ clause – in effect qualifying the nature of the motor vehicles itself rather than specifying a separate qualifying use test.

(d) Credit in respect of the ancillary services (such as insurance, repair and maintenance) were specifically blocked in respect of ‘blocked conveyances’ except when such blocked conveyances were used for credit qualifying supplies.

(e) Credit was made available to manufacturer or insurers of such blocked conveyances as long as they are in the business relatable to such blocked conveyances.

Summary of the eligibility matrix on account of the amendment would be tabulated as follows:

Criteria

Pre-2019 – All Conveyances

Post 2019 – Motor Vehicles

Post 2019 – Aircraft and Vessels

Blocked Conveyances

All motor vehicles & conveyances

Motor vehicles for transportation of passengers

Vessels and Aircraft

Credit Qualifying Supplies

Identical

Qualifying Use

Transportation of Goods

Merged in 1^st criteria

Transportation of Goods

With the amendment in 2019, the use test for motor vehicles has been merged into the Conveyance Test, while the original provisions have been retained for aircraft and vessels (refer subsequent analysis).

INTER-PLAY – USED VS. INTENDED TO BE USED
Section 16(1) grants input tax credit on all inward supplies based on two entry points (a) use or (b) intention of use. Section 17(5) operates as an exception to the general rule of grant of credit and uses the phrase ‘used’ while enabling credit based on the ‘onward supply test’. Is the overriding nature of 17(5) coupled with the absence of the phrase ‘intention of use’ having an impact on credit eligibility of goods used for onward supply?

Section 17(5) expresses that credit in respect of blocked conveyances (say motor vehicles) would be denied. This first level denial is absolute, implying that all blocked conveyances are ineligible for input tax credit – let’s call it a blanket ban. Having placed a banket ban on blocked conveyances, the law now states that it shall permit a narrow escape route when such blocked conveyances are ‘used’ for credit qualifying supplies. Consequently, while a taxable person may have availed credit of blocked conveyances on ‘use’ or even ‘intention of use’, the only escape route to retain the credit is after establishing that such blocked conveyances have been ‘used’ for credit qualifying supplies. This format of the provisions places a larger onus on the taxable person claiming credit on blocked conveyances. However, this stringent test does not appear to be applicable to non-specified conveyances (such as goods vehicles) not featuring as blocked conveyances. Therefore, while goods vehicles are permitted for input tax credit on mere ‘intention of use’ of such vehicles, passenger vehicles may have to undergo the rigour of whether they have been ‘used’ for the specified purpose.

Some may call this interpretation as hyper-technical and defeating the purpose of granting credit at the time of purchase and deferring it until the goods are actually used. No doubt this interpretation appears to be onerous on the taxpayer, and one would weigh the precedents on this. At this juncture, one may recall the decision of the Supreme Court in BPL Display Devices Ltd. vs. CCE1 where it was held that the exemption which was dependent on usage goods should also be interpreted to include intention of use. Despite the goods being lost in transit, the courts granted the benefit of exemption on the basis that use included intention of use. While this decision is attractive to apply, one may also have to consider the context of section 16(1) r/w 17(5). A reasonable interpretation to resolve this deadlock would be to hold that blocked conveyances which are worded under over-riding provisions would not be eligible for input tax credit. Credit would be permitted only on they been used for permitted purposes. Though this test is narrow in comparison to the wide scope of section 16(1), the effect of this test is only to place the onus on the taxpayer to establish the usage when called upon to do so. This test should not be interpreted as a pre-condition to availment of the credit itself. This fine inter-play of words can be framed into a three-layer water-fall test.

3-LAYER WATER-FALL TEST

_______________________________________________________________________________________________________________________________________________

1 2004
(174) E.L.T. 5 (S.C.)

ANALYSIS OF 17(5)(a) – CONVEYANCE TEST
Conveyance test blocks input tax credit on motor vehicles for transportation of persons having approved seating capacity of not more than thirteen persons. The phrase ‘motor vehicles for transportation of persons’ has not been enlisted anywhere. One may examine the HSN tariff entry for the inclusions/ exclusions to the phrase ‘motor vehicles for transportation of persons’. Vehicles specified in HSN 8702 and 8703 appear to be part of ‘motor vehicles for transportation of persons’. Tractors (8701), Motor Vehicles for transport of goods (8704), Special purpose motor vehicles (8705), Motorcycles (8711), etc appear to fall outside the scope of the said phrase.

Alternatively, motor vehicles can also be understood from the Motor Vehicles Act, 1988, which defines ‘motor vehicles’ as follows:

“(28) “motor vehicle” or “vehicle” means any mechanically propelled vehicle adapted for use upon roads whether the power of propulsion is transmitted thereto from an external or internal source and includes a chassis to which a body has not been attached and a trailer; but does not include a vehicle running upon fixed rails or a vehicle of a special type adapted for use only in a factory or in any other enclosed premises or a vehicle having less than four wheels fitted with engine capacity of not exceeding twenty-five cubic centimeters”

The said definition brings within its ambit any motor vehicle (including tractors, cranes, special purpose motor vehicles, motorcycles, etc) used upon roads and includes chassis or trailers. The coverage of the term under the Motor Vehicle Act, 1988 is wider than the scope envisaged under the HSN schedule, and this may pose some interpretational issues between the taxpayer and the revenue. The HSN schedule appears to be more proximate and contextual reference for understanding ‘motor vehicles for passengers’ on account of its framework and listing based on (a) seating capacity (of thirteen persons) (b) principal design of motor vehicles, and (c) their probable usage. Further, historical background of CENVAT provisions also suggests such a reference.

ANALYSIS OF 17(5)(aa) – CONVEYANCE TEST
Clause (aa) applies to vessels and aircraft when used for further supply of such vessels and aircraft or imparting training of such vessels and aircraft. One of the key effects of the 2019 amendment was that aircraft and vessels were carved out from the motor vehicles provisions and drawn up separately. While fresh provisions were drafted for motor vehicles, aircraft and vessels continued under the pre-amendment wordings. On a close comparative analysis, one could narrow down the difference to the qualification on the ‘nature of the conveyance’. For motor vehicles, the law makers have qualified the conveyance based on the purpose of use (i.e. passenger motor vehicles v/s goods motor vehicles) but for aircraft/ vessels, no such qualification has been made. A separate use test has been prescribed for eligibility of input tax credit on aircraft and vessels based on whether they have been used for the transportation of goods.

DE-JURE USE VS. DE-FACTO USE
This directs us to derive the rationale for distinct provisions for motor vehicles and for aircraft/ vessels. One may consider the ‘de-jure use’ (as per principal design and transport office records) or ‘de-facto use’ (actual use) as a reconciliation of the variance. In the case of motor vehicles, there are instances when passenger vehicles are modified with additional functions or features, though they are legally registered as passenger vehicles (refer vanity van case study below). The question arises whether the vehicles used beyond their registered use are permissible for credit as they are not just passenger vehicles after their modification.

The amendment by merging the use criteria with the blocked conveyance criteria seems to emphasise that this would not be permissible. In effect, the amendment is placing a blanket ban based on the de-jure use of the vehicles (i.e. as a passenger transport vehicle) and does not enable the person to avail credit based on ‘actual use’ of the passenger vehicle for goods transportation purposes.

But this is not the case for aircraft and vessels. The use criteria for aircraft and vessels is independently stated in a separate clause and does not qualify the aircraft or vessels itself i.e. the primary provision does not distinguish between cargo aircraft and passenger aircraft. Blanket ban on credit is placed without consideration of the primary purpose/ design. By way of a separate exclusion, the provision permits credit of aircrafts when used for transportation of goods, overcoming the criteria that they may also be passenger aircrafts. The probable reason could be that aircraft and vessels are subject to strict regulations and also have a separate enclosure of carriage of cargo, in addition to passenger seating facility. Therefore, dually designed aircrafts and vessels which are equipped for multiple use would be eligible for credit.

ANALYSIS OF 17(5)(a) (A), (B) & (C) – ONWARD SUPPLY TEST
Onward supply test permits credit on blocked conveyances by listing the credit qualifying supplies. It is essential that the motor vehicles are used for making further supplies. It is important to note that ‘self or incidental use’ would not make them as credit qualifying supplies. One would have to establish an activity of the specified nature (i.e. further supply or transportation or persons or training), qualifying under section 7, in order to fall within the narrow window to escape the blocked credits. By implication, the ‘identity of the motor vehicle’ on the inward leg of supply and that of the outward leg of supply should be directly co-relatable.

Clause (A) – What are the forms of supply i.e., either goods or services or both, which qualify for credit. In other words, does clause 17(5)(a)(i) permit input tax credit only for ‘automobile dealers’ (who are engaged in trading of motor vehicles) or can it also be applied to car rental or leasing companies. Under the GST scheme, the supply of motor vehicles can be in the form of supply of goods or the form of supply of services. Lawmakers have been explicit about the character of supply (i.e. goods or services) when a differential treatment was intended under such a consolidated law. In the absence of any differential treatment in 17(5)(a), the law appears to be covering both supply of motor vehicles as goods or services for the purpose of enabling input tax credit. Accordingly, cab-rental companies, leasing companies etc that purchase motor vehicles for the purpose of leasing, hiring, etc should be permitted to avail input tax credit on their purchases.

Clause (B) permits input tax credit on motor vehicles which are used for further supply of transportation of passengers. As stated above, mere transportation of persons would not meet the permissive criteria for availment of input tax credit. A factory transporting its own employees in an own vehicle would not be permitted to avail input tax credit unless the factory effects a ‘supply’ in the form of recovering a transportation fee from its employees. A tour operator, in the absence of an identifiable supply of transportation of passenger, may not be entitled to input tax credit even-though it performs transportation of passengers as an element of the overall supply. Though the revenue may claim that only SAC 9964 – Passenger transport services qualifies as ‘credit qualifying supply’, this does not emerge from the literal provisions of law. As long as there appears to be an onward supply from the passenger vehicle, the input tax credit may be available.

Clause (C) permits input tax credit on motor vehicles that are used for imparting training or driving such motor vehicles. This clause is oriented towards training schools etc. that purchase motor vehicles for use in training against a training fee. Supply principles discussed in clause (B) would also be applicable here.

Cumulatively clause (A), (B) and (C) are oriented towards a commercial value-added activity, which involves direct use of motor vehicles and excludes those cases where motor vehicles for transportation are on own account.

PARTIAL USE VS. COMPLETE USE
Instances also arise where the passenger motor vehicles are partially used for ‘passenger transportation services’ as well as ‘own purposes’. The law does not provide any guidance on attributability of such credit towards own purpose and commercial purpose. If the literal wordings are to be sole guiding factor, one could take the view that as long as they are used for passenger transportation activity, albeit partially, full credit should be permissible on such passenger motor vehicles based on the actual use criteria. Until the lawmakers do not provide any attribution methodology, a reversal for partial use towards own purposes does not seem to be expected from taxable persons.

ANALYSIS OF 17(5)(ab)
Section 17(5)(ab) blocks input tax credit on general insurance services and repair and maintenance of motor vehicles. However, credit is not blocked on services in respect of such conveyances, which are otherwise eligible for input tax credit. In addition, manufacturers and general insurance companies are also permitted to avail input tax credit on insurance and repair and maintenance activity for all motor vehicles, including passenger vehicles where they are engaged in the direct activity of such motor vehicles.

Importantly, the blockage of input tax credit is only on the ‘service activity’ of repair and maintenance. As an industry practice vide Circular No. 47/21/2018-GST dated 8th June, 2018, automobile dealers bifurcate their spare parts and labour work into goods and services, and taxes are applied accordingly. Applying the classification at the supplier’s end as conclusive of the nature of activity involved, it appears that the procurement of spare parts as part of repair and maintenance activity would be a supply of goods and hence outside the ambit of the said provisions.

One may note that the said provisions were introduced only during the 2019 amendment. Until then, there was ambiguity on whether ancillary activities pertaining to motor vehicles, such as repair and maintenance, were permissible input tax credit. The amendment fortifies the stand that prior to the amendment, such support services or goods availed on spare parts or repair were permissible credit for all motor vehicles (passenger and goods) without any specific bar u/s 17(5). This also derives support from the fact that the amended section 17(5)(b) specifically provides for blocking input tax credit on motor vehicles that have been obtained on lease, hire or rent. If section 17(5)(a) were to be interpreted to block input tax credit on all inward supplies having a direct or indirect connection with a motor vehicle, section 17(5)(b) would be redundant. Both these aspects would affirm the view that section 17(5)(a) prior to amendment did not block credit on repair, maintenance and insurance services.

SECTION 17(5)(b)
Associated to the aspect of credit, section 17(5)(b) blocks input tax credit on leasing, renting and hiring of conveyances. Two exceptions have been carved out in cases where (a) such inward supply is an element of an outward supply of the same category or a composite category; (b) such inward supply was necessitated on account of statutory provisions.

‘Leasing, renting and hiring’ has not been defined in the law specifically. The SAC/rate notifications provide rates/ exemptions on leasing, renting and hiring. The law has covered all three scenarios for using motor vehicles for purposing of blocked credits. Interestingly availment of passenger transport service (which is a separate SAC) does not feature in the said listing. Thus, where an enterprise avails of services of air or road travel under the passenger transportation category, section 17(5)(b) does not block the credits. In addition, if inward supply forms part of an outward supply, even as an element, the same would be eligible for credit on the basis that the inward supply has generated an onward value-added activity.

CASE STUDIES FOR APPLICATION OF LAW
Case 1 Hotel Cab – A Hotel purchases motor vehicles to transport guests and charges a fee as part of the overall accommodation package. In many cases, such activity is provided as a complimentary package to the accommodation services. Section 17(5)(a) states that motor vehicles are eligible under the Onward Supply Test when generating a passenger transportation activity. The hotel certainly has an element of passenger transportation service bundled in a composite package, but the invoice does not explicitly adopt the corresponding SAC for such activity. A literal reading of the provisions suggests that there must be a ‘taxable supply’ of transportation of passengers. Unless the service activity is taxed as a passenger transportation service credit should not be permissible. However, unlike section 17(5)(b)2, the said provision does not mandate a category-to-category correlation between input and output activity. Therefore, a purposive interpretation of the law could suggest that credit should be eligible in respect of motor vehicles if it is bundled as part of the overall service activity.

Case 2 Vanity Van – A celebrity purchases a vanity van registered as a passenger vehicle with modifications to store its vanity materials. The registered use is a passenger vehicle, but the actual use is for storing and transporting the vanity set-up for use by the celebrity. Section 17(5)(a) does not expressly differentiate between registered use or actual use. The HSN schedule however classifies motor vehicles based on the principal design or principal purpose. Where the motor vehicle is principally designed for transportation of passenger they would be classifiable under 8703 and probably the same test would have to be applied for purpose of section 17(5)(a). Therefore, the vanity van being principally designed for transportation of passengers and registered as a passenger vehicle may not be eligible for claim u/s 17(5)(a).

_____________________________________________

2 “Provided
that the input tax credit in respect of such goods or services or both shall be
available where an inward supply of such goods or services or both is used by a
registered person for making an outward taxable supply of the same category of goods or services or both
or as an element of a taxable composite or mixed supply”

3 2008
(232) E.L.T. 475 (Tri. – Del.)

Case 3 Intention to Resale – A Company purchases a motor vehicle for itself to be used for official purposes and has a policy to dispose the same (on payment of taxes) after a period of 1 year or crossing a particular odometer reading. While the Company has an intention at the time of purchase for making a further supply of such vehicles, the same is at a future undecided date. Section 17(5)(a) refers to actual use of such motor vehicles for further supply of such motor vehicles. If one views the said provision as applicable only at the time of availment, credits would not be available in such cases. Subsequent change in use or application to the permitted purposes does not appear to be envisaged in section 17(5)(a). One may consider the decision in Brindavan Beverages Pvt. Limited vs. CCE3 and the decision in CCE vs. Surya Roshni Ltd4 which hold that the eligibility of credit should be examined at the time of availment, and subsequent change in use would not alter the credit position. But alternatively, if the provision is to be interpreted as an end-use test, one may be tempted to claim that since the end purpose of resale, a.k.a. supply has taken place at a future date, credit should be available to the Company.

Case 4 – Automobile dealers purchase ‘Demo Cars’ for demonstration to the prospective customers at the showroom. These demo cars are first registered (either permanently or temporarily) and then sold after extensive usage to the end customers at lower prices. While the cars are initially intended for own use (i.e. demonstration to prospective customers) they do not expressly fall within the ‘permitted use’ list. Though there may be an intention for resale the same to end customers, credit u/s 17(5)(a) is permissible on actual use of the motor vehicles. Moreover, if the erstwhile law principles of testing conditions of eligibility at the time of original availment, are adopted, credit may be a contentious issue. While there are divergent advance rulings on this aspect, it appears the literal wordings of the provisions do not permit credit on subsequent adoption of the goods for the permitted uses.5 The favourable advance ruling holds that since the cars are eventually sold by the automobile dealer, credit should be permissible and the contrary ruling apply the literal provisions of law at the time of purchase without regard to the future use.

Case 5 – Cash Management Company purchase cash carry vans which are customized with high security features for transportation of invaluable items. Pre-2019, the credit was eligible only on transportation of goods. This raised an issue of whether motor vehicles used for transportation of ‘money’ which were not goods was eligible for input tax credit. While the initial advance ruling6 held that input tax credit is not eligible, the appellate advance ruling authority on remand has directed that input tax credit on the same would be available at par with motor vehicles used for transportation of goods7. Post 2019, such vans are outside the blocked conveyance list at the threshold itself and hence eligible for credit.

________________________________________________

4. 2003 (155) E.L.T. 481 (Tri. – Del.) affirmed
in 2007 (216) E.L.T. 133 (Tri. – LB)

5 It
may be noted that there are divergent advance rulings on this aspect – A.M.
Motors [2018 (10) TMI 514]; Chowgule Industries Private Limited [2019 (7) TMI
844]; Khatwani Sales and Services LLP [2021 (1) TMI 692]; Platinum Motocorp LLP
[2019 (3) TMI 1850]

6 CMS
INFO SYSTEMS LTD. [2018 (5) TMI 649] and reversed in 2020 (6) TMI 643

7 Recommendations
made during the 28th meeting of the GST Council on 21^stJuly, 2018

Case 6 – Oil mining companies procure accommodation barges for lodging their employees at on-site drilling locations which are on high-seas. These accommodation barges are vessels that are used for transportation of passengers and for providing accommodation at high-seas. In many cases, these vessels are obtained on lease and do not strictly meet the onward supply test of ‘transportation of passengers’. As discussed above, vessels are governed by the original philosophy and credit is enabled only on onward supplies and/or actual usage for transportation of goods. In the said facts, these accommodation barges are not involved in an onward supply of transportation of passengers and also not involved in the transportation of goods. Therefore, it appears such cases would be blocked from availing input tax credit.

Case 7 – Cost of ownership and operation of Motor Vehicles may also include expenses towards parking or rental space. If a limited scope is attributed to the phrase ‘in respect of motor vehicles’ u/s 17(5)(a), one may contend that ancillary services of motor vehicles should not be blocked for credit purposes. The revenue would be inclined to interpret the said phrase as being wide enough to cover all credits pertaining to motor vehicles, including costs of operation and maintenance. Going by the preceding analysis and the 2019 amendment, one may take the stand ancillary services are not blocked until they are specifically specified u/s 17(5).

Case 8 Charter of Aircraft – Companies avail aircraft on a charter basis for transportation of their executives. The chartered flight operator charges the company based on the actual flying hours, and in many cases, provides the Company exclusive access to the aircraft. The industry follows the divergent practice of either charging GST as (a) hiring/ renting of aircraft – 9966; or (b) passenger transport service – 9964. Under section 17(5)(b), credit is blocked for hiring or renting of aircraft but permitted for passenger transport service.

The explanatory notes to the service classification explain 9966 as being renting of transport vehicles where the service recipient defines how and when the vehicle will be operated, schedules, routes and other operational considerations. 9964 has been explained to include scheduled as well as non-scheduled air transport of passengers. In the present facts, there appears to be a wafer-thin line of difference between 9966 and 9964. Having said this, from an input tax credit perspective, it is settled law that the classification by the supplier cannot be altered by the recipient unless the supplier either admits to such alteration or the results of legal proceedings warrant such alteration at the supplier’s end (CCE vs. Sarvesh Refractories (P) Ltd8). Therefore, as a recipient of service, the taxable person ought to claim the credit only of invoices classified as 9967 and would have to reverse the credit on invoices classified as 9964. While this may seem unfortunate, such a practice would ensure stability in tax classifications over the longer run.

CONCLUSION
The automobile sector has been the catalyst of economic growth and a major contributor to the tax exchequer. The visible impact of a high GST tax rate and such credit blockades increases the transportation costs of business enterprises. The Government has recognized this and been progressive in liberalizing this input credit stream. While at the policy level, attempts are being made to widen the credit space, the provisions should not be interpreted as a block credit for all motor vehicles without adhering to the purpose of use of the conveyance.

_____________________________________________

8. 2002 (139) E.L.T. 431 (Tri. – Kolkata)
affirmed in 2007 (218) ELT 488 (SC)

shailesh.kwebmaker

NO CONSTRUCTIVE CREDITS!

INTRODUCTION
In the previous article, we discussed clause (h) of Section 17(5) of the CGST Act, 2017 which deals with the restriction on claim of input tax credit in cases where goods are lost, stolen, destroyed, written off or disposed of by way of gift or free samples. In this article, we will discuss clauses (c) & (d) of Section 17(5) which restrict claim of input tax credit on goods or services received in the construction of an immovable property.

PROVISIONS UNDER GST REGIME
Let us first refer to the relevant provisions for ease of reference:

‘(5) Notwithstanding anything contained in sub-section (1) of Section 16 and sub-section (1) of Section 18, input tax credit shall not be available in respect of the following, namely:

(c) works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service;

(d) goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.

Explanation — For the purposes of clauses (c) and (d), the expression ‘construction’ includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property’;

Clause (c) above restricts the availability of input tax credit in respect of works contract services supplied for construction of immovable property other than plant and machinery while clause (d) restricts the availability of input tax credit on goods or services or both received for construction of immovable property other than ‘plant or machinery’ on his own account including when such goods or services or both are used in the course or furtherance of his own business. On a plain reading, one may feel that clauses (c) and (d) are similar, with the only distinction being that the former applies to works contract services received while the latter applies to independent goods or services being received for the same activity, i.e., construction of immovable property. However, there are various nuances, which will be discussed later.

THERE SHOULD BE AN IMMOVABLE PROPERTY
This is the primary condition for an inward supply to be covered under the blocked credit list. It, therefore, becomes important to analyse the scope of the term ‘immovable property’. While the same is not defined under the GST law, one may refer to the definition u/s 2(26) of the General Clauses Act, 1897, which defines the same as under:

‘Immovable Property includes land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth.’

Even the Real Estate (Regulation & Development) Act, 2016 defines the term ‘immovable property’ in a similar manner:

‘Immovable property includes land, buildings, rights of ways, lights or any other benefit arising out of land and things attached to the earth or permanently fastened to anything which is attached to the earth, but not standing timber, standing crops or grass.’

Ongoing through the above set of definitions, it is apparent that land, along with anything attached or fastened to it, is an immovable property. However, when something is attached/ fastened to an immovable property, the nature of attachment/ fastening needs to be looked into before concluding if such thing is also a part of the immovable property. In Triveni Engineering & Industries Limited [2000 (120) ELT 0273 SC], the Hon’ble SC had held that installation or erection of turbo alternator on the concrete base specially constructed on the land cannot be treated as a common base and, therefore, it follows that the resultant structure would be an immovable property and therefore, cannot be treated as ‘excisable goods’.

On the contrary, in the case of Solid & Correct Engineering Works [2010 (252) E.L.T. 481 (S.C.)], the Court held that attachment of plant with nuts and bolts intended to provide stability and prevent vibration not covered as attached to the earth and hence not immovable property. It was more so as such attachment was easily detachable from foundation and not permanent in nature.

In Craft Interiors Private Limited [2006 (203) ELT 529 (SC)], the SC dealt with the issue of whether furniture attached to an immovable property can be treated as immovable property or not? The SC held that furniture items, such as storage cabinets, kitchen counters, etc., which are erected at customer site and cannot be dismantled/removed in complete or semi-knocked conditions, are immovable in nature and, therefore, not excisable. On the other hand, the Court also held that items like desks and chairs, are easily movable and therefore, excisable.

In WeWork India Management Private Limited [2020 (37) GSTL 136 (AAAR – GST – Kar)], the issue before the Appellate Authority was eligibility to claim the input tax credit on detachable sliding & glass partitions. Observing that the sliding/ partitions could be removed without any damage, the Authority held that the same was a movable property and, therefore, the same was not hit by clause (c)/(d) of Section 17(5).

Therefore, while determining whether a property is movable or not, following needs to be taken care of:

• What is the degree of permanency of the attachment to the land?
• Whether the goods attached/ fastened can be detached without causing substantial damage to it?
• Is the identity of the goods post-removal lost?

THE IMMOVEABLE PROPERTY SHOULD NOT BE IN THE NATURE OF PLANT AND MACHINERY
In case the resultant immovable property is in the nature of ‘plant and machinery’, the credit is not blocked. What constitutes ‘plant and machinery’ has been explained by way of explanation to Section 17(5) as under:

‘For the purposes of this Chapter and Chapter VI, the expression ‘plant and machinery’ means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes —

(i) land, building or any other civil structures;
(ii) telecommunication towers; and
(iii) pipelines laid outside the factory premises’.

The terms ‘apparatus’, ‘equipment’ and ‘machinery’ are not defined under the CGST Act, 2017 or the rules made thereunder. Therefore, to understand the said terms, let us refer to their dictionary meaning:

Apparatus

Equipment

Machinery

Oxford Dictionary

The equipment needed for a particular activity or purpose

The items needed for a particular purpose

Machines as a whole or parts of machine

Collin’s Dictionary

Apparatus is the equipment, such as tools and machines, which is
used to do a particular job or activity

Equipment consists of the things which are used for a particular
purpose

Machines, machine parts, or machine systems collectively

MacMillan Dictionary

The machines, tools and equipments needed for doing something,
especially something technical or scientific

The tools, machines, or other things that you need for a
particular job or activity

The moving or working parts of a machinery

Black’s Law Dictionary

An outfit of tools, utensils or
instruments adapted to accomplishment of any branch of work or for
performance of experiment or operation. A group or set of organs concerned in
performance of single function.

Whatever is needed in equipping; the articles comprised in an
outfit

Complex combination of mechanical parts

(continued)

A generic word of the most comprehensive significance
which may mean implements
and an equipment of things provided, and adapted as a means to some end

Ongoing through the above, anything which can perform a specific function or operation or undertaking any process can qualify as apparatus or equipment or machinery and will, therefore, consequently be treated as ‘plant and machinery’.

The above explanation refers only to such plant and machinery which has been fixed to earth by foundation or structural support, i.e., this explanation is specifically for cases where there can be a dispute as to whether the ‘plant and machinery’ are classifiable as immovable property or not. For instance, elevators for a building are plant and machinery, but are of such a nature that once installed, it is impossible to uninstall them without any damage to the structure. However, it is apparent that the elevator is machinery, and therefore, the legislature has specifically carved out an exception that permits the claim of input tax credit for such transactions.

However, in the case of Las Palmas CHS [2020 (41) GSTL 548 (AAAR-Mah)], the issue raised before the Appellate Authority was whether input tax credit could be claimed on receipt of inward supply of elevator, if the cost of such elevator was recovered from the members? The Authority held in the negative as Section 17(5)(c) applied only when the input works contract services were used for further making an outward supply of works contract services. However, it seems that the Authority has not analysed whether the elevator qualified as ‘plant and machinery’ and thereby eligible for input tax credit.

In P K Mahapatra [2020 (40) GSTL 99 (AAAR – GST – Chhattisgarh)], the issue before the Appellate Authority was to determine whether input tax credit could be claimed on the installation of private railway siding? Once again, the Authority denied the benefit concluding that the same amounted to an immovable property, without going into whether the railway siding could have been treated as plant and machinery or not? In fact, the CESTAT has, in the case of India Cements Ltd. [2017 (3) GSTL 144 (Tri – Hyd)], already held that CENVAT credit can be claimed on railway siding.

This takes us to the includes clause which provides that foundation and structural supports in relation to apparatus, equipment or machinery will also be included within the scope of ‘plant and machinery’. This would primarily cover expenses incurred towards civil works done for installing the goods purchased. However, in Maruti Ispat & Energy Private Limited [2018 (18) GSTL 847 (AAR – GST)], the Authority held that input tax credit on inputs/ input services used for constructing a foundation for installation of ‘plant and machinery’ was hit by Section 17(5)(c) as the same was ‘other structures’ referred to in Explanation to Section 17(5) defining the scope of ‘plant and machinery’.

What is important is the third clause, i.e., the excludes clause, which excludes the following from the scope of ‘plant and machinery’:
(i) land, building or any other civil structures;
(ii) telecommunication towers; and
(iii) pipelines laid outside the factory premises.

It is imperative to note that an inward supply may fall under the means or includes clause and therefore be classifiable as ‘plant and machinery’. However, if such inward supply gets covered under any of the above entries provided in the excludes clause, the same would not be considered ‘plant and machinery’ and, therefore, covered under the blocked credits.

The above provisions bring to limelight the interplay between the concept of land, building and civil structures and ‘plant and machinery’. Indeed, in the past, various decisions have held that if the land, building or any other civil structure thereon is so constructed to act as a plant, the functional utility of the asset would be pre-dominant and the asset could indeed be classified as a ‘plant and machinery.’ For instance, the House of Lords, in the case of IRC vs. Barclay Curle & Co. has held that a concrete dry dock is a plant [76 ITR 62 (House of Lords)]. Similarly, one may also refer to the following decisions, though in the context of Income Tax, where different civil structures have been held to be a plant:

• Dam – Tata Hydro Electric Power Supply [(122 ITR 288 (Bom)]
• Nursing Home – Dr. B Venkata Rao [243 ITR 81(S.C)]
• Cold Storage – Kanodia Cold Storage [(100 ITR 155(All)]

• Safe deposit vault – Central Bank of India [(102 ITR 270 (Bom)]

The claim of input tax credit on the above structures, which otherwise are classifiable as plant is hit, in view of the excludes clause in the definition of ‘plant and machinery’. The next two entries, i.e., telecommunication towers and pipelines laid outside the factory premises, are industry-specific restrictions on claim of credit, similar to the restriction on the claim of an input tax credit on the purchase of motor vehicles and there, does not appear to be much scope to escape from the purview of Section 17(5)(c) for the specific industries.

PLANT OR MACHINERY
As stated above, explanation to Section 17(5) defines the scope of ‘plant and machinery’ as a whole. However, clause (d) carves out an exception for ‘plant or machinery’ and not ‘plant and machinery’. This, unless one undertakes a liberal or purposive interpretation, the Explanation to Section 17(5) cannot be used to examine whether a particular item is ‘plant or machinery’ as the same deals with ‘plant and machinery’. Therefore, the common parlance meaning needs to be applied while analysing the said terms.

The dictionary meanings of term ‘plant’ are reproduced below for reference:

Oxford Dictionary – Machinery used in an industrial or manufacturing process.

Collin’s Dictionary – Plant is a large machinery that is used in industrial processes.

MacMillan Dictionary – Large machines and equipment’s used in factory.

Black’s Law Dictionary – The fixtures, tools, machinery and apparatus which are necessary to carry on a trade or business. Physical equipment to produce any desired result or an operating unit.

The above dictionary definitions give plant a wider scope for interpretation, and machinery is included within the purview of the term ‘plant’. The term ‘plant’ was interpreted on multiple occasions by Courts in the context of Income Tax, where it was defined to be an instrument which is utilized to carry on the business, and which is not merely the setting in which the business is carried on. The Courts have on multiple occasions held that when an immovable property has been so constructed as to facilitate the carrying on of the operations of a particular business, the said immovable property can be treated as ‘plant’ and not merely ‘building’.

One may refer to the decisions in the case of C.I.T vs. Kanodia Warehousing Corpn [121 ITR 996(All)], Benson vs. Yard Arm Club Ltd. [1979 Tax L.R 778(Cr.D)], C.I.T vs. Bank of India Ltd. [118 ITR 809 ,818-9 (Bom)], George Mathew vs. C.I.T [43 ITR 535 at 540 (Kar)], Mangalore Ganesh Beedi Works vs. C.I.T [52 ITR 615 (Mysore)] and C.I.T vs. Elecon Engineering Co Ltd. [96 ITR 672 at 686-689 (Guj)] affirmed by the Supreme Court [166 ITR 66 (S.C)] where an extremely wide meaning has been given to the term ‘plant’.

If a view that a particular immovable property is classifiable as a plant survives, one can escape from the purview of Section 17(5)(d) since the entry itself does not apply. Therefore, the phrase “on his own account” becomes irrelevant in such a case. However, the same would not apply for Section 17(5)(c) since the same refers to ‘plant and machinery’, which is specifically defined u/s 17(5).

THERE SHOULD BE CONSTRUCTION OF AN IMMOVABLE PROPERTY

Clauses (c) and (d) of Section 17(5) apply for the activity of construction. The term ‘construction’ has been defined by way of an explanation as under:

For the purposes of clauses (c) and (d), the expression ‘construction’ includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property;

The definition is provided in an inclusive manner, and therefore, the general parlance meaning of the word ‘construction’ would be applicable. Generally, the word construction is used in a situation where a new building or a structure comes into existence when none existed beforehand. In distinction, reconstruction would be a more appropriate term where an existing building is demolished, and a fresh structure is being brought into existence. Nevertheless, it was held that the general meaning of construction would take in its’ fold not only the creation of a new building but also a case of demolition of an existing building and re-construction of the building (Sadha Singh S Mulla Singh vs. District Board AIR 1962 Pun 204).

While the terms ‘construction’ and ‘re-construction’ both envisage a situation of a new civil structure coming into existence, the later inclusive words like renovation, addition or alteration or repairs are all intended to cover existing structures where certain activity is carried out. In this context, it may be useful to refer to the erstwhile service tax legislation wherein a distinction was made between construction, repair, renovation or restoration of a building or civil structure and ‘completion and finishing services’. Separate sub-clauses governed these activities under the positive list regime of service tax, and abatement was denied for ‘completion and finishing services’. Similarly, a separate valuation rule was provided for ‘completion and finishing services’. Various controversies arose in the said legislation where the assessee argued the classification of activities like plumbing, glazing, electrical work, painting, etc., as construction activities being eligible for the abatement/lower valuation, whereas the Revenue contended that the activities do not constitute construction but completion and finishing services. For example, whether plumbing activities would constitute completion and finishing or construction activity is a matter pending before the Supreme Court in the case of Commissioner vs. Sai Shraddha Plumbing Private Limited 2019 (28) GSTL J71 (SC). The outcome of the said decision may perhaps open up an opportunity for claiming input tax credit.

Further, the Explanation restricts the scope of construction activity. Accordingly, a receipt of works contract services u/s 17(5)(c) or goods or services or both u/s 17(5)(d) can be said to be towards the construction of immovable property only to the extent the cost has been capitalized in the books of accounts.

To capitalize means to expense the cost over the useful life rather than in the period in which it is incurred. In accounting, capitalisation occurs when a cost is included in the value of an asset. The matching principle requires companies to record expenses in the same accounting period in which the related revenue is incurred. For example, office supplies are generally expensed in the period when they are incurred since they are expected to be consumed within a short period of time. However, some larger office equipment may benefit the business over more than one accounting period. These items are fixed assets, such as computers, cars, office buildings, significant renovation and repair works to the building, etc. The cost of these items is recorded on the general ledger as the historical cost of the asset. Hence, these costs are said to be capitalized,
not expensed.

Therefore, if the taxpayer has satisfied this condition also, whereby he has capitalised the cost of works contracts service or goods/ services received for repairs, renovation, alteration, etc. of immovable property, only then does the restriction under clauses (c) and (d) of Section 17(5) get triggered.

This also raises an interesting question. Let us take an example of a partnership firm that has constructed a shopping mall, to be given on rental basis post-construction. The activity of renting is liable to GST and for the purpose of income tax, is treated as income from house property. Being a partnership firm, it is not required to get its accounts audited under the Partnership Act or under the Income Tax Act, 1961 as Section 44AB does not apply since the rental income is treated as ‘income from house property’ and not ‘business income’. In such a circumstance, the firm can always take a view to expense out the entire construction cost upfront, in which case the inward supply received cannot be said to be used for construction of an immovable property and therefore, would entitle the partnership firm to claim full input tax credit. This view of course would be subject to litigation.

MEANING OF ‘OWN ACCOUNT’
One of the phrases used in Section 17(5)(d) and not in Section 17(5)(c) is that the construction of the immovable property should be on recipients ‘own account’. The term ‘own account’ is defined in various dictionaries
as under:

Collin’s Dictionary – If you take part in a business activity on your own account, you do it for yourself, and not as a representative or employee of a company

MacMillan Dictionary – for yourself, not for someone else

Lexico – For one’s own purpose; for oneself

Black’s Law Dictionary – To have a good legal title; to hold as property; to have a legal or rightful title to; to have; to possess.

Therefore, the construction of an immovable property on his ‘own account’ means something that a person or a company does for itself. The rights and benefits of the constructed immovable property are enjoyed by the person who has actually got the construction
work done.

This interpretation of term ‘own account’ is likely to cause disputes. A mall owner, while constructing a mall, has the intention to lease the entire mall and earn income from it. Although the asset appears in its books, and therefore legally one may say the construction is for own account, it can be argued that the intention is not to use it for his own operations but allow other tenants to use it, thereby the benefit of the construction is not to his ‘own account’. Therefore, the same should not be covered under the blocked credits list.

This aspect has already seen judicial scrutiny in the case of Safari Retreats Pvt. Ltd. & Others vs. Chief Commissionerof CGST [2019-TIOL-1088-HC-ORISSA-GST] wherein the Hon’ble High Court allowed ITC on the construction of a mall by laying a principle that the creation of an asset will generate revenue which will be subject to GST. The Appeal against the said order is pending before the Hon’ble Supreme Court, and the matter is awaiting finality.

CONCLUSION
The intention of clauses (c) and (d) is clear, which is to deny the input tax credit in relation to immovable property. However, the manner in which the provisions are worded and the possibility of varied interpretation makes the said clauses a land mine for litigation. Already, the Hon’ble Orissa HC, in the case of Safari Retreats, has agreed with one of the views perhaps contrary to the legislative intent. However, the fact cannot be ruled out that the intention of the Government is to deny the input tax credit on such inward supplies, and therefore, retrospective amendment of this provisions may not be ruled out. Consequently, one has to be careful while taking a position w.r.t claim of input tax credit having an overlap with clauses (c) and (d) of Section 17(5) of the CGST Act, 2017.

shailesh.kwebmaker

GSTN COMMON PORTAL: E-GOVERNANCE

Digitisation of tax administration has been a progressive step of the Government in the recent past. Understandably, the primary thrust for it came from increasing tax complexities and allegedly evasive measures adopted by business enterprises. This warranted Governments to arrest such activities through real-time and non-erasable trails of events. Now, tax administrations are increasingly harnessing the benefits of digitisation by instant identification, examination and conclusion of tax challenges.

Therefore, a robust IT infrastructure was the key to the success of the implementation of a ‘self-policing’ GST in India. The need for such infrastructure led to the birth of the GST Network (GSTN) which was entrusted with the responsibility of setting up, operating and the maintenance of IT systems. GSTN was established as a special purpose vehicle by the Ministry of Finance to provide common IT infrastructure, systems and services to the Central and State Governments, taxpayers and other stakeholders for supporting the implementation and administration of the GST in India.

Much like the GST scheme, the GST Network has also been subjected to critiques. Firstly, the structure and functioning of the GSTN with the possibility of interference by non-governmental bodies, and secondly, the privacy concerns emerging from such large-scale collection of data. That apart, the GSTN has been entrusted to operate the GST common portal under the domain and boundaries of the GST law.

LEGAL BACKGROUND
Section 146 of the CGST / SGST Act, 2017 empowers the Government to notify a common electronic portal for facilitating registration, tax payments, furnishing of returns, computation / settlement of integrated tax, electronic way-bill and such other functions as may be necessary. Notification No. 4/2017-CT dated 19th June, 2017 notified www.gst.gov.in (the website managed by GSTN) as the common portal for the purpose of facilitating ‘registration, payment of tax, furnishing of returns and computation and settlement of integrated tax’. On the GST portal, the website states that the said portal includes all its sub-domains, internal and external services serviced by the domain and mobile applications of the GST portal. Similarly, Notification No. 9/2018-CT dated 23rd January, 2018 has notified www.ewaybillgst.gov.in as the Common Goods and Services Tax Electronic Portal for furnishing of electronic way-bill.

Recently, Notification No. 69/2019-CT dated 13th December, 2019 notified www.einvoice1-10.gov.in as the portal for e-invoice preparation. Parallel Notifications were issued by States for recognising the said web-portal(s) for specific purposes. Through such provisions, legal sanctity was sought to be provided to the said portal(s) but only for limited functions as specified in the Notifications. Interestingly, transition returns, refund applications and appeals do not find mention in the enabling Notifications notifying the common portal for specific purposes and one may resort to this as a legal contention in the days to come.

LEGAL QUESTIONS
Some critical questions arising from the e-governance initiatives of the Government are:
(a) What is the scope of the common portal in administration of the law?
(b) Whether the Notification issued under the CGST / SGST on the common portal would apply to the IGST Act even though a Notification has not been issued for this purpose?
(c) Whether the frameworks / contents, conditions, restrictions in the portal are backed by legal provisions? Is the Government imposing its view of the law on the taxpayer? Are there any remedies left to the taxpayer where the GST portal does not permit one to apply the law in a particular manner?
(d) What are the consequences of a failure in the GSTN systems, especially on down-time, lack of proper response, etc.? Whether the ‘proper officer’ can cite helplessness in matters of substantive rights where the portals restrict functionalities? What is the legal sanctity of the response / lack of response of GSTN helpdesks?

SETTLED PRINCIPLES
Before going into details, it may be important to assimilate the critical concepts of law which would govern the above questions. The first one is the well-settled provision that delegated authorities would have to operate within the framework of law and the legislations or actions are subject to the vires of the governing statute. This reminds one of the decision of the Supreme Court in St. Johns Teachers Training Institute vs. Regional Director, NCTE (2003) 3 SCC 321 at page 331 which held that regulations and rules are directed towards ‘supplementing’ the law rather than ‘supplanting’ the law. The Court stated as follows: ‘What is permitted is the delegation of ancillary or subordinate legislative functions, or, what is fictionally called, a power to fill up details.’

The other principle is that ‘forms / returns’ forming part of a statute cannot drive its interpretation1. The Supreme Court in the context of adjustment of MAT credit referred to the forms and held in CIT vs. Tulsyan NEC Ltd. (330 ITR 226) as follows: ‘It is immaterial that the relevant form prescribed under the Income-tax Rules, at the relevant time (i.e., before 1st April, 2007), provided for set-off of MAT credit balance against the amount of tax plus interest, i.e., after the computation of interest under section 234-B. This was directly contrary to a plain reading of section 115-JAA(4). Further, a form prescribed under the Rules can never have any effect on the interpretation or operation of the parent statute.’

And finally, procedural laws are meant to further the object of the substantive provisions and not restrict their scope [CCE vs. Home Ashok Leyland (2007) 4 SCC 51].

RELATIONSHIP BETWEEN GSTN AND GOVERNMENT OF INDIA
GSTN was incorporated on 28th March, 2013 for the purpose of implanting e-governance and technology initiatives for the efficient rollout of the GST law. As per media reports, it can be inferred that work on the creation of the IT infrastructure commenced much before the passage of the Constitution (One Hundred and First Amendment) Act, 2016. It was during the 4th GST meeting on 3rd-4th November, 2016 that GSTN made a presentation about the status of the web development and the services being offered by GSTN on this front.

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1 LIC vs. Escorts Ltd. (1986) 1 SCC 264

Interestingly, the statute does not enlist the criteria for selection, operation and regulation of an IT service provider (whether Government-owned or otherwise). The GST Council in its minutes also does not formally identify / appoint the GSTN as the sole service provider for this massive task. This question is important because the 11th meeting had specifically approved a proposal of appointing GSTN for the development of the e-way bill IT infrastructure but the appointment of GSTN for the basic GST portal seems to be missing in the minutes. The legal sanctity of entrusting / delegating the IT infrastructure to GSTN through the Government of India is unclear from public domain documents and requires immediate attention.

ANALYSIS
Compliance under the erstwhile laws under Excise, Service Tax, VAT, Entry Tax was largely performed electronically. It was thus expected that the reporting and compliance under the GST law would also continue to be driven by technology. However, the level of technological complexities was relatively lower under those laws. The electronic forms under the erstwhile laws had limited functionalities and were meant for the limited purpose of capturing data. The administration then utilised the data collected at the back-end for risk management purposes.

However, the GST portal ushered in a much higher level of legal control at the data entry point itself by the taxpayers and in many instances hindered the decision-making of the taxpayer. Although the insertion of legal control might have been intended to assist taxpayers in accurate data capture, in certain cases it appears to have breached the legal framework. For a start, we should read this disclaimer of the GSTN portal for its users:

‘Though all efforts have been made to ensure the accuracy and currency of the content on this website, the same should not be construed as a statement of law or used for any legal purposes or otherwise. GSTN hereby expressly disowns and repudiates any claims or liabilities (including but not limited to any third party claim or liability, of any nature, whatsoever) in relation to the accuracy, completeness, usefulness and real-time of any information and contents available at this website, and against any intended purposes (of any kind whatsoever) by use thereof, by the user/s (whether used by user/s directly or indirectly). Users are advised to verify / check any information and contents, with the relevant Government department(s) and / or other source(s) and to obtain any appropriate professional advice before acting thereon as may be provided, from time to time, in the website.’

Thus, the GSTN portal clearly disclaims its responsibility over administering the law and states that the web functionality does not represent the interpretation of law. In fact, the portal also does not claim responsibility over the accuracy of the contents which are uploaded on it and has directed taxpayers to either approach Government officials or seek professional advice.

DAWN OF THE PORTAL
The e-governance initiative under GST commenced with the migration of registration(s) of erstwhile taxpayers into the GST regime. This involved the filling of Form REG-26 which contained checks and balances in terms of back-end validation of PAN numbers, legacy registration numbers, bank accounts, etc. This is usually done to sanitise the data at the entry point so that redundancies can be avoided. As time passed, additional functionalities were introduced on the GSTN portal. The most critically discussed of these were related to the returns in GSTR1, GSTR2, GSTR3 and their ancillary forms. Though these forms were notified in law, due to various reasons including lack of technical preparedness of the GSTN, the alternative summary form in GSTR3B was introduced. Subsequently, additional modules on transition returns, refunds, input tax credit (ITC), etc., were introduced in a phased manner. The transition module has been widely debated in legal forums since it directly impacted the eligibility of taxpayers to claim the said credit. Technical glitches in the form, lack of clarity in the transition module, coupled with the complexity of the user tabs, made the form difficult to comprehend for taxpayers resulting in non-availment of credit.

In September, 2019 the refund module was launched envisaging electronic processing of refund from application to disbursement. There have been instances where taxpayer refunds have been delayed due to internal technical glitches in the refund disbursement process and its interaction with other external databases (such as PFMS). Recently, the portal has enabled the functionality of appeals (including advance rulings) in respect of refunds, registrations, etc. The portal is progressively digitising the inter-face between the administration and taxpayers.

In the effort to digitise the process, internal controls / checkpoints have been placed at the point of data entry itself which may hinder even genuine cases. The GSTN assumes that taxpayers have uploaded accurate data at all entry points in the manner expected by the portal. Taxpayers in many cases have failed to understand the data expectations due to lack of technical guidance material or ineffective helpdesk support from the GSTN, thus resulting in incorrect data entry. Moreover, the portal has been developed based on the administration’s perspective / interpretation of law which may or may not be accurate. In an era of self-assessment (in contradistinction to officer-assessment), taxpayers should be granted the liberty to apply the law as per their own understanding without any technical hindrances. The vires of taxing statutes have been tested multiple times in higher forums and reading down or striking down of legal provisions is not unknown. With several technical restrictions (enlisted below), taxpayers have been thrust with the administration’s view of law.

The ensuing paragraphs are an attempt to list the technical challenges in the portal which appear to be either contradictory to law or hamper a taxpayer’s right to perform a self-assessment of his taxes based on his interpretation. The important pointers under each module are herewith tabulated2:

Return module

Table
Ref.

Functionality

Comments

GSTR1: Aggregate turnover

Data filed auto-populated used for various
threshold limits such as E-invoice, etc.

The functionalities use turnover for
enabling facilities of e-invoicing, etc. This causes issues where taxpayers
might have reported an incorrect turnover in the previous year(s) which may
have been rectified in annual returns / left unrectified. The system merely
aggregates the turnover and adopts this as the basis for enabling / disabling
features

GSTR1: Date of invoice and invoice No.

Date of invoice cannot be before date of
registration

A taxable person who has availed GST
registration belatedly is barred from reporting the original tax invoice even
though taxes may have been charged / paid in the said invoice to the
recipient

GSTR1: B2C and B2B

Amendment from B2C to B2B

One may view section 39(7) as being a time
limit only to rectify any particulars which have an impact on the tax liability. In cases where the particulars do not
have any tax liability such as this, the time limit provisions should not
apply, but the portal restricts such revisions

GSTR1 : SEZ

SEZ supplies liable for
CGST / SGST

Certain advance rulings have stated that
restaurant services are liable to CGST / SGST and not IGST. Return
functionalities do not permit CGST / SGST for SEZ invoices

GSTR1 : B2CL

Amendment in B2CL invoices

B2C large invoices (in excess of Rs. 2.5
lakhs) are entered at an invoice level but amendment tables in GSTR1 do not
provide any functionality to update the GSTIN of these invoices and shift
them to the B2B section – taxpayers are forced to raise credit notes to the
B2CL data and upload fresh invoices in the B2B section

GSTR1 – DNs / CNs

Linking DNs / CNs with multiple invoices

Until recently, DNs / CNs were mandatorily
required to be linked to a single invoice. The law has been amended making
the linking an open-ended feature. The GSTN portal has only recently opened
this feature by de-linking the mapping of DNs / CNs with a single invoice.
Till now, taxpayer(s) were unable to upload this data

GSTR1 – Export details

Alterations in type of exports

Alteration in invoices from ‘with payment’
to ‘without payment’ is not permissible which causes disabilities in other
refund functionalities

GSTR3B: Taxable turnover

Negative turnover is not permissible

In cases where the credit note raised in a
tax period exceeds the output turnover, the data field does not permit negative
values. CBEC Circular / Helpdesk suggest that the unadjusted credit notes are
to be reported in subsequent months. Moreover, due to zero-values being
reported in GSTR3B, there arises a variance between GSTR1 and GSTR3B and
disables certain other functionalities in other modules (such as refunds,
etc.)

GSTR3B – ITC

ITC order of set-off

GSTR3B mandatorily requires the ITC to be
utilised prior to making cash payments or performing inter-head set-offs.
Taxpayers may choose to avail ITC and refrain from utilising the same on the
grounds of ambiguity. But the utilisation is thrust upon them, consequently
opening the scope for incorrect utilisation

GSTR9 – Table 9

Details of tax paid

Annual return auto-populates details of
taxes paid in a non-editable format in GSTR9. Taxpayers who have paid taxes

GSTR9 – Table 9

(continued)

Details of tax paid

through DRC 03, etc., and have

included the turnover in annual return
would not be able to record this tax payment, resulting in glaring
discrepancies

GSTR9 – Table 6

Details of input tax availed

Annual return permits reversal of ITC and
accordingly directs filing of DRC 03 for such reversals but the reverse is
not permissible. Taxpayers are not permitted to avail ITC through the annual
return. In the absence of a clear GSTR1, 2 and 3 and a stop-gap GSTR3B,
taxpayers have looked at GSTR9 as the only
final return to report the tax credits / liabilities. The law neither
specifies the document of availing credit nor bars claim of credit through
GSTR9. Yet, the functionality in the tax portal does not permit availing of
such ITC in the electronic credit ledger through GSTR9

GSTR9

Table 8 – GSTR2A

Details auto-populated in Table 8
representing input invoices uploaded by suppliers does not reconcile with the
taxpayers’ GSTR2A. Until 2018-19, the taxpayers were not provided with
item-wise listing of such auto-population and in many cases taxpayers were
forced to file
the document as it was auto-populated

GSTR9

Table 9 – Auto population

Form GSTR9 keeps the data fields for this
table open to alteration by the taxpayer but the portal freezes the tax
payment details through ITC and / or cash

GSTR1/9

Exempt supplies / HSN tables

The exempt supplies / HSN tables are static
and not open to alteration. Without the functionality, the taxpayers would be
faced with questioning on classification even though it may not be admittance
by taxpayer in its strict sense

GSTR1/3B/9

Unfructified supplies

Taxpayers may have situations where
supplies are rejected
by the recipient at the doorstep. Though the law provides for cancellation of
invoice, once
the invoice is uploaded on the GSTR1 the portal does not have any feature to
mark a particular invoice as cancelled, forcing the taxpayer to raise credit
notes which is itself not permissible under law

GSTR2A & 2B module

Table
Ref.

Functionality

Comments

GSTR2B

ITC not available summary

The form provides an ‘advisory’ that
invoices which do not meet the conditions of section 16(4), or the place of
supply is different from the location of the recipient, should not be
eligible for credit. The criterion of place of supply does not seem to emerge
from any specific provision

GSTR2A / 2B time limit

Delayed reporting of invoice by
counter-party

GSTR2A/ 2B mark credit which is belatedly
reported as ineligible even though the supplier would have reported taxes
appropriately and complied with section 16 in its entirety, e.g., alteration
of an invoice from B2C table to B2B table involving updation of GSTINs

GSTR2A / 2B

DTA clearance by SEZ

Bill of entry filed by DTA on procurement
of goods by an SEZ does not appear in the GSTR2B. This throws up red flags
while filing GSTR3B as this data is not auto-populated in the said form

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2 The tables are illustrative and not exhaustive – over the period GSTN has gradually addressed many such challenges

Adjudication modules

Table
Ref.

Functionality

Comments

GST APL-01

Disputed tax

Taxes which are reported through DRC 03
challan are reported as ‘admitted tax’ even though the tax payments are made
under protest to avoid the interest / penal consequences. While filing the
appeal, the online module directs an additional 10% to be paid as pre-deposit
towards disputed liability. Effectively, the taxpayers are required to pay
110% of the tax demanded for filing the appeal online

Job work module

Table
Ref.

Functionality

Comments

ITC-04

Unit of measurement (UOM)

The form raised red flags where the UOM of
outward movement towards job work is different from inward movement from job
worker. The form does not appreciate that job work activity can result in
complete transformation of inputs resulting in difference in UOMs. The portal
attempts to map the outward dispatches with inward receipts at the same UOM

Refund modules

Table
Ref.

Functionality

Comments

RFD-01

Sequential filing

RFD-01 are mandatorily required to be filed
sequentially forcing the taxpayer to file Nil refund applications even though
he / she may want to come back and file a refund for past period (of course
within the time limit)

RFD-01

Export turnover

Incorrect reporting of export turnover in
other tables (such as B2B, etc.) of GSTR3B / GSTR1 is not reflected in the
refund form resulting in incorrect application of refund formula

RFD-01

Lower of three figures

RFD-01 restricts refunds to the lower of
(a) input tax credit at the end of the tax period; (b) refund as on date of
application; and (c) input tax credit as per formula. The refund module is
not reflective of the law as it restricts refund of ITC based on the balance
as at the end of the tax period. Taxpayers who have accumulated ITC after the
relevant tax period would still be restricted to the ITC as at the end of the
tax period

RFD-01

Input tax credit

Taxpayers may have reversed ITC pertaining
to past periods while filing GSTR3B. Though prior period reversals are not
relevant for refund computations, the online form auto-populates the net
figure from GSTR3B, causing a deviation from the statutory formula

E-way bill modules

Table
Ref.

Functionality

Comments

EWB-01

Validity of E-way bill

The E-way bill portal calculates the
validity automatically based on the PIN codes specified by the taxpayer. It
is quite possible that transporters adopt a route of their choice depending
on accessibility, convenience, etc. To freeze the validity based on pin codes
from external third party data is not specified under law

EWB-01

Back-end validation of vehicle numbers

E-way bill portal performs a back-end
validation of the vehicle numbers with the government-approved ‘vaahan’
website. Inefficiencies in those websites also creep into the GST system as
the E-way bill portal raises red flags for a vehicle number not visible in
the ‘vaahan’ website

JUDICIAL PRECEDENCE UNDER GST

The prominence of law over forms and procedures has been the hallmark of even recent decisions under GST. The Delhi High Court in Bharti Airtel Limited vs. UOI [2020 (5) TMI 169] examined the plea of the taxpayer who was restricted from rectifying the returns for a particular tax period and was directed by a CBEC Circular to rectify only in subsequent tax periods. The Court examined the limitations of the GSTN portal and held that the taxpayer had a right to rectify the very same return and claim refund of the excess taxes paid for the tax period under consideration. The Madras High Court in Sun Dyechem vs. CST 2020 TIOL-1858-HC-MAD-GST held that incorrect reporting of tax type by the supplier cannot be left unamended as it would hamper the tax credits at the customer’s end. The Court directed the jurisdictional officer to make amendments in supplier’s GSTR1 so that the correct tax type is reflected in the customer portal, thus undermining the influence of the portal over equity and law.

In another case, the Delhi High Court in Brand Equity Treaties Limited vs. UOI [2020 (5) TMI 171] recognised that technical glitches should be granted a wider scope to include even challenges faced at the taxpayer’s end (such as lack of internet connectivity, IT infrastructure, etc.). In the context of Transition Credit, Courts in many instances (such as Tara Exports [2020 (7) TMI 443]) have permitted manual filing of Tran-1 forms to avail the tax credit as an alternative to filing the same on the online portal. These decisions affirm the settled proposition that procedural laws are meant to further the substantive rights acquired under law.

However, one must also not lose sight of the decision of NELCO vs. UOI [2020 (3) TMI 1087] wherein the Bombay High Court upheld the vires of the rule defining technical glitches as being those arising at the GSTN end and cannot be interpreted to cover those difficulties prevailing at the taxpayer’s end. The Madhya Pradesh High Court in Shri Shyam Baba Edible Oils vs. CC 2020-VIL-567-MP held that the procedure prescribed in law should be strictly followed. Where the law prescribes SCNs, orders, etc., which are to be communicated through the common portal, they should necessarily be communicated only through the common portal. These decisions uphold the importance of the common portal and imply that taxpayers should take necessary steps to equip themselves with the technological upgradations warranted under the new law.

Let us now take up the question whether the GSTN portal can be described as a portal to report the numbers of the taxpayer or can be it designed to administer the law by placing checks and balances at the data entry point itself, thereby curbing the right of the taxpayer to self-assess its taxes. Going by the propositions laid down above, the portal cannot place fetters on the taxpayer’s right to fill up data as per its computation and should not be driven by pre-filled data points contained in the GST portal. Moreover, even where the data is auto-populated, the taxpayers should be granted the right to alter the auto-population and place their self-assessed values. The tax administration can without doubt examine the data at the back-end and seek clarifications to the alteration of the data plugged into the form, but that should be performed through a due process of adjudication or assessment. A website-driven automated assessment is not warranted under the GST law. Therefore, the GSTN portal should refrain from being a legislative or administrative tool and rather restrict itself to being a repository of information of all taxpayers.

A second question is to examine whether the enabling Notifications under the CGST / SGST Act of identifying the GSTN portal as a common portal would apply to the IGST Act as well. Whether separate Notifications are required to be issued under the IGST Act empowering the GSTN portal to operate as a common portal for all purposes of the IGST Act? Going by the implication of the phrase mutatis mutandis3 in section 20 of the IGST Act which links it to the CGST Act, the rules, notifications, including the prescription of the common portal, would apply equally to the IGST Act as well. The entire chapter of ‘Miscellaneous provisions’ under the CGST Act has been made applicable to the IGST Act and consequently the common portal notified in terms of section 146 of the CGST Act falling under this chapter would be operative for the IGST Act as well.

A third question, on the vires of the restrictions / controls placed in the GSTN portal, has been discussed above. The forms are aimed at capturing the self-assessed data of the taxpayers and not to regulate the taxpayer itself. The restrictions are questionable and even where the common portal is the primary forum for making necessary applications, the Court has devised an alternative approach of manual filing of the applications. The taxpayer ought to have a fit case for seeking this alternative remedy of filing manual applications. The taxpayers could face hurdles subsequently in enabling the functionalities of refund, reflection in electronic credit ledgers, etc., and hence should use this as a measure of last resort only.

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3 (1983) 2 SCC 82 Ashok Service Centre vs. State of Orissa

Coming to a fourth, crucial question, proper officers have been the ‘go-to persons’ for taxpayers in case of technical difficulties. But the situation here is such that proper officers are neither equipped with legal nor technological powers and therefore claim helplessness. Taxpayers run from pillar to post between the GSTN helpdesk and the proper officer. In many cases the helpdesk directs taxpayers to reach out to the proper officer for technical snags. Without any specific direction from the Board, taxpayers are unable to enforce their right to receive a resolution to their technical problems from the proper officer. In certain cases, helpdesks also provide solutions without legal backing (for example, in one case a helpdesk directed the taxpayer to apply for cancellation and seek fresh registration due to a technical snag). The helpdesks are not proper officers under law and have no authority to decide on legal matters and it is imperative for the administration to issue binding guidelines to the field formations to accept the technical queries, seek speedy resolution at the back-end from the helpdesk and respond to the taxpayer with a solution. Until then, the taxpayers would be left on their own to comply with the law and then offer extensive explanations at the time of audits / assessments on what had transpired at the time of filing the applications on the portal and the reason for plugging the numbers as it stood therein.

In conclusion, the helpdesk does not have any legal authority to resolve taxpayer grievances and the proper officers should be directed through appropriate administrative instructions to take up these matters.

The authority to design, operate and regulate the IT infrastructure is open to questioning as the Legislature has not empowered the Government(s) or their Boards to direct the creation or regulation of the website. The involvement of GSTN as a separate entity appears to be on a questionable foundation and open to examination. Until then, taxpayers should make earnest efforts to reconcile themselves to the portal requirements and record the deviations from the data expectations suitably to enforce their legal rights of a self-assessment rather than a portal-assessment at higher forums.

shailesh.kwebmaker

AAAR upheld the order of AAR that penal interest charged by NBFC to its borrower for default in payment of EMI would attract GST in terms of section 7(1)(a) of CGST Act, 2017 read with entry No. 5(e) of Schedule II of CGST Act, 2017

16. [2019] 108 taxmann.com 1 (AAAR-Maharashtra) Bajaj Finance Ltd. Date of order: 14th March, 2019

AAAR upheld the order of AAR that penal interest charged by NBFC to its borrower for default in payment of EMI would attract GST in terms of section 7(1)(a) of CGST Act, 2017 read with entry No. 5(e) of Schedule II of CGST Act, 2017

FACTS

The applicant NBFC charges interest to its customers / borrowers on loans granted and in case of delay in repayment of EMI, the appellant collects penal / default interest (penal interest) in terms of the agreements executed by the customers. The appellant is of the view that penal interest collected from the customer is in the nature of additional interest and, thus, not leviable to

GST. When the appellant filed an application for advance ruling, AAR ruled that penal interest charged by appellant amounts to the supply of services under serial number 5(e) of Schedule II to the CGST Act and is therefore liable to GST. Hence the appeal.

RULING

As regards appellant’s contention that penal interest is in the nature of additional interest, AAAR noted that the agreement between appellant and customer has defined separately the terms ‘Default Interest’, ‘Penal Charges’ and ‘Bounce Charges’, but they are exclusive and what the appellant recovered from his customer is only the penalty for delayed payment of EMI under the term ‘Penal Charges’. Therefore, AAAR held that the penalty recovered by the appellant does not get covered by the term ‘penal interest’ as contended by the appellant, because per se it is not interest but a penalty / penal charges. Further, AAR held that since the definition of ‘interest’ given under clause 2(zk) of Notification No. 12/2017-CTR defines interest only to mean interest in respect of any amounts of money borrowed or debt incurred but does not include any other charges in respect of the amounts of money borrowed or debt incurred, the term ‘interest’ cannot be given extended meaning to include penal charges.

AAAR observed that the substance of the transaction is that the penal charges occur on the failure of the customer to adhere to the conditions of repayment of EMI as per the agreement. Thus, it is not the nomenclature in the agreement but the nature defined in the agreement that is important, that the appellant is entitled to recover and the borrower agreed to pay it. It was noted that one of the important tests to determine whether the levy is penal in nature is to see whether it is for the non-compliance of provisions and if any criminal liability or prosecution is provided, the levy is surely penal in nature. AAR held that the said test is surely passed by the penalty / penal charges in the present case as the consequences provided in the agreement for non-compliance of it may be a prosecution under the Negotiable Instruments Act. Hence, the penalty levied by the appellant cannot be termed as ‘additional interest’ but penal charges.

AAAR held that since there is a mutual agreement between the appellant and the borrower, it can be said that the appellant has tolerated an act or situation of default by the borrower, for which it is recovering some amount in the name of penal charges / penalty. Consequently, AAAR upheld the decision of AAR in terms of section 7(1)(a) of CGST Act, 2017 read with Entry No. 5(e) of Schedule II of CGST Act, 2017.

shailesh.kwebmaker

There is no embargo on carry forward of credit on account of Education Cess, Secondary and Higher Education Cess and Krishi Kalyan Cess under the GST regime

15. [2019-TIOL-2516-HC-Mad.-GST] Sutherland Global Services Pvt. Ltd. vs. Assis-tant Commissioner CGST and Central Excise Date of order: 5th September, 2019

There is no embargo on carry forward of credit on account of Education Cess, Secondary and Higher Education Cess and Krishi Kalyan Cess under the GST regime

FACTS

Credit pertaining to Education Cess, Secondary and Higher Education Cess and Krishi Kalyan Cess was rejected from being carried forward to the GST regime on the ground that the same could be set off only against specific duties and taxes provided in explanation to section 140(1) of the Central Goods and Services Tax Act, 2017 read with Rule 117 of the Central Goods and Services Tax Rules. Since the Rule does not cover any cess, the same could not be carried forward. Therefore, the present writ petition is filed.

HELD

The High Court primarily noted that there is no notification / circular / instruction expressly stating that the credit would lapse. The provisions of sub-section

(1) read with sub-section (8) of section 140 and the Explanation thereunder state that the assessee is entitled to the amount of CENVAT credit carried forward in the return relating to the period ending with the date preceding the appointed date and this, in the present case, includes accumulated credit on account of the cesses. Thus it is more than clear that all available credit as on the date of transition would be available to an assessee for set-off. Instructions issued by the CBEC dated 7th December, 2015 reveal a policy decision not to allow utilisation of accumulated credit of Education Cess, Secondary Higher Education Cess and Krishi Kalyan Cess but nowhere states that the credit has lapsed. The High Court further noted the amendment in section 28 of the amended act, 2018 to exclude cesses from the ‘eligible duties and taxes’ from retrospective effect, (and) stated, however, that the same is not yet notified.

shailesh.kwebmaker

Mere reflection of transitional credit of VAT from pre-GST regime in electronic credit ledger could not be treated as availment or utilisation unless such availment or utilisation of credit reduces tax liability, which is recoverable u/s 73(1), i.e., any portion thereof is put to use so as to become recoverable

14. [2019] 108 taxmann.com 377 (Patna) Commercial Steel Engineering Corporation vs. State of Bihar

Date of order: 27th June, 2019

Mere reflection of transitional credit of VAT from pre-GST regime in electronic credit ledger could not be treated as availment or utilisation unless such availment or utilisation of credit reduces tax liability, which is recoverable u/s 73(1), i.e., any portion thereof is put to use so as to become recoverable

FACTS

The appellant, a registered dealer under VAT, filed an application in terms of section 143 of CGST Act, 2017 to take credit of surplus value-added tax and entry tax of Rs. 42.73 lakhs and to carry forward the same in its electronic ledger in the GST regime. The competent authority passed an order by invoking section 73 of the CGST Act, 2017 rejecting the appellant’s application on the ground that it was not entitled to the availment of the credit reflected in the electronic credit ledger and such reflection of credit would amount to either availment or utilisation of the credit. The adjudicating authority also ordered recovery of this amount, holding it to be outstanding tax liability against the appellant. Being aggrieved, the appellant filed the present appeal.

HELD

The Hon’ble High Court noted that Revenue’s contention is that reflection on the electronic credit ledger is a confirmation of a wrong availment even if the said credit was not utilised and it is liable for proceeding u/s 73. The Court held that the legislative intent present in the provisions of section 73 and rules 117 and 121 is eloquent, i.e. be it a charge of wrong availment or utilisation, each is a positive act and it is only when such act is substantiated that it makes the dealer concerned liable for recovery of such amount of tax. But in both the cases (i.e. ITC availed or utilised), the tax available at the credit of the dealer concerned must have been brought into use by him, thus reducing the credit balance. A plain reading of section 73 would confirm that it is only on such availment or utilisation of credit to reduce tax liability, which is recoverable u/s 73(1) read alongside the other provisions present thereunder. In fact, the position is made clearer by reading the said provision alongside sub-sections (5), (7), (8), (9) to (11).

Further, the High Court held that the legislative intent reflected from a purposeful reading of the provisions underlying section 140 alongside the provisions of section 73 and rules 117 and 121 of CGST Rules, 2017 is that even a wrongly reflected transitional credit in an electronic ledger on its own is not sufficient to draw penal proceedings until the same or any portion thereof is put to use so as to become recoverable. As regards reliance placed by Revenue on the decision of the Hon’ble Supreme Court in Union of India vs.

Ind- Swift Laboratories Ltd. [2011] 9 taxmann.com 282 (SC), the High Court distinguished the same by observing that in the said case such credit has been utilised by a dealer and it is in such circumstances that the Supreme Court, on the basis of the note on the adjudication done by the Settlement Commission, has recorded its opinion. The High Court therefore quashed the impugned order passed by the competent authority in purported exercise of the power vested in him u/s 73 being per se illegal and an abuse of the statutory jurisdiction.

shailesh.kwebmaker

CLASSIFICATION CONUNDRUM

INTRODUCTION
The charging section for the levy of GST provides that the tax shall be levied on supply of goods / services or both. This entails the need for determination of whether a particular activity undertaken by a supplier is for supply of goods or supply of services? While dealing with this question, one may need to refer to the principles of composite supply or mixed supply as defined u/s 2 of the CGST Act, 2017 to determine whether the supply is that of goods or of services.

Once the determination of the nature of supply is done, the next question that arises is the rate applicable on such supply. There is a lot of confusion about the entry under which a particular goods / service should be classified in view of conflicting rates prescribed under the respective Rate Notifications, coupled with conflicting rulings by the Authority for Advance Ruling from different locations. This, despite the Rate Notifications specifically providing that rules for the interpretation as provided for under the Customs Tariff Act, 1975 shall also apply for the interpretation of headings covered under the said Notification.

In one of our earliest articles, ‘Principles of Classification’ (BCAJ, November, 2017), we had discussed in detail the subject of Classification under GST. In this article, we have attempted to identify a few instances dealing with Classification – both of a supply as goods vs. services, and the applicable rate on a supply along with conflicting AARs’ which add fire to this controversy.

GOODS VS. SERVICES – INTANGIBLES
The perennial controversy about determining what constitutes goods and what constitute services, although settled by the Supreme Court in the case of Tata Consultancy Services vs. State of Andhra Pradesh [2004 (178) ELT 22 (SC)] (the ‘TCS case’), used to be a burning issue under the earlier regime and continues to be so even under the new GST regime. This is because the definition of the said terms u/s 2 of the CGST Act, 2017. Section 2 (52) defines ‘goods’ to mean every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to, or forming part of the land which are agreed to be severed before supply or under a contract of supply. Similarly, section 2(102) defines ‘services’ to mean anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination to another form, currency or denomination for which a separate consideration is charged.

The first controversy which pertains to the issue of goods vs. services is in relation to intangibles. The issue of whether software, being an intangible property, is goods or service was already settled by the Apex Court in the TCS case wherein the Hon’ble Court had laid down the conditions for treating an intangible property as goods. Keeping that in mind, in view of the provision of Schedule II of the CGST Act, 2017, if the supply results in transfer of title in goods, the same would constitute supply of goods; while if there is transfer of right in goods without transfer of title thereof, the same would constitute supply of services. However, while dealing with this aspect another recent decision of the Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited vs. The Commissioner of Income Tax [Civil Appeal Nos. 8733-8734 of 2018], though in the context of income-tax, will always have an important bearing. In this case, the Court had held that licenses granted by way of End-User License Agreements were nothing but sale of goods. The relevant extracts of the decision are reproduced below for reference:

52. There can be no doubt as to the real nature of the transactions in the appeals before us. What is ‘licensed’ by the foreign, non-resident supplier to the distributor and resold to the resident end-user, or directly supplied to the resident end-user, is in fact the sale of a physical object which contains an embedded computer programme, and is therefore, a sale of goods which, as has been correctly pointed out by the learned counsel for the assessees, is the law declared by this Court in the context of a sales tax statute in Tata Consultancy Services vs. State of A.P., 2005 (1) SCC 308 (see paragraph 27).

In view of the above decision, an issue arises in case of import / export transactions through online mode. Such import / export transactions are not regulated through the Customs channel, and therefore, when payment is made for import of software or received for export of software, the nature of the transaction, i.e., whether the same pertains to purchase / sale of goods or service becomes particularly important. For example, if a person purchases all the rights which subsist in an intangible property / a license, the same would undoubtedly amount to supply of goods. The question that would arise in case of import of such goods is whether GST would be payable treating the same as ‘import of services’ or the same would be liable to tax under the proviso to section 5 of the IGST Act, 2017, i.e., the tax would be levied and collected under the Customs Act, 1962? If the latter view is taken, perhaps such transaction would not attract any IGST since there is no mechanism for levy of tax on intangibles under the Customs Act.

An even larger issue may crop up in the case of export transactions, especially when supply is under payment of IGST where there is a system for automated refund. Since the supply of intangibles is not routed through the customs system, the refund for such transactions may not be automatically processed and would therefore necessitate such exporters to file separate refund applications which can give rise to challenges as the Jurisdiction Officer may reject the refund claim on the simple ground that the same falls within the purview of Customs who may not at all be aware of the entire transaction.

GOODS VS. SERVICES – SALE VS. SERVICE
Entry 3 of Schedule II presumes an activity of job-work as service. While under the earlier regime job-work was defined to mean any activity amounting to manufacture, GST law defines the same to mean any treatment or process undertaken by a person on goods belonging to another registered person and the expression ‘job worker’ shall be construed accordingly. However, it would be incorrect to read this definition on a standalone basis, especially when the statute provides for concepts relating to composite supply / mixed supply which needs to be used when determining the nature of supply. Based on this, one would need to arrive at a conclusion whether a particular activity amounts to supply of goods or supply of service as job-work.

This discussion becomes important since there are specific instances where if the activity is treated as supply of goods, the same attracts tax at a different rate, while when treated as supply of service the applicable rate is different. At times where credit is not available fully, this would also involve cost ramifications. One such instance is observed in the context of newspapers. Supply of newspaper attracts nil rate of tax. However, the activity of printing of newspaper, which is classified as service, attracts tax @ 5%. Therefore, it becomes important to determine whether the supply being made is classifiable as supply of goods / services. Of course, while the answer to this question would depend on the facts of each case, the issue becomes more controversial in view of Circular 11/11/2017-GST dated 20th October, 2017 wherein the Board has clarified as under:

4. In the case of printing of books, pamphlets, brochures, annual reports and the like, where only content is supplied by the publisher or the person who owns the usage rights to the intangible inputs, while the physical inputs including paper used for printing belong to the printer, supply of printing [of the content supplied by the recipient of supply] is the principal supply and therefore such supplies would constitute supply of service falling under heading 9989 of the scheme of classification of services.
5. In case of supply of printed envelopes, letter cards, printed boxes, tissues, napkins, wall paper, etc. falling under Chapter 48 or 49, printed with design, logo etc. supplied by the recipient of goods but made using physical inputs including paper belonging to the printer, the predominant supply is that of goods and the supply of printing of the content [supplied by the recipient of supply] is ancillary to the principal supply of goods, and therefore such supplies would constitute supply of goods falling under respective headings of Chapter 48 or 49 of the Customs Tariff.

While in the first case the Board has clarified that the supply of printing service is the principal service, in the second case it has been clarified that supply of goods is the predominant supply. It is difficult to fathom how both the transactions can be dealt with differently as in both the cases the intention of the recipient is to receive back printed material from the job-worker. It is common for publishers to outsource printing activity and the dominant intention is to receive the printed content which is used by them to further supply such printed content.

In fact, this Circular also appears to be contrary to the principles of job-work which have been laid down by the Supreme Court in the case of Prestige Engineering (India) Ltd. vs. CCE Meerut [1994 (73) ELT 497 (SC)] which explained what shall and what shall not constitute job work. The primary rule laid down by the Court was that job work should not be narrowly understood as requiring the job worker to return the goods in the same form as this would render the Notification itself redundant since the definition specifically contemplated ‘a manufacturing process’, but it also cannot be so widely interpreted as to allow an arrangement where the process involved substantial value addition. It is imperative for the readers to note that the above clarification has also been followed by the Authority for Advance Ruling in the case of Sri Venkateswara Enterprises [2019 (30) GSTL 83 (AAR – GST)]. However, in another case, that of Ashok Chaturvedi [2019 (21) GSTL 211 (AAR – GST)], the Authority has held that the principal supply was that of goods and therefore the printed content would be classified under Chapter 49 and taxed accordingly.

A similar issue exists in the hospitality sector where there is confusion as to whether tobacco products such as cigarettes, hookah, etc., supplied and consumed in a restaurant shall be classified as supply of goods or supply of service as a part of restaurant services? The Advance Authority has, in the case of MFAR Hotels & Resorts Private Limited [2020 (42) GSTL 470 (AAR – GST – TN)], held that cigarettes supplied in the restaurant will be treated as supply of goods as the same is not naturally bundled with the service of the restaurant. However, it would appear that the ruling has not taken into consideration Entry 6(b) of Schedule II which deems a composite supply by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink as supply of service. If aerated beverages, which also attract the higher rate of tax as well as compensation cess supplied in a restaurant can be treated as supply of service, there is no logical reasoning to not extend the same benefit to tobacco as the same also falls within the basket of goods supplied for human consumption, irrespective of whether or not the same is injurious to health!

RATE CLASSIFICATION – GOODS
As discussed in the earlier article also, the Rate Notifications under GST provide that the classification of any goods / services in a particular rate / exemption entry shall be done applying the rules for interpretation as provided for under the Customs Tariff Act, 1975. The said rules were discussed in detail in the said article. However, since the introduction of GST there have been several items the classification of which has continued to be under dispute. In this article, we have attempted to identify and discuss such cases.

The first class of goods which has seen substantial classification dispute is ‘tobacco’ which comes in different forms and varied rates have been notified depending on the nature of the product. The following table summarises the different rates applicable to different types of tobacco:

Schedule

Entry
No.

HSN

Description
of product

Rate

109

2401

Tobacco Leaves

2401

Unmanufactured tobacco; tobacco refuse [other
than tobacco leaves]

28%

2403

Other manufactured tobacco and manufactured
tobacco substitutes; ‘homogenised’ or ‘reconstituted’ tobacco; tobacco
extracts and essences [including ‘biris’]

28%

A particular area of dispute has been as to what constitutes tobacco leaves. The Board has, vide Circular 332/2/2017 – TRU clarified that tobacco leaves shall mean leaves of tobacco as such, broken tobacco leaves and stems. This issue has been examined in detail in the context of Central Excise. The Tribunal has, in the case of Yogesh Associates vs. CCE, Surat II [2006 (195) ELT 196 (Tri – Mum)] wherein the Tribunal held that raw leaf treated with tobacco solution Quimam and other flavours including saffron water did not result in the leaf undergoing any irreversible change and the same continued to remain raw, unmanufactured tobacco leaf. This decision was also approved by the Apex Court in 2006 (199) ELT A221 (SC). However, there have been conflicting decisions from the Authority for Advance Ruling in the context of GST w.r.t. classification of tobacco products in different forms.

In the case of Shailesh Kumar Singh [2018 (13) GSTL 373 (AAR – GST)] and Pragathi Enterprises [2018 (19) GSTL 327 (AAR – GST)]), the Authority has held that dried tobacco leaves which have undergone the process of curing are not covered under Schedule I Entry 109 but will be covered under Schedule IV Entry 13. In Sringeri Yogis Pai [2019 (31) GSTL 357 (AAR – GST)] the Authority has further held that cured tobacco leaves would also get covered under Schedule IV Entry 13.

However, in Suresh G. [2019 (023) GSTL 0483 (AAR – GST)], the Authority has held that sun-cured tobacco leaves would get covered under Schedule I and therefore attract GST at 5%. The Authority held as under:

‘6. It is well-known fact that the fresh or green leaves are having no commercial marketability. Only after the long process of curing the tobacco leaves become capable for marketing. Therefore legislature imposed tax only on cured tobacco leaves which are capable of being traded. As per serial number 13 of Schedule-IV of Notification No. 1/2017-Central Tax (Rate), dated 28-6-2017 “un-manufactured tobacco” is brought under 28% taxable category. But the entry itself clearly specified that unmanufactured tobacco, tobacco refuse (other than tobacco leaves) is taxable at the rate of 28%. Since tobacco leaves are specifically excluded from Schedule-IV Sl. No. 13 it will squarely come under Schedule-I of Sl. No. 109 and taxable at the rate of 5%. Therefore tobacco leaves including the leaves cut from plant, dry leaves, cured leaves by applying natural process ordinarily used by the farmers to make them fit to be taken to market shall qualify for 5% tax rate. It is common knowledge that without curing tobacco leaves cannot be consumed. The curing in relation to tobacco leaves means removal of moisture from the tobacco leaves. Section 2(c) of the Central Excise Act, 1944 specified that the term “curing” includes wilting, drying, fermenting and any process for rendering an unmanufactured product fit for marketing or manufacture. Hence, the unavoidable process of curing of tobacco leaves to make it fit for marketing will qualify the word “curing” mentioned in Chapter 24 of the Customs Tariff Act, 1975.’

The above view has also been followed in the case of Alliance One Industries Private Limited [2020 (32) GSTL 216 (AAR – GST – AP)] and K.S. Subbaih Pillai & Co. (India) Pvt. Ltd. [2020 (32) GSTL 196 (AAR – GST – AP)].

It is therefore clear that there is a lot of confusion with regard to the correct classification of tobacco under GST. Further, with tobacco being liable to tax under Reverse Charge also, the need for a correct solution becomes more important since if a wrong classification is applied there will be an effect on both fronts, outward supplies as well as inward supplies. It therefore becomes more important for the taxpayer to determine the correct classification of the product being dealt with by him to avoid future litigation. In other words, it would be safe to say that applying a wrong classification would not only be injurious to customers’ health, but also to the taxpayers’ health!

The next controversy revolves around classification of fryums. This is because while there is no specific entry for fryums under GST, Entry 96 of Notification 2/2017 – CT (Rate) exempts papad, by whatever name known, from GST except when served for human consumption. On the other hand, there are different entries in the Rate Notification so far as namkeen is concerned. The following table summarises the different rates applicable to namkeen in different forms:

Schedule

Entry
No.

HSN

Description
of product

Rate

101A

2106 90

[Namkeens, bhujia, mixture, chabena and
similar edible preparations in ready for consumption form, other than those
put up in unit container and, –

(a)…. bearing a registered brand name; or

(b)…. bearing a brand name on which an
actionable claim or enforceable right in a court of law is available (other
than those where any actionable claim or any enforceable right in respect of
such brand name has been voluntarily foregone, subject to the conditions as
specified in the Annexure)]

2106 90

[Namkeens, bhujia, mixture, chabena and
similar edible preparations in ready for consumption form (other than roasted
gram), put up in unit container and, –

(a)…. bearing a registered brand name; or

12%

II
[continued]

2106 90

subject to the conditions as specified in
the Annexure)]

12%

III

2106

[Food preparations not elsewhere specified
or included (other than roasted gram, sweetmeats, batters including idli /
dosa batter, namkeens, bhujia, mixture, chabena and similar edible
preparations in ready for consumption form, khakhra, chutney powder, diabetic
foods)]

18%

Therefore, the questions which need deliberation are:
* Whether fryums can be treated as papad?
* If not, under which entry will fryums qualify?

The reason behind the need to determine whether fryum can be classified as papad or namkeen arises in view of the decision of the Tribunal in the case of Commissioner of Central Excise vs. TTK Pharma Ltd. [2005 (190) ELT 214 (Tri – Bang)]. The Tribunal had held that fryums can be marketed as namkeen only after they are fried, just like papad. However, the tax implication if this classification is not accepted is substantial because if fryums are classified as papad, the same are exempted from GST, while if classified as namkeen, the same would get classified under Schedule III and become liable to GST at 18%. Thus, the difference is substantial and therefore one needs to be careful while deciding the classification of fryums.

This aspect has also been dealt with by the AAR in the case of Sonal Products [2019 (23) GSTL 260 (AAR – GST)] and Alisha Foods [2020 (33) GSTL 474 (AAR – GST)]. In both instances, the Authority has held that fryums are classifiable as namkeen and not papad and therefore the same would be taxable at 18%. The Authority relied on the decision in the case of TTK Pharma Ltd. vs. Collector of Central Excise [1993 (63) ELT 446 (Tribunal)]. However, it has failed to appreciate that the Tribunal had used the word namkeen / papad interchangeably while dealing with the applicability of an exemption Notification. The Authority further referred to the decision in the case of Commissioner of Commercial Taxes, Indore vs. TTK Healthcare Ltd. [2007 (21) ELT 0197 (SC)]. However, the Authority has again failed to appreciate that the dispute in the said case was whether or not fryums could be treated as cooked food. The Authority has further concluded that the classification was to be done as per the meaning construed in the popular sense and as understood in common language.

It is important to note that the Authority has failed to appreciate that the process followed for making of papad / fryums is similar. In fact, both become ready for human consumption only when fried and when fried, both rather partake the character of namkeen. In this sense, the decision of the Authority to not treat fryums as papad appears to be on shaky ground.

The next item which has seen its fair share of controversy is parantha. Entry 97 of Notification 2/2017-CT (Rate) exempts bread (branded or otherwise) from tax, except when served for consumption, and pizza bread. Bread is something which is generally an accompaniment with the main meal of the day and is cooked in different styles using different ingredients. It is known by different names across the globe. If one does a search for ‘List of Breads’ on Wikipedia, it can be seen that even the roti, chapati, naan, kulcha, dosa, etc., which are consumed in different parts of India and known by different names are also types of bread. However, there is a separate entry for plain chapati or roti under Schedule I of Notification 2/2017-CT (Rate) and the same is taxed at 5%. But other forms of Indian bread do not find a specific entry in the Rate Notifications. This gives rise to the classification issue.

The first such issue reported was in the classification of ‘Classic Malabar parota’ or ‘Whole Wheat Malabar parotta’. The Authority for Advance Ruling has in the case of Modern Food Enterprises Private Limited [2018 (18) GSTL 837 (AAR – GST)] held that there is a substantial distinction between parotta and bread in terms of preparation, use and digestion and, therefore, exemption given to bread cannot be extended to parotta. However, in Signature International Foods India Private Limited [2019 (20) GSTL 640 (AAR – GST)], the Authority has held that paratha was similar to roti and therefore classifiable under Schedule I of Notification 1/2017-CT (Rate) and therefore attracts GST @ 5%. Surprisingly, in this case the Authority proceeded to conclude that naan / kulcha which were not defined anywhere would be classifiable under the residuary entry in Schedule III of Notification 1/2017-CT (Rate) and therefore attract GST @ 18%.

RATE CLASSIFICATION – SERVICES
Let us now look at similar issues while determining the applicable tariff entry for services. The first issue which arises is with classification of certain services provided to Government, whether Central Government, State Government, Union Territory, a local authority, a Governmental Authority or a Government Entity. The relevant entry for discussion is Entry 3(vi) of Notification 11/2017-CT (Rate) which provides for tax at 12% on composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017 provided to the Central Government, State Government, Union territory, a local authority or a Governmental Authority or a Government Entity by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of a civil structure or any other original works meant predominantly for use other than for commerce, industry, or any other business or profession. Vide the explanation, it has also been clarified that the term ‘business’ shall not include any activity or transaction undertaken by the Central Government, State Government or any local authority in which they are engaged as public authorities.

Despite the above clarification, there has been substantial confusion as to when a service would be classified under this entry, because when services are being provided to Government it is difficult to distinguish whether the service is for use other than for commerce, industry or any other business or profession. There have been conflicting AARs on this issue as well. In A2Z Infra Engineering Ltd. [2018 (18) GSTL 760 (AAR – GST)], the Authority held that services provided to a Power Distribution Company would be covered under the scope of ‘for use other than for commerce, industry, or any other business or profession’ and therefore concessional tax rate would not be applicable in such a case. A similar view was also followed in the case of Madhya Pradesh Madhya Kshetra Vidyut Vitaran Company Limited [2019 (020) GSTL 0788 (AAR – GST)] as well. In fact, in a recent decision the Appellate AAR in the case of Vijai Electricals Ltd. [2020 (42) GSTL 153 (App. AAR)] wherein despite the appellants submitting an opinion from the Government Departments that the activities of the recipient were non-commercial in nature, the denial of benefit of concessional rate of tax was upheld.

In the case of Tata Projects Limited [2019 (24) GSTL 505 (AAR – GST)], service provided to the Nuclear Fuel Complex engaged in the manufacture and enrichment of nuclear fuel for production of electricity which is a business and commercial activity, the concessional rate of 12% will not be available.

However, the Appellate AAR has in the case of ITD Cementation India Limited [2019 (25) GSTL 315 (AAAR)] set aside the order of the AAR and held that supply of service for construction of multi-modal terminal was for infrastructural development of waterways of India and not meant for commerce and business. A similar view was taken in the case of Vikram Sarabhai Space Centre [2019 (25) GSTL 129 (AAR – GST)] also.

There are many taxpayers who are providing service of this kind to Government and in many cases the contract values are inclusive of GST. Prompt clarification on what constitutes ‘commerce, industry, business or profession’ would be most welcome as there would be severe financial consequences if the end conclusion is not beneficial to the taxpayers.

Another burning issue in the context of services provided to Government is what constitutes ‘pure services’? Entry 3 of Notification 12/2017-CGST (Rate) provides exemption to pure services (excluding works contract service or other composite supplies involving supply of any goods) provided to the Central Government, State Government or Union territory, or local authority, or a Governmental authority, or a Government Entity by way of any activity in relation to any function entrusted to a Panchayat under Article 243G of the Constitution, or in relation to any function entrusted to a Municipality under Article 243W of the Constitution. However, what constitutes ‘pure service’ has not been defined either under the Notification or the Act / Rules.

This has resulted in substantial confusion since taxpayers intend to claim the benefit of the exemption Notification while the tax authorities look at ways to deny the same. In fact, the AAR has on multiple occasions held that only such service where there is no involvement of even an incidental supply of goods would be covered within the scope of ‘pure service’. In fact, in the case of Harmilap Media (P) Limited [2020 (33) GSTL 89 (AAR – GST)], while determining whether or not advertising service would classify as pure service, the Authority held in the negative since there is an element of supply of goods involved, though not material. Fortunately, this anomaly has been sought to be removed by way of insertion of Entry 3A to the Notification which now provides that the exemption shall extend to composite services also, provided that the value of goods involved in the supply is not more than 25% of the total value. This amendment will perhaps put the dispute to rest.

The next dispute revolves around classification of services relating to transport of goods. There are two rates notified for the service of GTA, one being 5% in case the service provider opts to not claim ITC and 12% where the service provider opts to claim ITC. What constitutes ‘GTA’ has been defined to mean any person who provides service in relation to transport of goods by road and issues a consignment note, by whatever name called. The first controversy which prevails is whether for classification as a GTA is the supplier compulsorily required to issue a consignment note? A perusal of the Rate Notification does indicate towards the same. However, the Appellate AAR has in the case of K.M. Trans Logistics Private Limited [2020 (35) GSTL 346 (AAAR -– GST)] while dealing with this issue held that once the possession of goods is transferred to the transporter, irrespective of whether the consignment note is issued or not, he becomes a GTA and would therefore be liable to tax accordingly.

However, in the case of Liberty Translines [2020 (41) GSTL 657 (App. AAR – GST)], in a case involving sub-contracting in transportation business, the Authority held that issuance of a consignment note by the sub-contractor transporter to the main transporter would not make him a GTA and the service would be classified under the entry of ‘renting of vehicles’ and would therefore attract tax at 18%, irrespective of whether the main contractor opts to pay tax under the 5% scheme / 12% scheme, thus involving substantial cost implications for the main contractor. It is, however, important to note that in the case of Saravana Perumal [2020 (33) GSTL 39 (AAR – Kar)] involving a similar fact matrix, the AAR has held that the services provided by the sub-contracting transporter to the main transporter would also get classified as GTA.

CONCLUSION
The above discussion clearly indicates that the classification issue will continue even under the GST regime. Of course, the same will be on multiple fronts, ranging from classifying an activity as that of goods or service or none, and then proceeding to determine the correct tariff classification. The controversy will get more pronounced with conflicting decisions from the AAR which will only add fuel to the fire. However, the taxpayers will need to be more cautious and careful, especially where there is confusion on the classification, because incorrect classification may have serious ramifications on the business.

shailesh.kwebmaker

STIGMA OF ATTACHMENT(S)

Lord Dunedin famously quoted in Whitney vs. IRC [LR 1926 AC 37, 51 (HL): 10 TC 79, 110: (1924) 2 KB 602] – ‘Now, there are three stages in the imposition of a tax: there is the declaration of liability, that is the part of the statute which determines what persons in respect of what property are liable. Next, there is the assessment. Liability does not depend on assessment. That, ex hypothesi, has already been fixed. But assessment particularises the exact sum which a person liable has to pay. Lastly, come the methods of recovery, if the person taxed does not voluntarily pay.’

In this era of digitisation, self-assessment, self-compliance, self-policing and self-vigilance, recovery provisions of taxes are directed to act as deterrence tools rather than being tyrannical. In a democratic set-up with a progressive vision of nation-building, these provisions are considered as a measure of last resort, adopted only in extreme cases. Yet, in the GST scheme of things attachment provisions have been invoked on multiple occasions and the taxpayers have faced the wrath of this power, especially in cases of fake invoicing. This article discusses the attachment provisions under GST with specific reference to attachments of bank accounts and debtors of tax defaulters.

CONSTITUTIONAL BACKGROUND

The recovery provisions have a Constitutional background in terms of Articles 265 and 300-A. Article 265 sets out the cardinal rule that no taxes can be levied or collected except under authority of law. Recovery provisions fall under the powers of collection by the Executive of the state. On similar lines, Article 300-A protects the right of ownership of the property of the citizen except under authority of law. These articles when applied together frame two important principles under recovery: (a) Taxes recoverable should be under authority of law; and (b) Recovery process infringes ownership rights and should be backed by legal provisions. In District Mining Officer vs. Tata Iron & Steel Co. and Anr. (2001) 7 SCC 3581 , the three-judge Bench observed that not only should the levy of taxes have the authority of law but also its recovery should be under due authority of law. It is in this backdrop that recovery provisions under the GST law should be understood and applied by Revenue authorities.

–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––—————————————————————————————————————————————-

1 This
decision has been referred to the larger Bench in Asst. Director of Mines
and Geology vs. Deccan Cements (2008) 3 SCC 451

SUMMARY OF GST PROVISIONS ON RECOVERY

Chapter 15 of the CGST / SGST enactments provide for demands and recovery of taxes. Recovery proceedings can be initiated under the following circumstances:

(i) Taxes not paid, short paid or erroneously refunded,

(ii) Ineligible availment or utilisation of input tax credit,

(iii) Taxes which are not due but collected on supplies,

(iv) Admitted taxes (including turnover reported in GSTR1)2,

(v) Disputed taxes (to the extent of mandatory pre-deposit),

(vi) Disputed taxes to the extent stay is not obtained, and

(vii) Interest and penalties on all or any of the above.

Section 78 provides that recovery proceedings can be initiated at any time after three months from the date of service of the demand order. This time limit coincides with the maximum time limit of three months to file an appeal before the appellate forums. In effect, if the assessee fails to utilise the time to file an appeal within the prescribed limit, it is generally presumed that the matter is not being agitated and powers are thrust on the Revenue to proceed for recovery of taxes due to the Government. As an exception, section 78 permits the proper officer to advance the recovery actions where the circumstances warrant that the collection of taxes may be adversely affected if the entire duration of three months is permitted to the assessee, such as disposal of assets, diversion of funds, etc.

Section 79 provides for various methods of recovery of taxes such as:

(1) Adjustment of refunds held by the said proper officer or any other specified officer,

(2) Sale of goods under detention by the above authorities,

(3) Garnishee proceedings (evaluated below),

(4) Distraint and sale of any movable or immovable property,

(5) Recovery as land revenue, and

(6) Recovery of any amount under bond or security executed before the officer.

Garnishee powers u/s 79 enable the proper officer to serve upon the taxpayer’s debtors (banks, trade debtors / receivables, etc.) a notice (in DRC-14) directing them to deposit the amount specified to the account of the Government and such deposit would be treated as a sufficient discharge of their debt to the taxpayer. Although the Revenue has powers to recover taxes from other assets of the taxpayer, the circumstances may warrant that Revenue would have to protect its interest before the assets are alienated by the taxpayer. In such cases, Revenue would resort to attachments of the properties of the taxpayer in anticipation of a demand to be recovered in future.

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2 Amendment proposed by Finance Bill, 2021

RECOVERY POWERS ARE NOT SEQUENTIAL

The CGST Act provides multiple alternatives to the Revenue officials for recovery of taxes which include attachment of properties (refer above). Are Revenue officials required to exhaust the remedies sequentially prior to proceeding for attachment of properties? Section 79 itself states that recovery can be performed by ‘one or more of the following modes’. This implies that the choice of modes of recovery is purely with the Revenue and it cannot be insisted that each mode has to be exhausted prior to proceeding with an alternative mode of recovery3. Revenue can simultaneously invoke recovery from multiple debtors / assets as long as the overall recovery is capped to the tax arrears.

ATTACHMENT AS A PRECURSOR TO RECOVERY

Attachments of property of the tax defaulter can be a prelude to subsequent recovery of tax arrears. ‘Attachment’ in this context refers to prohibition of transfer, conversion, disposition or movement of property by an order issued under law. It is used to hold the property for the payment of debt [Kerala State Financial Enterprises vs. Official Liquidator (2006) 10 SCC 709]. It is also well established that attachment creates no charge or lien upon the attached property. It only confers a right on the holder to have the attached property kept in custodia legis for being dealt with by the Court in accordance with law. It merely prevents and avoids private alienations; it does not confer any title on the attaching creditors. The objective is to protect the interest of Revenue until completion of proceedings and enforcing realisation of taxes in arrears to the debtor. On the other hand, the process of recovery involves the actual realisation / liquidation of the property for meeting the tax dues either from assets already under attachment or other properties of the tax defaulter.

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3 2000 (126) E.L.T. 222 (A.P.) G.
Lourdha Reddy vs. District Collector, Warangal

Attachment of fixed deposits before the maturity date

Disputes have emerged whether Revenue can attach and recover fixed deposits prior to their maturity. In Vysya Bank Ltd. vs. Jt. CIT [2000] 109 Taxman 106/241 ITR 178 (Kar.), the Court held that fixed deposits which are lying with banks can be encashed even before their maturity since the Department steps into the shoes of the tax defaulter and can invoke pre-closure of such deposits. On the other hand, rents which are not yet due from the landlord cannot be subjected to attachment or recovery from the debtor.

Attachment of Overdraft / Cash Credit accounts

Overdraft / Cash Credit facilities do not create a debt by the third party in favour of the tax defaulter. Therefore, unutilised overdraft or cash credit facilities cannot be attached by the Revenue for realisation of tax dues. In a recent decision, the Court went a step further and stated that future credits after attachment would also not be subjected to the freeze contemplated in law [2020 (5) TMI 193 – RCI Industries & Technologies Ltd. vs. DGGSTI] – ‘6. In the circumstances, we dispose of this petition with a direction that the attachment would be limited to the amounts which were lying to the credit of the petitioner in CC A/c at the time of freezing and any further credit which may come would not be under attachment.’

Provisional attachment of property

As an exception to the regular course of attachment after confirmation of tax demands, section 83 enables provisional attachment of any property, including bank accounts, of the taxable person for a maximum period of one year during pendency of adjudication / assessment proceedings (as per extant provisions). Rule 159 provides the procedure for provisional attachment of any property, including bank accounts, as follows:

* Commissioner shall pass an order in DRC-22 to that effect mentioning therein the details of the property which is proposed to be provisionally attached,

* Commissioner shall send a copy of the order of attachment to the authority concerned to place encumbrance on the said movable or immovable property, which shall be removed only on the written instructions from the Commissioner to that effect,

* In case of perishable or hazardous goods, the taxable person can obtain an immediate release of the goods on payment of the market price. In case of failure of payment, such goods may be disposed of and adjusted with the recoverable dues, and

* Any objection to attachment should be filed within seven days of attachment and the Commissioner may release the property after hearing the aggrieved.

Drastic nature of provisional attachment

The power of provisional attachment has been held to be drastic in the sense that such actions infringe the liberty of the taxpayer in running its business operations and is to be exercised before any judgement or decision is made. The authority exercising this power should have strong compelling reasons for this extraordinary action with the objective of protecting the interest of Revenue. Generally, taxpayers who have a compliant track record and tangible asset base without any indication of diversion of funds should not be saddled with such drastic actions. The High Court in 2019 (30) GSTL 396 (Guj.) Pranit Hem Desai vs. ADGGI made very assertive observations about the use / misuse of the power of provisional attachment. Though section 83 does not provide any safeguards against misuse of powers (except the approval of a Commissioner, which is generally a routine exercise), the Court stated that the very nature of action warrants circumspection and extreme care and not (its use as) a routine tool for harassment:

‘Further, the orders of provisional attachment must be in writing. There must be some material on record to indicate that the Assessing Authority had formed an opinion on the basis thereof that it was necessary to attach the property in order to protect the interest of the Revenue. The provisional attachment provided under section 83 is more like an attachment before judgment under the Code of Civil Procedure. It is a liability on the property. However, the power conferred upon the Assessing Authority under section 83 is a very drastic, far-reaching power and that power has to be used sparingly and only on substantive, weighty grounds and for valid reasons. To ensure that this power is not misused, no safeguards have been provided in section 83. One thing is clear, that this power should be exercised by the Authority only if there is a reasonable apprehension that the assessee may default the ultimate collection of the demand that is likely to be raised on completion of the assessment. It should, therefore, be exercised with extreme care and circumspection. It should not be exercised unless there is sufficient material on record to justify the satisfaction that the assessee is about to dispose of the whole or any part of his property with a view to thwarting the ultimate collection of the demand. Moreover, attachment should be made of the properties and to the extent it is required to achieve the above object. It should neither be used as a tool to harass the assessee nor should it be used in a manner which may have an irreversible detrimental effect on the business of the assessee.’

POWER OF PROVISIONAL ATTACHMENT IS NOT ABSOLUTE

The power of the Commissioner in attaching any property including bank accounts is not absolute. In Bindal Smelting Pvt. Ltd. vs. ADGGI [2020 (1) TMI 569 – P&H] the Court held that the expression ‘is of the opinion’ or ‘has reason to believe’ is of the same connotation and is indicative of subjective satisfaction of the Commissioner which depends upon the facts and circumstances of each case. It is settled law that the opinion must have a rational connection with or relevant bearing on the formation of the opinion. Rational connection postulates that there must be a direct nexus or live link between the protection of interest and available property which might not be available at the time of recovery of taxes and after final adjudication of the dispute. The opinion must be formed in good faith and should not be a mere pretence. The Courts are entitled to determine whether the formation of opinion is arbitrary, capricious or whimsical. In Valerius Industries vs. Union of India 2019 (9) TMI 618 Gujarat High Court, the Court held the following:

* The order of provisional attachment before the assessment order is made may be justified if the assessing authority or any authority empowered in law is of the opinion that it is necessarily to protect the interest of Revenue. A finding to the effect should be recorded prior to pursuing this remedy.

* The above subjective satisfaction should be based on some credible materials or information and should also be supported by some supervening factor.

* The power u/s 83 of the Act could be termed as a very drastic and far-reaching power. Such power should be used sparingly and only on substantive weighty grounds and reasons.

* Such power should be exercised only if there is a reasonable apprehension that the assessee may default the ultimate collection of the demand that is likely to be raised on completion of the assessment. It should, therefore, be exercised with extreme care and caution.

* This power should neither be used as a tool to harass the assessee nor should it be used in a manner which may have an irreversible detrimental effect on the business of the assessee.

* The attachment of bank accounts and trading assets should be resorted to only as a last resort or measure. The provisional attachment u/s 83 should not be equated with the attachment in the course of the recovery proceedings.

* The authority before exercising power u/s 83 for provisional assessment should take into consideration two things,

a) Whether it is a revenue-neutral situation, and

b) The statement of ‘output liability or input tax credit’.

* Having regard to the amount paid by reversing the input tax credit if the interest of the Revenue is sufficiently secured, then the authority may not be justified in invoking such power for the purpose of provisional attachment.

Similar views were voiced in Automark Industries (I) Ltd. vs. State of Gujarat [2016] 88 VST 274 (Guj.) where such provisions were held to be drastic and extraordinary in nature. These decisions consistently hold that these powers should be used sparingly and not as a matter of routine practice.

PROVISIONAL ATTACHMENT OF ENTIRE BUSINESS PREMISES

Revenue authorities were performing attachment of business premises u/s 71 at the time of their visit on the ground of tax evasion. Section 83 is applicable only in specified sections and since section 71 does not form part of the list therein, it does not permit Revenue to invoke attachment of assets on a visit of premises. In Proex Fashion Private Limited [2021 (1) TMI 365], the Court held that attachment pursuant to visit to business premises u/s 71 is not permissible.

This limitation of section 83 is sought to be overcome by the proposed substitution of section 83 (vide Finance Bill, 2021) which encompasses all the sections under Chapters XII, XIV and XV of the CGST Act for invoking provisional attachment. Under the amended section 83, officers would be empowered to provisionally attach the business premises at the time of visit, inspection or search rather than waiting for adjudication of the tax demands.

DISCLOSURE OF REASONS / CIRCUMSTANCES FOR PROVISIONAL ATTACHMENT

Section 83 does not require that the necessary circumstances be communicated to the taxpayer prior to invoking provisional attachment. But such formation of belief can be examined by the Court on being questioned by the tax defaulter. The Court can examine the materials to find out whether an honest and reasonable person can base his reasonable belief upon such materials although the sufficiency of the reasons for the belief cannot be investigated by the Court (Sheonath Singh’s case [AIR 1971 SC 2451]).

Continuation of attachment after one year

Pendency of proceedings is a sine qua non for provisional attachment of any property. Where the provisional attachment has been initiated, the conclusion of the proceedings warrants that the provisional attachment should be lifted and cannot be continued. Revenue authorities would have to lift the encumbrance over the property and invoke other recovery provisions based on the outcome of the adjudication / assessment.

In UFV India Global Education vs. UOI 2020 (43) GSTL 472 (P&H), the Court held that provisional attachments are not valid after completion of the proceedings on the basis of which attachments were initiated. In other words, where the attachment was initiated on the basis of an inspection u/s 67, the attachment would cease to operate on the completion of the proceedings under the said section. As a corollary, where the inspection proceedings migrate to adjudication under sections 73 or 74, a fresh provisional attachment is required to be initiated during the pendency of such adjudication proceedings. However, this position in law is also undergoing alteration by substitution of section 83 where the provisional attachment has been sought to be extended until the conclusion of proceedings of adjudication or one year, whichever is earlier.

Renewal of provisional attachment

In Amazonite Steel Pvt. Ltd. vs. UOI 2020 (36) GSTL 184 (Cal.), the Court reprimanded officers who failed to withdraw the provisional attachment of the property beyond the time limit of one year and imposed heavy costs on the officials concerned. But this does not mean that the Commissioner is not empowered to renew the provisional attachment after the expiry of one year. In Shrimati Priti vs. State of Gujarat [2011 SCC Online Guj. 1869], the Court interpreted the scope of section 45 of the Gujarat Value Added Tax Act, 2003 (similar to section 83) and held that on the one hand section 45 requires the competent officer to review the situation compulsorily at least upon completion of the period, while so doing, it does not limit his discretion to exercise such powers again if the situation so arises. Other things remaining the same, the Court also held that there is nothing in the express wording of section 83 which prohibits the Commissioner from issuing a fresh order for provisional attachment on expiry of one year. Therefore, as long as there is pendency of proceedings under a specified section, Commissioners can form an opinion and renew the provisional attachment of the property. In the context of Income-tax law, the provisional attachment has been specifically stated as not being extendable beyond two years. It is in this context that the Delhi High Court in VLS Finance Ltd. vs. ACIT [2011] 331 ITR 131 (Delhi) held that attachment of property cannot extend the limit specified in law and hence distinguishable from the position under GST.

Though in theory these provisions are held to be extreme actions, it is not unknown that Revenue officers have used this tool to arm-twist taxpayers in recovery of taxes. Apprehension of business breakdown compels enterprises to succumb to such demands. Despite their bona fides being proved during investigations, certain taxpayers also find the removal of attachment to be a herculean task. The tool of deterrence has in certain instances become a tool of harassment. Indeed, with great power comes great responsibility!

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