Indirect Taxes Archives

No Service Tax on Goods Transportation by by Vessel upto 31 05 2016

Notification No. 36/2016 dated 23 05 2016

CBEC vide this Notification has exempted the taxable services by way of transportation of goods by a vessel from outside India upto the customs station in India with respect to which the invoice for the service has been issued on or before the 31st May, 2016, from the whole of service tax leviable thereon, subject to the condition that the import manifest or import report required to be delivered under section 30 of the the Customs Act, 1962 has been delivered on or before the 31st May, 2016 and the service provider or recipient produces Customs certified copy of such import manifest or import report.

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Krishi Kalyan Cess not leviable if POT of service fall on or before 31 05 2016

SERVICE TAX UPDATES

Notification No. 35/2016 dated 23 06 2016

CBEC vide this notification has clarified that Krishi Kalyan Cess shall not leviable if the invoice with respect to taxable services has been issued on or before 31st May, 2016 and the provision of service has also been completed before 31st May, 2016.

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FAQs on Settlement of Arrears in Dispute Act, 2016.

VAT Updates

Trade Circular No.19T of 2016 dated 30.6.2016 & 20T of 2016 dated 19.7.2016

To clarify the points raised through representation from Trade & Associations regarding the Maharashtra Settlement of Arrears in Disputes Act, 2016, Commissioner of Sales Tax has issued this Circular in the form of questions and answers.

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Works Contract – Rate Of Tax Vis-À-Vis Nature Of Goods Transferred

Introduction

Taxation of Works Contract
has always remained a debatable issue even under the VAT era. As per the position
prior to GST, Works contract was separate subject by itself as it was
considered as deemed sale. Article 366 (29A)(b) provided the definition of
‘works contract’ which is as under:

(29A) tax on the sale or
purchase of goods includes:-

(a) …

(b) a tax on the transfer of property in
goods (whether as goods or in some other form) invoked in the execution of a
works contract;

As per the definition,
‘transfer of property in goods’ is considered as deemed sale. The issue arose
whether it is single transaction attracting one rate of tax on the total
contract value or transfer of various goods involved in the same so as to
attract respective rates on the goods so transferred? There are a number of
judgements throwing light on the given disputable issue.

Recent judgement of M.S.T. Tribunal

Recently, similar issue
arose before Hon. M.S.T. Tribunal in case of Sai Construction (S.A.No.375
of 2016 dated 31.8.2017) and the period involved was 2008-2009. The
short facts of the appeal narrated by the Hon. Tribunal can be reproduced as
under:

4. Shri V. P. Patkar,
learned Advocate, has explained the entire case and process of work done by the
appellant. The appellant is engaged in execution of works contract in general
and construction contract in special. During the period under assessment,
appellant has constructed road bridges. Contracts were awarded by Executive
Engineer Public Works Department, Miraj. For the purpose of construction of
said bridge, appellant purchased cement,
and metals. Said material is mixed together which is normally called
mortar and used in the construction of bridge. Appellant is assessed u/s. 23(3)
and taxable sale of goods is calculated according to the provisions u/r. 58.
According to Shri Patkar, lower authorities have erred in levying tax @ 12.5%
on sale of ‘sand’ and ‘khadi’ used in the execution of contract. According to
the appellant, sand and khadi is taxable @ 4%. Hence, it should be taxed
accordingly. Concrete prepared from sand and khadi is not purchased. It is
prepared during the process for use in the construction of bridge. Hence
concrete is not purchased by the dealer and not liable to tax @ 12.5%. Shri
Patkar, learned Advocate relied upon various judgments and authorities. We will
mention and discuss the same as we proceed further.

The arguments of the
department are also narrated by the Tribunal as under:

5. Shri S. S. Pawar,
learned Asst Commissioner of Sales Tax (Legal), appeared on behalf of revenue,
he has vehemently argued the case and also relied on various judgments of
different High Courts and Apex Courts. According to Shri S. S. Pawar, it is
important to ascertain what are the goods actually used in the execution of
said contract. The goods used in the contract are liable to tax u/s. 6 of MVAT
Act. The appellant has purchased sand, khadi, cement and they are mixed in
specified proportion. This mixture is called ‘concrete’ or ‘mortar’. Mortar is
then poured in the designed patterns at site. Then what is used in contract is
important. Shri Pawar further stated that, according to the theory of
accretion, goods accreted at the site are subject matter of tax according to
the deeming provisions as promulgated in sub clause (b) of clause 29A of
Article 366 of the Constitution. Transfer of property in the goods under clause
29A(b) of Article 366 is deemed to be sale of the goods involved in the
execution of works contract by the person making the transfer and the purchases
of those goods by the persons to whom such transfer is made. It is not
necessary to ascertain what dominant intention of the contract is.

Based on above two sets of
arguments, the Tribunal referred to historical background of the works contract
taxation and also analysed various judgements cited before it. After having all
the discussion, the Tribunal observed as under:

10. Considering all judgments
and authorities, we have come to the conclusion that, after 46^th
amendment to the constitution it has become possible for the state to levy
sales tax on the value of goods involved in the works contract in the same way
in which the sales tax was leviable on the price of the goods and material
supplied in a building contract which has been entered into two distinct and
separate parties as goods and services (Builders Association of India,
1989)(SC) provisions in section 2(24)(b)(ii) clearly interpret that, sales
means “transfer of property in goods whether as goods or in some other form
involved in the execution of works contract.” It clearly shows that, goods can
be used as goods in the same form or in some other form, it does not make
difference. It clearly indicates that, the goods which are appropriated to the
contract in which property is transferred are liable to tax in the State. When
the property is transferred to the buyer, it may be in some other form.
According to lower authorities, the theory of accretion is important. In the
present case, movable goods in the form of mortar is accreted as per section 6
of the W.C.T. Act, 1989, but not under the MVAT Act, 2002. We do not agree with
this contention of the revenue. Sand and Khadi purchased and appropriated to
the contract of construction of bridge is important aspect for levy of tax.
When transfer of property in the goods is to be held liable to tax then, goods
appropriated to the contract are important. In the present case, sand and khadi
are appropriated to the contract, in which property is transferred, as these
are the goods involved in the execution of bridge construction contract. In
W.C.T. Act, 1989, levy of tax explained in section 6. In section 6 goods were
liable to tax as per their form. Whether goods are sold in the same form or
otherwise was an important aspect but under the provisions of the MVAT Act and
as held by the Apex Court in Builders Association case (cited supra)
state is entitled to levy tax on the value of goods involved in the execution
of contract in the same way in which sales tax was leviable on the price of
goods and material supplied in building contract.

11. Considering all these
aspects and discussions made above, lower authorities have erred in applying
the rate of tax on the goods involved in the execution of contract. In our
considered opinion, in the present case, sand and khadi involved in the
execution of contract is liable to tax at price as arrived at after deducting
various items as per Rule 58 of MVAT Rules. Sand and khadi is used in the form
of mortar and thereafter the transfer of property takes place in the form of
bridge does not make any difference. Constitution article 366(29A)(b) clearly
says that, it is a deemed sale of goods involved in the execution of contract
whether as goods or in some other form. Hence, the tax levied @ 12.5% on
concrete/mortar is liable to be set aside. It requires fresh calculation at
specified rate of sand and khadi. Hence, the matter is required to be remanded
back to the first appellate authority.

Thus, the Tribunal has
provided useful guidelines about nature of goods transferred in a works
contract. It will be useful for discharging correct tax liability.

Conclusion

Under Works Contract, there
are a number of disputes including whether the transaction is a works contract
or not? Similarly, there are disputes about valuation of goods transferred. As
far as rate of tax is concerned, there are also a number of disputes. However,
by the above judgement, there is a very useful guideline to interpret nature of
goods for the purpose of applying rate of tax. _

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GST – First Principles On Valuation (Part-1)

One of the
important aspects of taxation is the determination of the value on which tax is
sought to be computed and collected. The
Goods & Service Tax law has been designed on value addition principle and
has adopted the ‘transaction value’ approach for defining the tax base. In view of the number of concepts in
valuation, the article has been split into two parts – this article captures
the basic concepts and issues in valuation and the next article would capture specific
instances of valuation.

A) Gist
of the Valuation provisions

The scheme of valuation hovers around
‘transaction value’. Section 15 of the Central/ State GST law contain the
valuation provisions and the scenarios where an adjustment should be made to
arrive at the taxable value. The entire
scheme of valuation can be depicted by way of a flow chart as under:

B)
Analysis of Valuation Provisions

a) Meaning of the term
‘Transaction Value’

Section 15 states that the taxable value
would be the transaction value of supply i.e. ‘price paid or payable’ for the
supply of goods or services. Though the
term ‘price’ is not defined in the GST law, the Sale of Goods Act, 1930 defines
price to mean ‘money consideration’. It
is the price which is contractually agreed between the parties to the
supply. The phrase ‘paid or payable’
implies that the consideration would include all sums which have accrued to the
supplier, irrespective of its actual payment.
As per Customs Interpretative notes to the Customs Valuation Rules, the
said phrase refers to total payment made by the buyer to or for the
benefit of the seller. Payment need not
always involve transfer of money and would include payments through letter of
credits, negotiable instruments, settlement of debt, etc.

b) Consideration – Nexus
Theory

The term consideration has been defined in
section 2(31) of the CGST/ SGST law to refer to any payment (monetary or
non-monetary) or monetary value of an act or forbearance, ‘in respect of’
or ‘in response to’ or ‘for inducement of ’ the supply of goods
or services. It refers to the
counter-promise received in response to the supply and it is immaterial whether
such counter-promise is in monetary or non-monetary form.

On a reading of the definition of
consideration, it can be inferred that a nexus between the payment and the
supply is essential to term it as consideration. The italicised phrases indicates this
requirement. In view of the clear
definition of ‘consideration’, it can be contended that the decision of the
Hon’ble Supreme Court in CCE, Mumbai vs. Fiat India Pvt. Ltd.
would no longer apply¹. Therefore, where prices are subsidised or
set below the cost (such as market penetration sales), it would still be termed
as sole consideration, unless the supplier has received any other direct
benefit for the said supply.

Activities
undertaken by the buyer on his own account are not to be considered as indirect
payments to the seller, even-though that might be regarded as resulting in a
benefit to the seller. As an example,
advertisement expenses incurred to advertise aerated products (finished goods)
manufactured by a third party bottler were held to be excludible from
assessable value of concentrates (which are raw materials) manufactured and
sold under an agreement with the bottlers (CCE, Mumbai v. Parle
International Ltd.²). These costs are incurred by the
concentrate manufacturer on his own account and not as an indirect payment to
the bottler of goods.

1 2012 (283) E.L.T. 161 (S.C.) – The Court had
interpreted the term ‘consideration’ to include market considerations/ factors
which influence price, such as reduction of price for market penetration.
Accordingly, it held that price was not the sole consideration as market
penetration was an additional consideration for deciding the price.

c) Price to be sole consideration

According to Black laws dictionary, ‘sole’
refers to single, individual, separate as opposite to joint. By sole, the legislature requires that price
should be the lone consideration for it to be accepted as the transaction
value. It should not be adversely affected by any supplementary or ancillary
transaction. As per Customs
Interpretative Notes, price would not be regarded as being the sole
consideration, where the seller establishes or places a restriction on the
buyer that sale of goods is conditional to purchase of other goods, and
therefore, reference to valuation rules may be warranted. Further, if money
consideration is affected by any other non-monetary payment or any act or
forbearance, then price is not
considered as a sole consideration and reference should be made to the
valuation rules.

Where price is not the sole consideration
(in case of a non-monetary component in the transaction) or where price is not
determinable, Rule 27 is to be invoked.
A sort of an hierarchial valuation structure has been provided where
subsequent clauses would apply only if the preceding rule fails to provide
reliable basis of valuation:

Once a comparable transaction is identified,
certain adjustments may be required to bring parity for ascertainment of value,
such as:

– Difference
in commercial level of supply

– Difference
in commercial terms (such as freight, insurance, warranty, etc.)

– Difference
in product characteristics (additional features, add-ons, etc.)

In the above flow chart, Open market value
(OMV) would refer to ‘full money value’ of the goods/services supplied at the
same time when the supply being valued is made.
Comparable value (CV) would refer to value of goods or services of like
kind and quality under similar commercial terms. Substantial resemblance to the
subject supply would suffice while determining comparable value. It may be
worth appreciating that the law has made a subtle difference between OMV and
the Comparable Value. This can be
tabulated as follows:

Parameter

Open Market Value

Comparable Value

Price of

Identical Goods

Similar goods

Degree of Comparability

Very High

Substantial resemblance

Time Factor

OMV at the same time of supply

No specification

Priority

Higher

Lower

To cite an example, if a Company is valuing
a related party transaction of say ‘Surf Excel’ washing powder, one cannot
directly adopt the market value of ‘Ariel or Tide’ since these are only
comparable products. The valuation
provisions require that an attempt should first be made to ascertain the market
value of Surf Excel itself, at the same time at which the supply under
consideration is being made. It is only
in the absence of such a market value, should the comparable values of either
Ariel or Tide be adopted (off-course with the justification that they share a
similar reputation). This is more or
less in line with the principle laid down in the Customs Valuation Rules where
a priority is given to identical goods (i.e. goods are same in all respects except
with minor differences not having a bearing on value) over similar goods.

d) Transaction to be between
unrelated parties

Price would be adopted as the transaction
value only if the supply is between unrelated parties. Explanation to the said section deems, inter-alia,
the following persons as related parties:

a. Persons are officers or
directors in one another’s business

b. Persons are legally
recognised partners – say joint venture partners

c. Employer and their
employees

d. One of the parties
directly or indirectly controls the other or they are controlled by a third
person or they together control a third person

e. Members of same family

f. Sole agent or
distributor or concessionaire would be deemed to be related.

The said definition has been borrowed from
the Customs Valuation rules. In cases
where the transaction is between related parties, Rule 28 requires the assesse
to follow the similar pattern as applicable in Rule 27 (above). By way of a second proviso, a concession is
provided by way of an assurance of acceptance of invoice value in cases where
the recipient of such supply is eligible for full input tax credit. It may be interesting to note that the
proviso does not explicitly state whether the full input credit should be
examined at the entity level or at the invoice level eg. A sells to its related
entity B certain goods. B is entitled to
full input tax credit at the invoice level (T4 bucket of Rule 42) but avails
proportionate credit at the entity level.
A view can be taken that the test of full input tax credit should be
examined at the invoice level and not at the assesse level. Simply put, if the recipient is able to justify
that the credit is exclusively for taxable supplies i.e. (for inputs or input
services), then valuation in related party transactions cannot be questioned.
This is purely on the rationale that any under-valuation would be revenue
neutral since the output tax at the supplier’s end would become the input tax
credit at the recipient’s end.

e) Principal-Agent Transaction
for supply of Goods (Rule 29)

Transaction of supply of goods, inter-se,
between the principal and agents have been deemed as supply transactions in
terms of entry 3 of Schedule I of the CGST/ SGST law. The valuation rules would be invoked in the
absence of a ‘price’ between the principal and agent. Rule 29 provides for an option of adopting
the OMV or 90% of the re-sale price of the goods by the supplier.

f) Common provisions for Rule
27, 28 & 29 (Rule 30 & 31)

The valuation rules also provide a last
resort (in cases where value is in indeterminable under the preceding rules)
under Rule 30. The said rule prescribes
that cost of ‘production/manufacture’ or cost of ‘acquisition’ or cost of
‘provision of services’ with 10% mark-up can be adopted as the transaction
value. The rules do not provide for a mechanism to determine such costs. In such cases, it may be advisable to apply
the generally accepted accounting/costing standards³. An indicative
matrix of costs which may be generally included or excluded has been provided
below:

Manufacturing

Trading

Services

Direct
RM Costs

Purchase
Costs

Direct
Salary Costs

Direct
Labour Costs

Inward
Logistics Costs

Other
direct overheads allocable to the service

Allocated
/ Identified Manufacturing Overhead Costs⁴

Product
loss within acceptable limit (such as evaporation, etc)

Project
specific costs

Know-how
/ royalty for production

Loss
of Goods in Storage

Outward
logistic Costs

Administration
Costs

Sales
& Marketing Costs

Financial
Costs

Brand/
Marketing Royalty

After
Sales Support Services

Rule 31, as residuary rule provides that
valuation should be made keeping in line with the valuation principles outlined
in the preceding rules. The purpose of Rule 31 is to ease the valuation
mechanism in the case of failure of the preceding rules to arrive at a
value. It must be appreciated that this
rule is not a ‘best judgement assessment’ as it would still require the person
invoking the valuation to establish failure of preceding methodologies and also
give a justifiable basis of valuation.
To cite an example, in case of renting of an immovable property between
related parties (say recipient is unable to avail entire credit), earlier
mechanisms may not in some circumstances be suitable to arrive at the
appropriate value. It may be possible
for an assessee or the tax officer to use the discounting model or the IRR
model and arrive at the fair lease rental for the subject immovable
property. Similarly, in case of supply
of intangibles, it is challenging to identify the OMV/CV or even the cost of
such intangible. The intangibles may have been developed over a fairly long
period of time (including several failures) which would not be clearly
ascertainable. In such cases, a
discounted free cash flow method from an independent valuer may form a suitable
basis under this Rule. ____________________________________________________________

3 Cost Accounting Standards Issued by Cost Accounting Standards Board (CASB) may form a reliable basis

4 Including cost of consumables

C) Table
comparing the erstwhile valuation schemes

A comparative tabulation of the broad
features of erstwhile law would assist in appreciating the essence of the
valuation scheme:

Parameter	Sales Tax/VAT	Excise Law	Service Tax Law	Customs Law
Taxable Event	Sale transactions	Manufacture of Goods	Service Transactions	Importation / exportation of Goods
Valuation Principle	Price	Duty on goods with reference to its value	Money/ non-monetary consideration	Duty on goods with reference to its value
Base Value	Contracted Price	Transaction value	Gross amount charged	Transaction Value
Valuation Rules	Absent, except to the extent of removal of non-taxable portion in case of composite supplies	Specific scenarios	Restricted cases	Elaborate and applicable to all cases
Additions to base value	NIL	Additional amount in connection with sale (such as advertisement, publicity, etc.)	NIL	Freight, Insurance, Handling, etc. and royalty, etc. in connection with sale of imported of goods
Specific Deductions	Trade Discounts, Freight charged separately	Trade Discounts, Post removal recoveries	Deficiency in services	Post importation recoveries
Reference to time and place for valuation	NIL, being a transaction tax	Valuation at the time and place of removal	NIL, being a transaction tax	Valuation at the time and place of importation / exportation
Scenarios for reference to Valuation rules	NIL	Related party transaction, price not being sole consideration, free of cost (FOC) supplies, absence of sale/ transaction value, captive consumption, difference place of sale and place of removal	Consideration either partly or wholly in non-monetary form, non-taxable component in gross amount charged, FOC supplies, notified transactions, specific inclusions or exclusions	Similar to excise with additional adjustments for post importation payments (for royalty, technical services, etc.) , restrictions placed by supplier, accruals to importer from sale proceeds, etc.
Valuation methodology	NA	Cost accounting rules prescribed	Value of similar services or Cost of provision of service	Sequential mechanism of arriving at value based on price of identical or similar goods or either through deductive or computed price method
Post taxable event adjustment	Post-sale expenses are not relevant	Post removal accruals, those having a nexus with the transaction of removal/ sale includible	No specific provision but generally included as part of gross amount charged	Post importation flow back of consideration includible in specific scenarios
Cum-tax benefit	NIL unless specifically included	Available	Available	Not Applicable

Parameter

Sales Tax/VAT

Excise Law

Service Tax Law

Customs Law

Taxable Event

Sale transactions

Manufacture of Goods

Service Transactions

Importation / exportation of Goods

Valuation Principle

Price

Duty on goods with reference to its value

Money/ non-monetary consideration

Duty on goods with reference to its value

Base Value

Contracted Price

Transaction value

Gross amount charged

Transaction Value

Valuation Rules

Absent, except to the extent of removal of non-taxable
portion in case of composite supplies

Specific scenarios

Restricted cases

Elaborate and applicable to all cases

Additions to base value

NIL

Additional amount in connection with sale (such as
advertisement, publicity, etc.)

NIL

Freight, Insurance, Handling, etc. and royalty, etc.
in connection with sale of imported of goods

Specific Deductions

Trade Discounts, Freight charged separately

Trade Discounts, Post removal recoveries

Deficiency in services

Post importation recoveries

Reference to time and place for valuation

NIL, being a transaction tax

Valuation at the time and place of removal

NIL, being a transaction tax

Valuation at the time and place of importation / exportation

Scenarios for reference to Valuation rules

NIL

Related party transaction, price not being sole
consideration, free of cost (FOC) supplies, absence of sale/ transaction
value, captive consumption, difference place of sale and place of removal

Consideration either partly or wholly in non-monetary form,
non-taxable component in gross amount charged, FOC supplies, notified
transactions, specific inclusions or exclusions

Similar to excise with additional adjustments for post
importation payments (for royalty, technical
services, etc.) , restrictions placed by supplier, accruals to
importer from sale proceeds, etc.

Valuation methodology

Cost accounting rules prescribed

Value of similar services or Cost of provision of service

Sequential mechanism
of arriving at value based on price of identical or similar goods or either
through deductive or computed price method

Post taxable event adjustment

Post-sale expenses are not relevant

Post removal accruals, those having a nexus with the
transaction of removal/ sale includible

No specific provision but generally included as part of gross
amount charged

Post importation flow back of consideration includible in
specific scenarios

Cum-tax benefit

NIL unless specifically included

Available

Not Applicable

As evident from the table above, the scheme
of valuation under the GST law is a concoction of the valuation scheme under
the erstwhile laws. The settled principles in earlier laws may not have a
direct application to the GST law, yet a possible conclusion/inference can be
drawn from those decisions. Though there is an excise/customs hue to the
current valuation scheme, the term Supply is more akin to the term
sale/service, both being based on a contractual arrangement.

Therefore, the basic tenet of valuation
under GST should ideally follow the sales tax law principle rather than
excise/customs valuation principles. It may be worthwhile to study the
important principles under the earlier law in this context and appreciate the
difference in approach under the said laws.

Sales Tax Law

In the famous
case of State of Rajasthan vs. Rajasthan Chemists Association⁵,
the Hon’ble Supreme Court struck down the attempt of the Legislature to tax a
sale transaction on the basis of the MRP of the product. But importantly, it
stated that unlike in Excise where the duty is on the goods itself, the levy of
sales tax is on the activity of sale rather than the goods itself. Therefore,
the attempt of the Legislature to adopt a measure of tax on the value of goods
at a point distinct from its taxable event is unconstitutional. The legislature
cannot attempt to tax a ‘likely price’ in a contract of sale since what can
only be taxed is a completed sale transaction and not an agreement of
sale.

5 (2006)
147 STC 542 (SC)

Service Tax Law

In the context of service tax, the Delhi
High Court in Intercontinental Consultants and Technocrats Pvt. Ltd. vs. UOI
(2013) 29 STR 9 (Del) stated that the valuation should be in consonance
with the charging provision under the Finance Act, 1994. Since the charging
section levied a tax on service, nothing else apart from the consideration for
the service can be included in arriving at the value of a service. On this
basis, the Court struck down a valuation rule which exceeded the scope of the
charging section of the Service tax law.
In a slightly different context, the Delhi High Court in G.D.
Builders vs. Union of India 2013 (32) S.T.R. 673 (Del.) also stated that
the value of a service should be restricted only to the service component in
the transaction, implying that the valuation scheme is limited by the scope of
the charging provisions.

Excise Law

The excise law has had significant amount of
litigation over the valuation of goods manufactured and removed from the
factory premises of a manufacturer. The excise law has progressively evolved
from a wholesale price approach to a normal price approach and then to a
transaction value approach w.e.f 01. 07. 2000. Though the Central Excise scheme
focused on determining duty on manufacture of goods, the valuation provisions
were linked to the price paid or payable (i.e. including post manufacturing
costs and profits) with adjustments where price was not a reliable basis of
valuation. On a challenge over inclusion of post manufacturing costs/profits,
the Hon’ble Supreme Court in Union of India vs. Bombay Tyres International
case (1983) ELT 1896 (SC), made a clear distinction between the subject
matter of tax and the measure of tax and held that the Legislature had the
flexibility to fix the measure of tax different from the subject matter of
taxation so long as the character of impost is not lost. Courts have concluded that while the levy of
excise duty was on the manufacture or production of goods, the stage of
collection need not in point of time synchronise with the completion of the
manufacturing process; the levy had the status of a constitutional concept, the
point of collection was located where the statute declared it would be. This issue is again under consideration
before a larger Bench of the Hon’ble Supreme Court in the case of CCE,
Indore vs. Grasim Industries⁶ in view of a difference in opinion by the
coordinate three judge bench in Commissioner of Central Excise vs. Acer Ltd.⁶. Be that as it may, the basis of levy of duty
under excise law is clearly distinct from that of the GST law and therefore,
excise law principles should not be directly applied while interpreting the
valuation scheme under the GST law.

GST Law

In GST, the term ‘supply’ is a contractual
term. It comes into existence only under
an obligation of a contract. The list of
transactions cited as examples in section 7 (sale, exchange, barter, lease,
license, etc.) arise out of contractual obligations. In line with the
sales tax law, it is very well possible to contend that the taxable event of
supply should also be understood in the context of the obligations agreed
between parties under a contract.
Consequently, valuation should also be undertaken with due consideration
to the obligations between the contracting parties for the supply. Therefore,
where there was no supply intended between the contracting parties, say FOC
materials, its value cannot be included in the transaction value. This
principle may have implications in various scenarios which have been discussed
later.

Valuation principle – Conceptual aspects

D) Key
principles emerging from a reading of valuation provisions

Conceptual aspects

The following conceptual points may be
applied while addressing a point on valuation in GST:

i. Taxable value is a
function of the contracted price.
Intrinsic value/fair value/market value of goods or services are not
relevant except in specific circumstances.

______________________________________________________________________

6 in Civil Appeal No. 3159 of 2004 & (2004) 8 SCC 173

ii. Price implies monetary
consideration agreed for the subject supply.

iii. Valuation of a supply
would succeed its categorisation – into ‘composite or mixed supply’
basket.

iv. Valuation provisions are an
amalgam of erstwhile laws including the Customs law.

v. Receipt of
price/consideration could be from any third party and not necessarily by the
recipient.

vi. Each supply transaction is
distinct and independent from the previous transactions and price of one
transaction cannot generally have a bearing on another transaction.

vii. Transaction value is not
with reference to any particular time or place – a distinguishing feature in
comparison to the erstwhile Excise law or Customs Law.

viii. Every ‘gross amount
charged’ (like service tax) is not the transaction value – there should be some
nexus between the amount charged and supply of goods/services.

Other Procedural aspects

i. Valuation Rules would
trigger only under specific scenarios – in all other cases, price should be
accepted as transaction value – Onus is on the revenue to establish that the
pre-requisites of invoking the valuation rules have been satisfied. Valuation guidelines have to be followed
necessarily and best judgement assessments are not permissible.

ii. Valuation rules attempt to
identify undervaluation of transaction. While valuation rules do not
specifically prohibit questioning over-valuation, the consequential legal
implications of over-valuation in terms of adjudication/recovery etc. do
not capture cases, such as excess payment of output taxes, etc.

iii. Any upward or downward
revision in price or value should be undertaken by issuance of a debit or a
credit note by the supplier of the goods or services only. Downward revision in
price is different from non-recovery of consideration (such as bad debts). Bad debts are not deductible from taxable or
already taxed value, though non recovery on account of there being no supply of
goods or services or on account of deficient supply are deductible by way of
credit notes.

iv. Valuation rules are not
mutually exclusive. Eg. in case of second hand goods between related parties
operating under the margin scheme, valuation officer can invoke the valuation
rules to recalculate the sale price for arriving at the appropriate gross
margin.

E) Specific
issues in Valuation

Ex-works/
FOB/CIF basis of pricing and delivery

The erstwhile sales tax and excise law were
flooded with disputes over valuation especially in the context of inclusion of
freight, insurance and other costs in the taxable value. The pricing and terms
of delivery in the transaction were critical in deciding the issue on
valuation. Under sales tax law, ex-works
sales indicated exclusion of post-sale freight and insurance charges. Under the
excise law, ex-works delivery terms indicated exclusion of all costs recovered
after removal of goods from the factory gate.

In the context of GST, the price agreed
between parties is considered as the taxable value of the supply. Sub clause
(c) to section 15(2) specifically includes an incidental expense charged by the
supplier for anything done before delivery of goods to the customer. The
law has clearly shifted the goal post from the point of supply to the point of
delivery of goods. All recoveries from the customer until the supply/sale of
goods would be includible in price agreed for the goods. Additional recoveries
post sale/ supply but until delivery of goods would be includible in the
taxable value u/s. 15(2), even if the ownership or price agreed between the
parties is on ex-works or FOB basis. On application of section 15(1) and 15(2),
all pre-delivery costs charged from the customer would be includible in the
taxable value of supply.

There are cases where the sale and delivery
by the manufacturer is ex-works/FOB, but the supplier arranges for the
transportation in pursuance of the buyer’s instructions. The supplier incurs a
‘freight advance’ and recovers the same either in the invoice our buy way of an
additional debit note. In such cases, the supplier has undertaken post-delivery
activities as a ‘pure agent’ of the buyer and hence should not form part of the
taxable value either u/s. 15(1) or 15(2) of the GST law. An alternate
contention can be placed by invoking the concept of composite supply, ie, the
arrangement of transport by the supplier is naturally bundled with the supply
of goods and hence, part of transaction value. Disputes on this front are bound
to continue unless the supplier takes a conservative view in cases where the
recipient is eligible for full input tax credit.

Discount
Policies

Like the issue over freight, the sales tax
law and excise law experience litigation over deduction of discounts. Trade discount granted at the time of sale or
at the time of removal of goods were generally deductible under the sales
tax/excise law. The issue arose especially where discounts were granted after
sale or removal of goods.

Under the excise law, trade discounts given
at the time of removal of goods were considered deductible, while any post
removal discounts were held to be non-deductible. In Union of India & Ors vs. Bombay
Tyres International (P) Ltd.⁷ and subsequently in the case of Purolator
India Ltd. vs. CCE, Delhi⁷, it was held that discounts stipulated
in the agreement of sale but provided subsequently would be eligible for
deduction from the price “at the time of removal”.

In a recent decision of the Hon’ble Supreme
court in Southern Motors vs. State of Karnataka⁸, the
Supreme Court read down a rule contained in the VAT law which required
discounts to be disclosed in the invoice for it to be eligible to claim a
deduction from the total turnover of a dealer. The Court relying upon the
decision of the Supreme Court in IFB Industries Ltd. vs. State Of Kerala and
Deputy Commissioner of Sales Tax (Law) vs. M/s. Advani Orlikon (P) Ltd.⁹ observed as follows:

“21. This Court
referred to the definition of “sale price” in Section 2(h) of the Act and noted
that it was defined to be the amount payable to a dealer as a consideration for
the sale of any goods, less any sum allowed as cash discount, according to the
practice normally prevailing in the trade. While observing that cash discount
conceptually was distinctly different from a trade discount which was a
deduction from the catalogue price of goods allowable by whole-sellers to
retailers engaged in the trade, it was exposited that under the Central Sales
Tax Act, the sale price which enters into the computation of the turnover is
the consideration for which the goods are sold by the assessee. It was held
that in a case where trade discount was allowed on the catalogue price, the
sale price would be the amount determined after deducting the trade discount.
It was ruled that it was immaterial that the definition of “sale price” under
Section 2(h) of the Act did not expressly provide for the deduction of trade
discount from the sale price. It also held a view that having regard to the
nature of a trade discount, there is only one sale price between the dealer and
the retailer and that is the price payable by the retailer calculated as the
difference between the catalogue price and the trade discount. Significantly it
was propounded that, in such a situation, there was only one contract between
the parties that is the contract that the goods would be sold by the dealer to
the retailer at the aforesaid sale price and that there was no question of two
successive agreements between the parties, one providing for the sale of the
goods at the catalogue price and the other providing for an allowance by way of
trade discount. While recognizing that the sale price remained the stipulated
price in the contract between the parties, this Court concluded that the sale
price which enters into the computation of the assessee’s turnover for the
purpose of assessment under the Sales Tax Act would be determined after
deducting the trade discount from the catalogue price.”

7 1984
(17) E.L.T. 329 (S.C.) & 2015 (323) E.L.T. 227 (S.C.)

8 [2017]
98 VST 207 (SC)

9
(1980) 1 SCC 360

The Court also expounded the meaning of
trade discount as follows:

“28. A trade
discount conceptually is a pre-sale concurrence, the quantification whereof
depends on many many factors in commerce regulating the scale of sale/purchase
depending, amongst others on goodwill, quality, marketable skills, discounts,
etc. contributing to the ultimate performance to qualify for such discounts.
Such trade discounts, to reiterate, have already been recognized by this Court
with the emphatic rider that the same ought not to be disallowed only as they
are not payable at the time of each invoice or deducted from the invoice
price.”

The GST law seems to have simplified the law
to the extent that any pre-supply discount is considered as deductible provided
it is recorded in the invoice issued to the customer. The law also provides an
additional deduction in respect of post supply discounts provided two
conditions are satisfied – (a) the terms of discount is agreed before the
supply and (b) corresponding input tax credit has been reversed by the
recipient of supply. As regards the first condition, the law requires that the
principles, eligibility or formula of discount is agreed before the supply
occurs. The quantification of the discount could take place any time subsequent
to the supply by way of credit notes (of-course within the permissible time
limit). The objective is to deny benefit of discounts which are an
afterthought. The second condition
requires that corresponding input tax credit on such discounts is reduced by
the customer.

Price
Support vs Discounts

Section 15(2)(e) provides that price
subsidies (i.e. directly linked to the price of a product), except those
provided by the Central/State Governments are includible in the transaction
value. ‘Subsidy’ refers to paying a part of the cost. Subsidy could be received from any party
interested in the transaction and is not restricted to the manufacturer of
goods. Commercial trade adopts innovative formats and nomenclatures in order to
subsidise the price of their products and promote their sale. One such format
of subsidy is providing a ‘price support’ to the person stocking the goods in
order to liquidate the stocks for commercial reasons. The price support could
be in the form of monetary reimbursements by issuance of credit notes in favour
of the stockist or also in non-monetary form but it ultimately reduces the
original sale price for the stockist. In certain states like Tamil Nadu/
Karnataka, the VAT law required reversal of input tax credit where the sale
price was less than the purchase price but such a provision is absent in the
GST law. Is this price support a subsidy
or a discount or neither of these? The
possible differentiating factors can be tabulated below:

Discount	Price Subsidy	Price Support/ Protection
*Deductible from turnover in hands of supplier*	*Added to the value in the hands of recipient*	*Depending on whether it is a discount or price subsidy*
Contractually agreed at the time of original supply and provided subject to fulfillment of certain conditions	Usually provided by someone other than the seller of goods	Provided subsequent to the transaction of supply for liquidating stocks at lower prices
By the seller of the goods but not generally linked to the subsequent sale price	Pre-agreed & specifically linked to a subsequent sale by the recipient	Discretionary, ie companies are not obliged to provide it contractually though it is in their own interest to support their distribution channels
		Could be provided by the seller, manufacturer or even an online platform

Discount

Price Subsidy

Price Support/ Protection

Deductible from turnover in hands of supplier

Added to the value in the hands of recipient

Depending on whether it is a discount or price subsidy

Contractually agreed at the time of original supply and
provided subject to fulfillment of certain conditions

Usually provided by someone other than the seller of goods

Provided subsequent to the transaction of supply for
liquidating stocks at lower prices

By the seller of the goods but not generally linked to the
subsequent sale price

Pre-agreed & specifically linked to a subsequent sale by
the recipient

Discretionary, ie companies are not obliged to provide it
contractually though it is in their own interest to support their
distribution channels

Could be provided by the seller, manufacturer or even an
online platform

On the above basis, the treatment of price
support may be adopted as follows:

a. Where price support is
provided by the supplier (contracting parties to the supply), it should be
treated as a trade discount and treated in accordance with section 15(3).

b. Where price support is
provided by third parties (such as an online platform), it should be treated as
a subsidy and treated as per section 15(2)(e) and added to the sale value.

Moulds/
Dies/ Tools, etc.

Under the excise law, products were
manufactured from moulds or dies supplied by the buyer of such goods. Generally, the intellectual property of these
moulds and dies continued to be with the buyer of the said goods. These moulds were usually sent on free of
cost (FOC) and returnable basis.

Resultantly, the conditions of transaction
value were not satisfied since the price of the manufactured goods was not the
sole consideration – in view of section 4(1)(a) read with Rule 6 of the Excise
Valuation Rules, such FOC items were termed as additional consideration. The
said rule contained an explanation requiring the manufacturer to amortise or
apportion the value of such moulds, etc. as additional consideration to
the transaction.

The GST law imbibes the concept of ‘price
being sole consideration’ but does not contain corresponding rules like Rule 6
of Excise Valuation rules. Since this
rule was made in order to identify and attribute a value towards additional
consideration, a question arises regarding an attribution similar to excise. There are arguments both for and against this
which have been tabulated below:

Attribution required because:	Attribution not required because:
FOC could certainly result in undervaluation – Price of the product does not contain the cost of the FOC item and therefore price is not sole consideration in such cases	GST being a contract/ transaction tax (similar to sales tax/ service tax), unlike Excise, cannot extend beyond the contracted price and not a notional price
Sole consideration-Similar terms have been used under the excise law where such an attribution was an accepted legal principle	There is no corresponding rule which requires such addition like Rule 6. The law is silent on the mechanism, etc. which indicates that it does not intend to tax such items
	Sales tax law did not contain any such rule for valuation – The service tax law contained specific rules for inclusion of FOC items unlike in GST

Attribution required because:

Attribution not required because:

FOC could certainly result in undervaluation – Price of the
product does not contain the cost of the FOC item and therefore price is not
sole consideration in such cases

GST being a contract/ transaction tax (similar to sales tax/
service tax), unlike Excise, cannot extend beyond the contracted price and
not a notional price

Sole consideration-Similar terms have been used under the
excise law where such an attribution was an accepted legal principle

There is no corresponding rule which requires such addition
like Rule 6. The law is silent on the
mechanism, etc. which indicates that it does not intend to tax such
items

Sales tax law did not contain any such rule for valuation –
The service tax law contained specific rules for inclusion of FOC items
unlike in GST

In the view of
the author, GST being a transaction tax rather than a duty on goods, the case
for a non attribution seems to be a stronger proposition. Reliance can be
placed on the decision of the Hon’ble Supreme Court in Moriroku UT India
(P) Ltd. vs. State of UP 2008 (224) E.L.T. 365 (S.C.), which was
rendered in the context of the sales tax law wherein the court stated that
toolings and moulds supplied by the customer to the manufacturer/seller cannot
be amortised as in the case of Excise Duty under the Central Excise Act,
1944. A CBEC circular dt. 26^th
October, 2017 has been issued in the context of valuation of supply of paraffin
by way of extraction from Superior Kerosene Oil (SKO). The circular clarifies
that the value of supply is the quantity of paraffin retained from extraction
of SKO rather than the entire quantity of SKO sent by refinery for extraction.
This in a way resounds that valuation of supply is with reference to the
charging section and limited to price paid or payable in a supply transaction.

The subsequent article on valuation
would address specific instances where valuation under GST would pose certain
challenges and possible resolutions to such issues by taking hints from the
earlier indirect tax laws.

shailesh.kwebmaker

Sale In Course Of Import Vis-À-Vis Works Contract

Introduction

Under VAT era, one of the
important Constitutional exemptions was for sale in course of import. A sale
transaction taking place in course of import could not be taxed as per Article
286 of the Constitution of India. The transaction in course of import was
defined in section 5(2) of CST Act, 1956, which reads as under:

““S.5. When is a sale or
purchase of goods said to take place in the course of import or export –

(1) —-

(2) A sale or purchase of
goods shall be deemed to take place in the course of the import of the goods
into the territory of India only if the sale or purchase either occasions such
import or is effected by a transfer of documents of title to the goods before
the goods have crossed the customs frontiers of India……..”

It can be seen that there
are two limbs to the above section. First, sale occasioning import, and second,
sale by transfer of documents of title to goods before goods Crosses Customs
Frontiers of India. Many a time dispute arises about first limb, as to what is
its scope. There are a number of pronouncements. However, the recent one
decided by Hon. M.S.T. Tribunal in case of Larsen and Toubro Ltd. – Scomi
Engineering, BHD (VAT App.No.353 of 2015 dated 30.10.2017) can be analysed
to see the scope of said exemption.

Facts of the case

Hon. Tribunal has noted
facts as under:

“The factual background of
this appeal can be stated as below – Appellant, M/s.Larsen and Toubro Ltd. –
Scomi Engineering, Berhad (“LTSEB” for the sake of brevity), Consortium is a
registered dealer under the Maharashtra Value Added Tax Act, 2002 (“MVAT Act”
for short) and under the Central Sales Tax Act, 1956 (“CST Act” for short)
bearing Registration No.27870728473V and 27870728473C respectively. The Mumbai
Metropolitan Regional Development Authority invited pre-qualification
applications from entities interested for the design, development,
construction, commissioning, operation and maintenance of Monorail System on
turnkey basis in Mumbai Metropolitan Region. Since the project involved civil
work as well as manufacture of goods of rolling stock, designing etc.
and since Larsen and Toubro Ltd. is having expertise in civil work and Scomy
Engineering, Berhad (based in Malaysia) has expertise in manufacture of goods,
designing, installing etc., both of them jointly submitted an
application for qualifying to bid in response to the said request of MMRDA.
Thereafter, MMRDA issued a request for proposal inviting bids for the design,
development, construction and maintenance of Monorail System. Accordingly, the
consortium of Larsen and Toubro Ltd. and SEB submitted its response and
submitted a proposal for manufacture and import amongst others of rolling stock
from Malaysia. The joint bid was accepted by MMRDA by a letter of acceptance
dated 07/11/2008. Accordingly, a contract was executed between MMRDA on one
part and consortium of Larsen and Toubro Ltd. and SEB on the other part on
09/01/2009. By this contract, MMRDA awarded to LTSEB a contract for planning,
designing, development, construction, manufacture, supply of Monorail System
from Sant Gadge Maharaj Chowk to Wadala and from Wadala to Chembur Station.
Larsen and Toubro and SEB thereafter divided their respective scope of work in
accordance with the bid submitted by them and a contract was executed between
two members of the consortium LTSE and SEB on 29/03/2010. In this contract, the
portion of the work related to SEB was recorded for the design and supply of
certain goods i.e. rolling stock, signaling equipment, switch equipment and
deco equipment from outside India. These goods were manufactured by SEB in
Malaysia in terms of the bid submitted by MMRDA. The appellant LTSE – SEB had
filed an application for determination of disputed question to the Commissioner
of Sales Tax. By this application, the following question was referred to the
Commissioner for determination – “Whether the rolling stocks imported pursuant
to the contract with MMRDA and supplied in the course of execution of Monorail
Project constitutes a transaction in the course of import u/s. 5(2) of the CST
Act, 1956 and not liable to tax u/s.8(1) of the MVAT Act, 2002?”

3. After giving elaborate
hearing to both sides, the Commissioner of Sales Tax answered this question in
the negative holding that the import of rolling stocks and supplied to MMRDA in
the course of execution of Monorail Project does not constitute a transaction
in the course of import u/s. 5(2) of the CST Act and it is a local sale liable
to tax under the provisions of the MVAT Act. Being aggrieved by the order of
determination of disputed question, the appellant consortiums have approached
the Tribunal in appeal.”

Submission of appellant

The main submission on
behalf of appellant was that the transaction of import was integrated with
local works contract transaction.

For throwing light on same
various factors of transaction were explained like, specifications for
manufacture, imported goods not useable elsewhere and meant only for given
contract with MMRDA and other clauses in contract about inspection/testing etc.
were pointed out.

Based on above facts it was
submitted that either it is one direct import transaction between appellant and
MMRDA or even if they are considered to be two sales one between Scomy
Engineering, Berhad (based in Malaysia) and Consortium and other between
consortium and MMRDA, still the second transaction is exempt as it is the sale
which has occasioned import and hence exempt. Reliance was place on Hon.
Supreme Court judgment in case of K. G. Khosala (17 STC 473)(SC) and ABB Ltd.
(55 VST 1)(Delhi).

Submission of Department

On behalf of Sales Tax
Department, it was argued that no privity of contract has been made out. There
are two sales and the local sale cannot fall under section 5(2). Reliance was
placed in case of K. Gopinathan Nair and others vs. State of Kerala (97
STC 189)(SC). The manufacturing as per specification was disputed on
ground that only requirements were stated by MMRDA and specification are given
subsequently, which cannot satisfy condition of inextricable link. Judgement in
ABB Ltd. was tried to be distinguished on above facts.

Tribunal’s Observations

The Tribunal thereafter
analysed the agreements. The Tribunal found that the specifications are
mentioned in contract with manufacturing place at Malaysia. About the nature of
consortium existence and inextricable link, the Tribunal observed as under:

“20. The issue as to
whether a nexus appears in the contract between MMRDA and movement of goods
from Scomi Engineering, Malaysia. One has to read the terms of the contract as
a whole. It has been argued before us by the learned Senior Counsel Shri.
Sridharan that the Larsen and Toubro and Scomi Engineering formed a consortium
which is neither partnership firm nor a company and nor an association of
persons. It is an unincorporated consortium. It can be seen that unincorporated
consortium cannot be a legal entity in the eyes of law. Scomi Engineering,
which is one of the members of the consortium is itself a manufacturer and
supplier of rolling stock from Malaysia. This suggests that though consortium
members are executing the contract jointly, they have separate existence. If
the contract is perused, on page 140 of the compilation containing contract
agreement, it is mentioned in para A.1.1 that Larsen and Toubro Ltd. is India’s
largest engineering and construction conglomerate with additional interest in
electrical, electronics, etc. Whereas in the same para, it is also
mentioned that Scomi Engineering, Berhad (SEB) is a public limited company
listed on the Kuala lampur Stock Exchange. His business focus is in the energy
and logistic engineering which comprises OCTG machine shops and transportation engineering
such as monorail, buses and special purpose vehicle. It is further mentioned
that wholly owned subsidiary Scomi Rail, Berhad is renowned for its monorail
system. These recitals in the contract show that Larsen and Toubro and Scomi
though formed a consortium, they were specialised in two separate fields and
each had shared execution of that part of work in which each was specialised.
On page 70 of the contract, work share apportionment between consortium members
is demarcated. It shows that 30% of the project value of rolling stock will be
shared exclusively by Scomi Engineering. Similarly, 8% of the project value of
E & M work will be shared exclusively by Larsen and Toubro. It shows that
rolling stock is the responsibility of SEB whereas automatic fair collection
system is the responsibility of Larsen and Toubro. Thus, the contract shows
that the consortium members will operate in two separate fields, one with
engineering work and the other with manufacturing, designing and maintenance of
rolling stock. In the present case, Scomi Engineering, Berhad, Malaysia which
supplied rolling stocks is one of the members of the consortium and therefore
the question naturally arises as to whether the person can sell goods to
himself. Moreover, the parties are covered by the contract between MMRDA and
consortium and therefore we have to look into the terms and conditions of the
said contract to examine as to whether the movement of goods from Malaysia was
in pursuance of the contract between consortium and MMRDA. The terms clearly
show that the contract was executed by MMRDA with full understanding that Scomi
Engineering, Malaysia is one of the members of the consortium which is expert
and skilled in designing and manufacturing of rolling stock and the rolling stock
will be manufactured in Malaysia and will be supplied to MMRDA. Therefore,
there is merit in the argument of Shri. S. Sridharan that merely because
rolling stocks are first sent to Nhava Sheva port and they are delivered to
consortium and then consortium delivered the same to MMRDA, inextricable link
is not broken down.”

The Tribunal observed about
various judgments cited before it. The Tribunal also referred to various other
documents filed before it. About application of judgment cited by Sales Tax Department,
the Tribunal observed as under:

“38. Since Shri Sonpal has argued that the
principles laid down by the Hon’ble Supreme Court in the case of K. Gopinathan
Nair are not fulfilled in the present case, we have perused the said authority.
The main principles laid down in that case are that a sale or purchase can be
treated to be in the course of import if there is a direct privity of contract
between the Indian importer and the foreign exporter and the intermediary
through which such import is effected merely acts as an agent or a contractor
for and on behalf of the Indian importer. Thus, it is also laid down that there
must be either a single sale which itself causes the import or is in the
progress or process of import or though there may appear to be two sale
transactions they are so integrally interconnected that they almost resemble
one transaction. If these tests are considered and the present contract is
seen, it must be seen from the documents filed by appellant that though there
was no express condition in the covenant that rolling stock should be imported
from Malaysia, such understanding between the parties can be inferred since
Scomi Engineering, BHD is one of the Member of the consortium and in the
document of contract, it is mentioned that Scomi Engineering has all the
manufacturing unit in Malaysia. Section 5(2) of the CST Act requires that
movement of the goods from foreign country should be in pursuance of the
contract. From the terms of the contract, it appears that the intended movement
of goods from Malaysia was envisaged by terms of the contract and it was within
the contemplation of the parties and therefore it can be reasonably presumed
that such movement was to fulfill the terms of the contract. When it is so, it
has to be said that the goods moved from Malaysia as a part of single
transaction. Even if for the sake of argument, it is held that there are two
transactions of sale between MMRDA and consortium and the other between Scomi
Engineering, BHD Malaysia and consortium, then also the two transactions are so
connected integrally that they are inseparable. Therefore, we are not inclined
to accept the argument of Shri. Sonpal that conditions laid down in K.
Gopinathan Nair’s case are not satisfied in this case.”

Observing as above, the
Tribunal concurred with appellant that the sale is in course of import covered
by section 5(2) of CST Act.

Conclusion

The nature of sale in
course of import, more particularly when the facts are complex and there is no
express condition of import, is very delicate and required to be decided based
on judgments. The above judgment will be one more important judgment to throw
light on the subject and provide necessary guidance to trade and authorities. _

shailesh.kwebmaker

SEZs Under GST Regime

Introduction

A business dealing with foreign customers,
whether or not exclusively, is required to compete with various foreign
competitors who may be operating in more favourable environment in their own
countries. In order to boost such businesses, who intend to pre-dominantly
engage in export activities, India had adopted a model of Special Economic Zone
(SEZ) to provide level playing field to exporters located in SEZs. Being a unit
located in SEZ or being a developer has its’ own advantages with exemptions
under both direct (income tax) as well as indirect tax laws (Service tax, Sales
tax, Central Excise, etc. upto 30^th June 2017 and Goods &
Service Tax (GST) w.e.f 1^stJuly 2017). This article primarily
analyses the impact of SEZ operations under the GST regime.

Background to SEZ Legislation

The law relating to SEZ is governed by the provisions
of the Special Economic Zones Act, 2005 and various rules, notifications and
circulars issued thereunder. The person who is developing the SEZ is known as
SEZ developer and businesses operating from within the SEZ are known as SEZ
Units. There are elaborate conditions and processes which need to be followed
by both, SEZ developer as well as SEZ unit for getting approvals to set-up/
operate from a SEZ / as an SEZ unit.

On the indirect tax background, two
important provisions of the law are Sections 51 & 52. Section 51 of the Act
provides that the provisions of the SEZ Act shall have an overriding effect
over inconsistent provisions contained under other laws while Section 52 of the
Act provides that a SEZ is deemed to be a territory outside the customs
territory of India for the purposes of undertaking the authorized operations.

Brief Overview of the Provisions specifically
relating to SEZ under the GST Law

– Section 7 of the Integrated Goods &
Service Tax Act, 2017 (IGST Act) deals with the provision relating to
determination of nature of supply, i.e., whether a supply is to be treated as
interstate or intrastate. Clause (b) of sub-section (5) thereof provides that
supply of goods or services or both “to or by” a Special Economic Zone
developer or a Unit shall be deemed to be a supply in the course of
inter-state trade or commerce. This specific provision results in a uniform
treatment to supplies to SEZ / by SEZ Units across the country.

– Having declared all supplies to/ by an SEZ
Unit as interstate supplies, Section 16 (1) of the IGST Act provides that a
supply of goods / services or both, to a SEZ unit or developer shall be treated
as a “zero-rated supply”. It may be important to note that only supplies
to SEZ Unit/developers are treated as zero rated supplies and not supplies by
SEZ Unit/developers.

– Further, Section 16(3) provides that a
person making a zero-rated supply shall be eligible to claim refund under two
options, namely:

• Outright exemption by
applying for a Letter of Undertaking or Bond and subsequently claim refund of
unutilised input tax credit in terms of provisions of section 54 of the Central
Goods & Service Tax Act, 2017 (CGST Act).

• Rebate option, wherein the
supplier shall discharge the liability on the value of zero rated supply by
utilising balance from electronic credit ledger / cash ledger and claiming
refund thereof of the entire amount of tax paid.

– Rule 89 of the CGST Rules, 2017 lays down
various conditions for claiming of refund by suppliers making supply to a SEZ
developer / unit (under either of the above options). Second proviso to Rule 89
(1) requires the supplier to file refund application only after:

• In case of supply of
goods, the goods have been admitted in full in the SEZ for the “authorised
operations” as endorsed by the specified officer of the Zone.

• In case of supply of
services, obtaining evidence regarding the receipt of services for authorised
operations as endorsed by the specified officer of the Zone.

– Proviso to section 25 (2) of the CGST Act
provides that a person having multiple business verticals in a State / Union
Territory may apply for separate registration for each business vertical.
However, for SEZs, rule 8 of the CGST Rules, 2017 provides that a unit of a
person located in an SEZ shall be deemed to be a different vertical from the
units located in DTA and mandates the need for separate registration.

Some Issues

1. Whether Place of Supply is
relevant in case of supplies made to SEZ unit / developer?

– The charging section under the IGST Act
provides that the tax shall be levied on all inter-state supplies of goods or
services or both. Similarly, the charging section under the Central / State GST
Act provides for levy of tax on all intra-state supplies of goods or services or
both.

– What shall be treated to be inter-state or
intra-state supply is dealt with under sections 7 & 8 of the IGST Act,
2017. The general crux of the said section is that if the location of supplier
and place of supply are in same state, the transaction has to be treated as
intra-state, else it will be treated as inter-state supply. How to determine
the place of supply is also covered under Chapter V of the IGST Act.

–   However, there are certain cases where a
deeming fiction has been introduced to treat certain transactions as
inter-state supplies. For instance, supplies in the course of import of goods /
services are deemed to be inter-state supplies u/s. 7 (2) and 7 (4)
respectively. Likewise, the supplies made to or by an SEZ developer / unit are   also
treated   to   be an inter-state supply u/s. 7 (5) (b).

– The question that actually arises is whether
the place of supply needs to be determined in all cases where a transaction is
entered into with / by a unit in SEZ? Let us try to understand this with the
help of the following example:

ABC Limited is a SEZ
Unit. They organize a convention in a hotel located in DTA. ABC Limited has
intimated the hotel that they being an SEZ, the supply is to be treated as
inter-state supply and no tax should be charged on them on account of zero
rating u/s. 16. However, the hotel contends that in terms of provision of
section 7 (3) r.w. Section 12 (3), the location of supplier and Place of Supply
is the same, i.e., the hotel and hence the transaction is to be treated as
intra-state and CGST plus SGST will be applicable. They also claim that GST
being a consumption driven tax and consumption having taken place within the
DTA, tax is applicable.

– There are two aspects which need consideration here:

• Whether section 7 (3) –
which deals with determination of nature of supply in case of services and is a
general provision shall prevail over a specific provision, i.e., section 7 (5)
(b) which creates a legal fiction by deeming all supplies by or to a SEZ unit /
developer as inter-state?

• Whether the nature of
supply is to be determined basis the “person”, i.e., SEZ Developer / unit or
the actual location where the consumption takes place?

– In legal jurisprudence, in the context of
Monopolies & Restrictive Trade Practice Act, 1969, the Supreme Court in the
case of Voltas Limited vs. Union of India [AIR (1995) SC 1881] concluded
that an agreement falling within any of the clauses (a) to (l) will be held to
be an agreement relating to restrictive trade practice because of the legal
fiction and it will be immaterial to consider whether it falls within the
definition of restrictive trade practice in section 2 (o). No exception can be
taken against this view.

– In similar context, if a supply is made to /
by a SEZ developer / unit, it will have to be classified u/s. 7 (5) (b) and not
section 7 (1) or section 7 (3). In fact, this can also be a basis to say that
the provisions relating to determination of place of supply covered under
Chapter V of the IGST Act are not applicable to supplies by / to SEZ as they
merely aid in determining the place of supply, which is one factor for
determining whether a transaction is interstate or intrastate. Cases where the
main section itself treats a transaction to be either interstate or intrastate
shall need no reference to the provisions relating to place of supply.

– Another aspect to bear in mind is that while
the general provisions u/s. 7(1) and section 7(3) are subject to sections 10
& 12 dealing with the place of supply provisions, section 7(5), which interalia
deals with supplies to or by SEZ is not subject to the provisions of
sections 10 & 12 lending further support to the contention that the place
of supply provisions are irrelevant for such supplies.

– To answer the second sub-question relating
to consumption within the SEZ Area, one important distinction that needs to be
brought out is that section 7 (5) (b) is person centric and not consumption
centric, i.e., the section says supplies “to or by a SEZ developer / unit
located in SEZ” and not “in and from a SEZ developer / unit located in SEZ”.
This distinction is essential, because even for general cases for determination
of place of supply in case of services, more relevance is given to the location
of the person and not the location where the services are actually consumed.
For instance, in case of a person providing event management service to a
company located in Mumbai for the event to be held in Delhi, the place of
supply, which needs to be determined basis the location of such person (refer
section 12 (2) (a)) shall be Mumbai and not Delhi, though the services might
have actually been provided in Delhi. In similar context, even in case of SEZ
Developer / Unit, so long as the services are provided to a SEZ developer/
Unit, the location from where the services are provided may not be
relevant.

– In this context, there is one more scenario
which needs consideration here. Let us take an example of a person in DTA
supplying services to a domestic client but the consumption of the service
takes place in a SEZ, for example subcontracting of services. The supplier of
service has obtained an LUT for making such zero-rated supplies. However, the
question that arises is whether this supply shall be treated as zero-rated
supply considering the fact that the supply is not made to a SEZ developer /
unit but to a contractor who in turn renders services to the SEZ Developer/unit
for consumption by a SEZ developer / unit, admittedly in SEZ Area? It can be
said that this transaction shall perhaps be covered by section 7 (1) / 7 (3)
and not 7 (5) (b). This is because while the supply is consumed in SEZ, the
same is not made to a SEZ Developer / Unit. The supply is made to a person in
DTA and hence, the Place of Supply will have to be determined as per the
provisions of Chapter V of the IGST Act. However, it cannot be said that the
said person has made a supply to SEZ developer/ unit and should be eligible for
zero rating.

– To summarise, it can be concluded that:

• In case of supplies made
to a SEZ developer / unit, the transaction always has to be treated as
inter-state supplies and the provisions relating to Chapter V of the IGST Act
are not applicable.

• It is the actual supply to
SEZ developer / unit which is relevant and not the place of consumption. There
might be a case where the supply might have been consumed in the DTA, but the
supply is made to SEZ developer / Unit in which case provisions of section 7
(5) (b) shall continue to apply and the transaction shall be treated as zero
rated supply.

2. Whether the provisions
relating to Reverse Charge are applicable on supplies received by a SEZ
developer / unit?

– The GST law provides for two specific
instances where Reverse Charge Mechanism shall apply, one being the cases where
supply of specified goods / services is notified to be covered under reverse
charge and second being the case where the supply of goods / services, which
are other wise taxable but no tax is levied on account of the supplier being
unregistered.

– At the outset, it should be noted that a
SEZ developer / unit receiving inward supplies (other than those on which
reverse charge is applicable) from registered person are liable to tax subject
to LUT/ Bond. In that context, there is no reason for no tax on inward supplies
on which reverse charge is applicable. Infact, when such supplies are received
from registered suppliers, they can opt to execute LUT / Bond and state so in
their invoice, in which case, the zero rating continues to apply for the SEZ
developer/ unit as well and no tax shall be applicable.

– The notified reverse charge, which is in
effect today is applicable on domestic services as well as import of services.
However, the important question that arise is as per the provision of the SEZ
Act, SEZ is deemed to be outside the customs territory of India. Therefore, the
question that arise is whether the reverse charge provisions can be made
applicable to the SEZ?

– In this regard, reference can be drawn to
the decision of the Gujarat High Court in the case of Torrent Energy Limited
vs. State of Gujarat in Special Civil Application 14856 of 2010 decided on
16.04.2014. The facts of the said case were that the Appellants had a power
generation unit in a SEZ. Section 21 of the Gujarat SEZ Act provided for total
exemption from payment of various state taxes to the units situated in SEZ
area. However, vide a subsequent amendment to the VAT Act by introduction of
Section 5A and amendment to Section 9, a liability was created on SEZ units to
pay tax on purchase of zero rated goods used for purposes specified in Section
9 (5). In this case, the Hon’ble High Court found that the levy was not
sustainable on the grounds that any contrary intention emerging from any other
State fiscal statute would not limit the scope of the non-obstante clause when
no overriding effect is given to the provisions under the VAT Act, which were
enacted much after the SEZ Act.

– In this context, one can say that under
the GST law, by merely not giving an exclusion to the SEZ in the definition of
India in itself cannot make the non-obstante clause ineffective and the
provisions of the SEZ Act providing that the SEZ shall be deemed to be a unit
located outside the customs territory of India shall continue to prevail.
However, such a view may be subject to litigation at the ground level. Further,
it is important to note that the above matter is currently pending before the
Supreme Court and hence, the matter is yet to attain finality.

– However, a conservative view may always be
taken appreciating the fact that a person making zero rated outward supplies is
eligible for refund of accumulated input tax credit. In such a case, the onus
to discharge tax liability on the SEZ shall be as under:

Nature of Supply	Tax Position
Import of Services by a SEZ Unit or Developer for authorized operations	Exempted as per Notification 18/2017 (Integrated Tax – Rate)
Procurement of goods or services notified to be liable under RCM from registered dealer	No tax since zero rating continues in cases where the vendor has obtained LUT
Procurement of goods or services notified to be liable under RCM from unregistered dealer	IGST payable under RCM
Procurement of goods or services (other than notified) from unregistered dealer	Since the operation of this provision is currently suspended, no tax payable

Nature of Supply

Tax Position

Import of Services by a SEZ Unit or Developer for authorized
operations

Exempted as per Notification 18/2017 (Integrated Tax – Rate)

Procurement of goods or services notified to be liable under
RCM from registered dealer

No tax since zero rating continues in cases where the vendor
has obtained LUT

Procurement of goods or services notified to be liable under
RCM from unregistered dealer

IGST payable under RCM

Procurement of goods or services (other than notified) from
unregistered dealer

Since the operation of this provision is currently suspended,
no tax payable

3. What are the conditions
for claiming refund of tax paid / accumulated input tax credit on supplies to
SEZ developer / unit?

– Section 54 of the CGST Act provides for
refund of accumulated input tax credit on account of zero rated supplies made
or taxes paid on zero rated supplies. The section further provides that the
application for refund shall be accompanied by such documentary evidences as
may be prescribed.

– The said documentary evidences required for
filing the refund claim have been prescribed in Rule 89 of the CGST Rules,
2017. Second proviso thereof provides that refund shall be granted only if the
supplies made are used for the authorised
operations of the SEZ Developer / Unit. However, it is important to
note that there is no such requirement under the Act which provides that the
refund shall be allowed for zero rated supplies made. There is no provision under
the CGST Act which provides for any conditions / power to prescribe conditions
for the claim of refund for zero rated supplies, specifically supplies to SEZ
Developer /unit made. Therefore, the question that arises is whether the
provisions of Rule 89 are ultravires to the provisions of the Act or
not?

– However, before proceeding further, it is
also important to understand the need for answering the said question. There
can be two kinds of suppliers making supply to SEZ, one being a person
exclusively / pre-dominantly supplying to SEZ resulting in accumulated credit
and the other being a case where a person is pre-dominantly supplying in DTA
with some supplies to SEZ resulting in accumulated credits being adjusted
against liabilities on account of other supplies.

– In the first case, this aspect will be
important because not all supplies received by a SEZ Developer/ Unit may be
categorised as being received for authorised operations. For instance, an SEZ
unit, supplying software consultancy services, may be receiving supply from a
canteen operator which the proper officer may not certify as being used for
authorized operations & in such case, even if the supplier has opted for
LUT, he will not be able to claim refund of accumulated credits.

– In this context, to decide whether the Rule
89 is ultravires to the Act or not, one can refer to the provisions of
the Supreme Court decision in the case of Indian National Shipowners
Association vs. Union of India [2010 (017) STR 0J57 (SC)]. The issue in the
said case was the validity of the provisions of reverse charge mechanism on
import of services for the period upto 18.04.2006 where the liability was
created by Rule 2(1)(d)(iv) of the Service Tax Rules, 1994 without
corresponding provisions in the Finance Act, 1994. The Court confirmed by the
Bombay High Court ruling [2009 (013) STR 0235 (Bom.)] which held that the Rules
were ultravires to the provision of the Act by holding as under:

… Before enactment of section 66A it is
apparent that there was no authority vested by law in the Respondents to levy
service tax on a person who is resident in India, but who receives services
outside India. In that case till section 66A was enacted a person liable was
the one who rendered the services. In other words, it is only after enactment
of section 66A that taxable services received from abroad by a person belonging
to India are taxed in the hands of the Indian residents. In such cases, the Indian
recipient of the taxable services is deemed to be a service provider. Before
enactment of section 66A, there was no such provision in the Act and therefore,
the Respondents had no authority to levy service tax on the members of the
Petitioners-association.

21. In the result, therefore, the
petition succeeds and is allowed. Respondents are restrained from levying
service tax from the members of the Petitioners-association for the period from
1-3-2002 till 17-4-2006, in relation to the services received by the vessels
and ships of the members of the Petitioners-association outside India, from
persons who are non-residents of India and are from outside India.

– In similar context, till the time provisions
of section 54 are amended empowering the imposition of conditions for grant of
refund, Rule 89 should be treated as ultravires to the provisions of
section 54 and shall have no effect.

4. How shall supplies by SEZ
to DTA be treated?

– While SEZs are formed with specific goal to
promote exports and units within the SEZ are required to achieve specified
export targets, there can be instances when supplies may be made to customers.
Let us try to analyse such scenarios with the help of following examples:

Example
relating to supply of goods by an SEZ to a unit located in DTA

ABC Limited is a trader and has imported
goods in its’ warehouse in Free Trade Warehousing Zone, which is located within
the SEZ in Gujarat, i.e., the goods have not crossed the customs frontier and
the Bill of Entry for Home Consumption is not filed. ABC Limited has a customer
in DTA in Gujarat willing to buy the said goods. Following issues arise in this
transaction for ABC Limited:

a. Will ABC Limited be required to
discharge GST on its’ sale invoice to the customer or customer will discharge
the IGST at the time of filing Bill of Entry for Home Consumption at the time
of removal of goods from the SEZ?

b. Whether the supply is to be treated as
intra-state considering that both the location of supplier and place of supply
are in same state?

– To answer the above question, let us first
refer to the proviso to section 5 (1), which is the charging section for the
levy of IGST, and provides that the integrated tax on goods imported
into India shall be levied and collected in accordance with the provisions of
section 3 of the Customs Tariff Act 1975 at the point when the duties of
customs are levied as per section 12 of the Customs Act, 1962. Further,
reference to section 7 (2) also becomes necessary which provides that the
supply of goods imported into the territory of India till they cross the
customs frontiers of India shall be treated to be a supply in the course of
inter-state trade or commerce.

– What is meant by “imported goods”, while not
defined in IGST Act, is defined under the Customs Act, 1962 as any goods
brought into India from a place outside India but does not include goods which
have been cleared for home consumption”.

– In the above example, since the goods are
being sold from the FTWZ itself, which is a bonded warehouse, in other words, a
customs area under a bill of entry for warehousing, i.e., before the goods have
been cleared for home consumption, they are imported goods. In view of section
7 (2), the supply will have to be treated as interstate supply and in view of
proviso to section 5 (1), since the goods are imported goods, there shall be no
levy under the charging section of IGST Act and tax will have to be levied
under the Customs Act only. Further, it is provided that the Bill of Entry for
Home Consumption can be filed either by the buyer in the DTA or the SEZ unit
(on authorization from the buyer) (Refer Rule 22 of Special Economic Zone
(Customs Procedure) Regulations, 2003.

– However, it is important to note that the
Central Board of Excise & Customs has given a contrary view in Circular
46/2017 dated 24.11.2017 wherein it has been clarified that the supply of the
nature stated in the above example squarely falls within the definition of
“supply” as per section 7 of the CGST Act and shall be liable to IGST in view
of section 7 (2) treating such supplies as interstate supplies.

– However, the above notification clearly
appears to be issued without considering the specific provisions of section 5
(1) clearly keeping the taxability of imported goods outside the purview of
IGST Act and imposing the levy under the Customs Act, 1962 and hence, appears
to be erroneous. Further, the proposition suggested in the Circular hints at
double taxation, as at the time of removal of goods from the SEZ, a Bill of
Entry shall also be required to be filed which will create a tax liability on
the party filing the document as well as the unit within the SEZ shall also be
required to charge IGST on its’ invoice.

– Section 7 (5) (b) clearly states that
supplies by SEZ are to be treated as interstate supplies and hence, if at all
ABC Limited decides to file the Bill of Entry with the authorities (after
obtaining the necessary authorisations), the applicable tax shall be IGST by
treating the transaction as an interstate supply.

– So far as supply of services by SEZ to DTA
is concerned, the same would be a taxable inter-state supply irrespective of
whether the customer is in the same state or not on account of the deeming
fiction under the law.

5. Specific aspects of
dealing with / being a SEZ Developer/ Unit

– Dealing with SEZ developer / Unit, it has to
be noted that the supply being made to the SEZ developer / unit is never to be
questioned at the time of application of LUT. For instance, the jurisdictional
officer of the supplier cannot deny the grant of LUT on grounds that since the
supply is of a goods/ service on which credit would not have been eligible had
the zero rating not been prescribed.

– Registering for GST as SEZ Developer / Unit
– at the time of obtaining registration, care should be taken to ensure that
the fact the person registering is a SEZ developer/ unit is being selected in
the portal as this is expected to have its’ own challenges. For instance, if a
SEZ developer / unit is not registered as such on the portal, it will face a
peculiar situation where it would have charged IGST on all its DTA supplies
(even where the customer is in same state) but the portal will not allow the
same while filing GSTR 1 since the supplier is not registered as SEZ. This will
also impact the credit claim of the customer resulting in disputes. Similarly,
on inward side as well, all the vendors would have charged IGST but while
filing their GSTR 1, they may not be able to select IGST (of course, this
specific issue is not identified since filing of GSTR 2 has been postponed for
the time being).

Conclusions

While the
intention of the law is to ensure that the maximum benefits flow to the SEZ
developer / units to promote exports, the manner in which the provisions have
been drafted has increased the scope of probable tax litigation. While the law
is now in place for more than six months, there is sufficient time for business
in SEZ or dealing with SEZ to take correct tax positions to avoid future pains
!!! _

shailesh.kwebmaker

GST on Re-Development Of Society Building, SRA And JDA – Part I

The levy of Goods and Service Tax on land development, re-development of housing society buildings and slum rehabilitation is a contentious issue though these activities were already subject to the levy of service tax and VAT in the pre-GST regime.

In this article implications of GST on the builders / developers, a co-operative housing society (society), its members, landlords, tenants and unauthorised occupants (viz. slum dwellers on encroached land) are discussed. The most important issue is that whether there is any change under GST regime from the earlier service tax regime. In the opinion of the writers, there is a qualitative and substantive change. Under service tax, , immovable property was outside the scope by way of definition of ‘activity’. The term ‘activity’ was of wider and unrestricted implication. However, in case of GST, a ‘supply’ is liable to tax only if made in the course or in furtherance of business. This has resulted in interesting debate and complexities.

GST on re-development of society building
Let us say, a Co-operative Housing Society registered under the Maharashtra Co-operative Societies Act, 1960 and its members (for the sake of brevity, the society and members are collectively referred to as ‘SM’) decide to redevelop the existing building which is in dilapidated condition and is required to be re-developed as per prevailing Development Control Regulations [DCR]. In case of re-development of the dilapidated building, the municipal regulations in Maharashtra presently allow approx. 3:1 FSI instead of 1:1 which is allowed under normal circumstance.

The key contents that are incorporated in the Development Agreement with the developer (DA) are discussed below:

SM shall allow the developer to reconstruct building by demolishing the existing one with some additional area, may be by way of constructing additional floors. The developer shall do so by employing his funds and at his attendant cost and risk. To avail the benefit of extra construction is permitted under DCR, the developer is required to purchase necessary Transferable Development Right (TDR) from permissible sources. As per the terms of DA, the developer may be required to construct some extra area for the existing members which is to be given to them free of cost to incentivise the project.

Out of the total constructed area after utilising full potentiality of FSI and TDR, the remaining area after allotment to the existing members as warranted by DA belongs to developers which is known as “Developer’s free sale portion” and he can sell it at his discretion and price. SM undertakes to enrol and register the purchasers of such free sale portion as the members of the society upon fulfilment of necessary formalities. The newly enrolled members are entitled to the same rights as of existing members and also have undivided share in the title of the land in the similar manner.

In addition to re-development, the developer shall pay to SM cash consideration in form of corpus fund, hardship allowance, rent for alternate accommodation till permanent alternate accommodation is granted in the new building, brokerage, shifting allowance etc.

In the above background, we will examine the incidence of GST from the point of view of:
a.The society and its members
b.The developer

Taxability of development right in the hands of SM

The issue here is that the SM is supplying development right to the developer to re-develop the building, putting up extra area / floor by using permissible FSI, TDR etc. in return for newly constructed flats with some additional area free of cost and some cash consideration mentioned above in terms of DA. Under GST law, SM may not be liable to tax for the following reasons:

Supply not in the course or furtherance of business:

For the purpose of determining the liability under GST, it is necessary to look into Charging Section 91 according to which central goods and services tax is leviable on all intra-State supplies of goods or services or both. Thus, ‘supply of goods or services or both’ is the vital element for charge of tax. Section 7 (a) defining ‘supply’ require that the supply for a consideration by a person should be in the course or in furtherance of business.

“S.7 – For the purposes of this Act, the expression “supply” includes––

all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business”.

Definition of ‘goods’ as per S. 2(52) is as follows:

“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”.

Thus, goods do not include immovable property. Development right is an immovable property.

Definition of ‘service’ u/s. 2(102)

“services” means 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.

As per the above definition, everything other than goods, money and securities is service. However, the moot issue is whether an immovable property can be said to be a ‘service’. This is a contentious issue as right in land, viz. development right is a benefit arising from land is “immovable property”. This will be discussed little later, since the discussion centres right now on the treatment of immovable property under GST.

“Supply of goods or service or both” for the purpose of levy of GST u/s. 7, has to be in the course or furtherance of business. The society and / or members cannot be said to be in the business of grant of development right, whether the re-development of a society building is undertaken by virtue of compulsion on account of dilapidated condition or not. A society or its members cannot be said to be involved in supply of development right to the developer in the course or in furtherance of business by entering into development agreement. By agreeing to get a new flat in lieu of the old flat, the members of society have not made any supply.

Land and right / benefit in land outside the scope of GST – Sch. III of CGST Act, Transfer of undivided right in land from the existing members to the new purchasers:

Various judgements of the Supreme Court and High Courts on the principle of mutuality and examination of the provisions of Maharashtra Co-operative Societies Act, 1960 and bye-laws of a Co-operative Societies made thereunder that the rights of a member in a co-operative housing society are a bundle of rights including the right of possession, right to transfer and right to let-out the flats allotted to him etc., etc.

In Ramesh Himmatlal Shah vs. Harsukh Jadhavji Joshi, (1975) 2 SCC 105, the Hon’ble Supreme Court referred to clause 47(1)(b) of Maharashtra Cooperative Societies Act, 1960 and observed that a flat in a multi-storeyed building would naturally have a corresponding right over the undivided proportionate share of the land on which the building stands and that a member of the society has interest in the property belonging to the society. In the words of the Hon’ble Apex Court:

“We may now turn to the relevant Rules. By Rule 9 “when a society has been registered the Bye-laws of the society as approved and registered by the Registrar shall be the Bye-laws of the society”. Rule 10 contains classification and sub-classification of societies and we are concerned with the fifth class mentioned therein, namely, the “Housing Society” which again is sub-divided into three categories and we are concerned in this appeal with the second category, namely, “Tenant Co-partnership Housing Society”, which is described therein as an example of “Housing Societies which hold both lands and buildings either on leasehold or freehold basis and allot them to their members”.

In Gayatri De vs. Mousumi Coop. Housing Society Ltd., (2004) 5 SCC 90, the Hon’ble Supreme Court held that in the event of death of a member of a housing society, the heirs of the deceased person would inherit the flat with proportionate interest in the land. For this, the Supreme Court examined the provisions of West Bengal Cooperative Society Act, 1983, and observed as under:

“Section 87 of the Act deals with a member’s right of ownership and sub-section (3) of the said section makes it abundantly clear that a plot of land or a house or an apartment in a multi storied building shall constitute a heritable and transferable immovable property within the meaning of any law for the time being in force provided that notwithstanding anything contained in any other law for the time being in force, such heritable and transferable immovable property shall not be partitioned or subdivided for any purpose whatsoever”.

When a person purchases a flat and incidentally becomes a member of the society, the right, title, interest over the flat is not merely a right to occupy it. It is specie of property, which can be sold. Once a member completes the procedure, the society has no option but to recognising the incoming member as the owner of the flat. The Supreme Court in the case of Hill Properties Ltd. vs. Union Bank of India, (2014) 1 SCC 635, observed as under:

“So far as a builder is concerned, the flat-owner should pay the price of the flat. So far as the society or company in which the flat-owner is a member, he is bound by the laws or articles of association of the company, but the species of his right over the flat is exclusively that of his. That right is always transferable and heritable”.

In this context, it is required to examine Sch. III of CGST Act which denotes the activities or the transactions that shall be treated neither as a supply of goods or nor supply of services –

“Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building”.

In case of re-development of society building, the developer is given right to construct additional area and to sell the same to the purchasers by purchasing TDR from open market. The undivided ownership right in the land of the existing members is thus curtailed and the same is being transferred to the developer for further commercial exploitation including recouping the cost of re-construction of the existing building. Transfer of ownership right in land is out of the scope of “supply” as per Sch. III to the CGST Act.

Development right – a right in land being an immovable property whether outside the scope of GST?

The expression “land” and “building” in Schedule III includes even right in land / building. It is relevant to note Entry 18 of List II of Seventh Schedule to the Constitution of India. It reads as “Land, that is to say, rights in or over land, land tenures including the relation of landlord and tenant, and the collection of rents; transfer and alienation of agricultural land; land improvement and agricultural loans; colonization”. Therefore, reference to land includes even rights in land.

Relying on the Hon’ble Supreme Court decision in Santosh Jayaswal vs. State of M.P., (1995) 6 SCC 520, in Godrej & Boyce Mfg. Co. Ltd. vs. State of Maharashtra, (2009) 5 SCC 24 : (2009) 2 SCC (Civ) explaining the meaning of the expression, “benefits to arise out of land”, perusal of Bombay High Court’s decision in case of Chheda Housing Development Corporation vs. Bibijan Shaikh Farid, (2007) 3 Mah LJ 402 and other relevant decisions of the Apex courts and High Courts and various provisions of Maharashtra Regional Town Planning Act 1966 read with section 3 of Transfer of Property Act defining immovable property indicates the artificial manner in which the development rights are carved out from the land. Further, sections 17(1) and 2(16) of The Registration Act r.w. S.2(16) of Indian Stamp Act also establish that development rights are right in immovable property.

The expression, “immovable property” has not been defined under the GST law. Therefore, it would be relevant to note the definition of “immovable property” under the following laws:

Section 3(26) of the General Clauses Act, 1897:

Definitions:

In this Act, and in all Central Acts and regulations made after the commencement of this Act, unless there is anything repugnant in the subject or context-

(26) “immovable property” shall include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth;

Section 2(ja) of the Maharashtra Stamp Act:

In this Act, unless there is anything repugnant in the subject or context,-

(ja) “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;

Section 2(6) of the Registration Act, 1908:

In this Act, unless there is anything repugnant in the subject or context-

(6)”immovable property” includes land, buildings, hereditary allowances, rights to ways, lights, ferries, fisheries or any other benefit to arise out of land, and things attached to the earth or permanently fastened to anything which is attached to the earth, but not standing timber, growing crops nor grass;”

A perusal of the above definitions indicates that they are more or less similar. Thus, immovable property includes interalia benefit arising out of land and things attached to the earth or permanently attached to the earth.

It is relevant to note the following extract wherein the expression “benefits to arise out of land” is explained:

Extract from commentary on The Transfer of Property Act, 1882 (TP Act) by Sir. Dinshaw Fardunji Mulla [11th Edition – 2013]”

“The definition of ‘immovable property’ in S.3(26) of the General Clauses Act is not exhaustive”.

“Immovable property shall include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth”.

“The TP Act defines the phrase ‘attached to the earth, but gives no definition of immovable property beyond excluding standing timber, growing crops and grass. These are no doubt excluded because they are only useful as timber, corn and fodder after they are severed from the land. Before they are so severed, they pass on transfer of the land under S. 8 as things attached to the earth”.

“A ‘benefit to arise out of land’ is an interest in land and, therefore, immovable property. The Registration Act, however, expressly includes as immovable property benefits arising out of land, hereditary allowances, rights of way, lights, ferries and fisheries”.

“From a combined reading of the definition of ‘immovable property’ in S. 3 of the TP Act and S. 3(5) of the General Clauses Act, it is evident that in an immovable property, there is neither mobility, nor marketability as understood in excise law”.
……

The definition of immovable property in the General Clauses Act, TP Act and other laws and judgements cited above have dealt with benefit and right in land. In the absence of a specific definition under GST law, general definition must prevail.

Consequently, Development Right being the benefit arising from the land, must be held to be immovable property and outside the scope of GST.

Therefore, in view of the specific provision of treating sale of land and sale of building as neither supply of service nor as supply of sale would not make the sale of land / building liable for GST as there is no charge in the first place. Similarly, the absence of reference to right in land / building in serial no. 5 of Schedule III cannot deem the presence of a charge of GST. The satisfaction of levy should be arrived at dehors the entries in Schedule III.

Whether the amounts paid by developer to SM in terms of DA like hardship allowance, rent, shifting allowance, contribution to the corpus of the society, brokerage and such other amounts as agreed upon can be treated as ‘consideration’ in the hands of SM so as to attract the levy of GST?

The consideration flowing from a developer to the SM, in whatever form, is not against any taxable supply. All payments from the developer to the SM is flowing out from DA. Appointing developer to re-develop the existing building is not a taxable supply as we have discussed earlier. The developer makes payment to the members of society in satisfaction of the obligation to the society and its members. Viewed in this manner, the allotment of a new flat, the payment of compensation being rent for alternate accommodation and hardship allowance is also governed by the principle of mutuality. Payment of corpus fund to the society by the developer is also in satisfaction of the obligation flowing out from DA as a part of design of the re-development arrangement. Therefore, the SM are not liable for GST as they have not effected any supply under the DA.

It may be argued that the developer makes payment to the members and /or the society as compensation for the act of agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act treated as supply of service as per section 7(1)(d) read with paragraph no. 5(e) of Schedule II. However, there is no stipulation in the DA which requires the members of society to agree to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act; for which a consideration is stipulated. The essential ingredient of the contract is redevelopment. Therefore, the members or the society are not liable to GST even under this entry. There is no supply made by SM to developer though they have been compensated.

Whether the DA involves any taxable supply by developer to SM under GST?

Developer is constructing the building, a part of which will be given to the members of SM. The other part of the building will be sold by it for a consideration. For the construction of the building for the members of SM, developer is not receiving any monetary consideration from them, but a right from SM is received to load TDR on its plot so that the developer would be able to construct extra area in the building for selling in the market. There are common facilities and common spaces which are owned and used jointly by the owners of these units. These units do not have any independent existence. Therefore, construction of entire building is necessary before handing over the units to the members. In other words, developer cannot construct the building for selling to new customers unless he would construct that part of the building which would be allotted to SM. Hence, the developer is constructing the entire building in order to sell a part of the building.

Effectively, the developer is providing service to both SM and the buyers of additional flats under DA as a part of a single supply. The entire revenue in this arrangement flows from the buyers of additional flats, a part of which is paid by developer to the members of SM by way of construction and monetary consideration. The proportionate ownership of the land obtained by the developer from SM would be passed on to the flat buyers. For all these efforts, the developer would be remunerated by way of sale consideration from the additional flats constructed for sale.

Support may be found from the definition of consideration contained under CGST Act.

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:
…………………”

Thus, it can be said that the SM by virtue of entering into DA, induces developer to supply works contract service and to sell additional area to outsiders to recoup the cost of construction and other monetary consideration. In turn they undertake to make the purchasers as members by allotting undivided share in land. The sale consideration will also be the consideration for re-construction of the existing building.

Whether the transaction between SM and the developer is barter and liable to tax as such?

The definition of ‘supply’ contained in S.7 (supra) includes a barter arrangement. The question arises that whether the grant of development right by SM and the construction of the building by a developer is barter. The answer is that it may be so in technical term but not liable for GST as grant of development right is not liable for GST as already discussed above.

Availment of input tax credit (ITC) and reversal thereof attributable to the units allotted free of cost to SM.

Units allotted free of cost to SM are not without consideration. The consideration flows from other persons. The service provided by developer is taxable. Hence, ITC under the law is available fully and can be used for the GST payable on the sale of under constructed flats from free sale area.

Without receiving such inputs and input services, it would be impossible to construct that part of the building on which GST is payable. Therefore, it cannot be said that the entire inputs and input services used for construction of the building are not used for providing taxable supply. Therefore, ITC is eligible. It has been discussed earlier that there is a single supply to SM and the purchasers of free sale area.

(To be continued – concluding part will cover taxability of slum rehabilitation projects, land development agreements.) _

shailesh.kwebmaker

GST vis-a-vis Judgement under earlier Regime

Introduction

GST has been
introduced in our country from 1^st July 2017. Although the overall
design of GST scheme is new, it is a mixture of both the taxes i.e. tax on
Goods as well as tax on Services. In the earlier regime, the taxation of goods
was separate and service tax was separate, hence litigation was accordingly
with the respective laws. However, certain judgements under earlier laws may
still have their relevance in GST regime. Looking into present notifications on
classification and rate/s of tax, it seems that classification of a transaction
and rate of tax thereon is going to be one major area of confusion and/or
conflict, wherein such judgements may provide us necessary guidance.

Case study

Normally, there
can be five categories of transactions, to be dealt with to decide rate of tax.

(i) Whether
transaction is supply of goods or supply of service?

(ii) Whether
transaction is works contract?

(iii) Whether
transaction relates to treatment / process of goods of others?

(iv) Whether
transaction is mixed supply transaction?

(v) Whether
transaction is composite transaction?

Once the nature
of transaction is decided to be one of above, the rate can be decided
accordingly.

If the
transaction is relating to supply of goods, the rate will be as applicable to
said goods. If it is service transaction, the rate will be as applicable to
service.

Works
Contracts, under GST, are related to immovable properties and such transactions
are categorised as ‘service transactions’. At the same time ‘Treatment and
Processing’ transactions are also categoried as ‘service transactions’.

Once a
transaction is categorised as service transaction, then it will not be
necessary to look into any goods involved in supply of services. The
transaction should be taxed as service, as one transaction.

Blasting
transaction

In case of
blasting transaction, different chemicals and explosive materials are used for
blasting of land or rocks etc. It is seen that explosive materials are
taxable at 28% under GST, where as chemicals are taxable at 18%.

The first issue
in the above case will be to see the nature of blasting transaction. The nature
of blasting transaction has already been a subject matter of interpretation by
the Hon. Rajasthan High Court in case of Shekhawat Explosives vs. State
of Rajasthan and another (137 STC 326)(Raj). The facts narrated by the
High Court in the above judgment are as under:

“5. In any case, both the sides requested
us that the matter may be examined on merits also. We therefore, heard learned
counsel on the merits of the case. Learned counsel Sh. Mehta has argued that
the job-work, which was undertaken by the present appellant was that of
blasting and in this job of blasting the explosives were used, which stood
exhausted in the process of blasting itself. Therefore, there is no effective
sale of any explosive by the appellant so as to make it leviable for charging
the sales tax under the provisions of the Act and therefore, the order as has
been passed by the assessing officer was bad from very inception.”

The Rajasthan
Sales Tax Department’s argument was that there is transfer of property in goods
in the above transaction and hence it is liable as works contract.

The Hon. High
Court examined the issue and came to conclusion as under:

“The charging
section is section 4 under chapter II, i.e., levy of tax and its rate and it
has been clearly provided under sub-section (1) of section 4 that the tax
payable by the dealer under this Act shall be at single point in the series of
sales by successive dealers, as may be prescribed and shall be levied at such
rates not exceeding fifty per cent on the taxable turnover, as may be notified
by the State Government in the Official Gazette. A conjoint reading of the
provisions of section 2(38) and section 4(1) makes it clear that in such
matters when a job of blasting is undertaken, the use of explosives in such job
can neither be termed as sale within the meaning of the Rajasthan Sales Tax Act
nor it could be subjected to the levy of tax.

Learned counsel
Sh. Bhandari has argued before us, rather he was at pains to argue on the basis
of section 2(38), clause (ii) that it remains a case of sale because it
involved a transfer of property in goods and he submits that the explosives had
been purchased by the appellant on the basis of the form “C” supplied
by the department and on that basis he did avail certain concession. Even if
that be so, it will not give the status of sale to such process of extension.
Even if it is a case of transfer of property, though the property does not
stand transferred in any physical form, it stands exhausted in the process of
the execution of the works contract. Unless any transaction is given the status
of sale within the meaning of section 2(38), there is no question of charging
sales tax thereon. In case the appellant has made any misuse of the form
“C” and has wrongly availed any concession or has taken any undue
benefit or unlawful gain, which otherwise could not be available to him, it is
always open for the concerned authorities to take appropriate action against him
in accordance with law, but that does not mean that he could be made liable to
pay sales tax on such transaction (which does not amount to sale) on the basis
of which job of blasting was undertaken and completed and in the process
thereof the explosives were made use of.

6. We therefore, find that this appeal
must succeed on its own merits, the order dated November 24, 2001 passed by the
learned single Judge is set aside. This appeal as well as the writ petition are
allowed and the impugned assessment order dated September 29, 2001 (annexure 7)
is quashed and set aside.”

Conclusion

It can be seen
that the transaction of blasting is considered as not sale of any kind of goods
and therefore it becomes transaction of rendering service. The nature of
transaction will remain the same even under GST regime. The outcome is that the
blasting transaction will be taxable under GST as service transaction. Even if
goods involving different rates are used for rendering the above service, still
there will not be any impact of the same for deciding the rate of tax. Service
is one transaction and the rate will be attracted as per rate applicable to
service. Since for blasting transaction, no separate classification is made for
rate of tax, it will fall in residuary category and liable to GST at 18%.

There are several such
other judgements, in the old regime, which will be useful for appropriate
guidance in the GST regime.

shailesh.kwebmaker

GST – First Principles on the term ‘Business’

The objective of this article is to
understand the scope and relevance of the term ‘business’ under GST laws and
apply it in context of non-commercial institutions such as charitable trusts,
NGOs, educational institutions, employee welfare trusts, etc. and mutual
associations such as residential welfare associations, trade associations,
clubs, societies, etc. GST is generally understood as an amalgam of VAT and
Service Tax laws. While most of the VAT laws applied to dealers, which
somewhere built in the requirement of business, the service tax laws applied
comprehensively to all persons. In this context, it may be gainful to bear in
mind that the philosophy of the VAT laws is inherited in the GST law to some
extent.

At the outset, it can be argued that the
term supply by itself is a commercial term and is generally not used for
activities undertaken by non-commercial organisations. Though the term ‘supply’
is defined in a very broad manner, presence of a tinge commercial character in
the transaction seems to be essential element (unless specifically made
redundant). When examined in the presence of the terms ‘sale’, ‘transfer’,
‘service’, the term supply is narrow if seen from this perspective. It is
pertinent to note that the law makers have not used the term ‘activity’ (as was
used in the service tax law) but rather chose to use the term ‘supply’ which
indicates the intent of the Legislature to narrow down the scope of
chargeability on this count. Also, the statutory definition of term supply u/s.
7(1) is further qualified by the phrase ‘in the course of furtherance of
business’.

In fact, the term business plays a
significant role in the entire definition of ‘supply’ under section 7 which can
be analysed as follows:

(i) The first clause of supply requires that all forms of supply of
goods or services should be ‘in the course or furtherance of business’ .

(ii) The second clause dispenses with the requirement that the
import transaction should be in the course or furtherance of business; in
other words, non-business transactions which are import of services would
also be termed as supply.

(iii) The third clause r/w Schedule I enlist transactions entered
into without consideration. This clause dispenses with the requirement of
consideration flowing between the taxable persons in such transactions. Even
though certain entries do not use the term business, there is an implicit
requirement of a business activity being present in view of the specific terms
such as ‘business asset’, ‘principal’, ‘agent’, etc.

This interpretation leads one to an
inference that except in case of import of service (as well as import of goods
in IGST transactions), transactions can be termed as a supply only if they
acquire the feature of being a business/ commercial transaction. Further
analogy can also be drawn from various other definitions / provisions under the
GST Law (such as outward supply, capital goods, inputs, composite supply, input
tax credit, place of business, etc). None of these terms attempt to
administer a non-business transaction. Given the scheme of the law, it would be
reasonable to interpret that only transactions in the nature of ‘business’
(except import of service and goods) would have GST implications.

This leads us to question as to whether any
boundaries can be drawn over the term ‘business’ under the GST law.

Definition of ‘Business’

The term business has been defined in an
inclusive manner u/s. 2(17) of the CGST Act to include the following
activities:

a) Any trade, commerce,
manufacture, profession, vocation, adventure, wager or any other similar
activity, whether or not it is for a pecuniary benefit

b) Any activity or transaction
in connection with or incidental or ancilliary to sub-clause (a)

c) Any activity or transaction
in the nature of sub-clause (a), whether or not there is volume, frequency,
continuity or regularity of such transaction

d) Supply or acquisition of
goods including capital goods and services in connection with commencement or
closure of business;

e) provision by a club,
association, society, or any such body (for a subscription or any other
consideration) of the facilities or benefits to its members;

f) admission, for a
consideration, of persons to any premises;

g) services supplied by a
person as the holder of an office which has been accepted by him in the course
or furtherance of his trade, profession or vocation;

h) services provided by a race
club by way of totalisator or a licence to book maker in such club ; and

i) 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 primary part of the said definition can
be analysed as follows:

(a) Main activity being in the
nature of ‘trade, commerce, manufacture, profession, vocation, adventure, wager
or any similar activity whether or not it is for a pecuniary benefit’;

(b) Incidental/ ancillary
activity to the above business activity;

(d) Any activity in connection
with commencement or closure of business.

A brief history of a similarly worded
definition under the VAT laws may assist us in understanding the scope of the
term. Historically, the term business was not included in the list of
definitions under the Central Sales Tax Act and other General Sales tax
legislation. It was in 1959 where the Madras General Sales Tax Act defined this
term to include trade, commerce, etc. within its ambit. The definition has
evolved over time and attempted to overcome certain infirmities identified by
judicial decisions. It would be very interesting to note that the Courts not
given an unlimited space to this term even-though the said term was defined in
an inclusive manner.

Legal principles on the term ‘business’

The Central Sales Tax Act, 1956 had defined
the said term as follows:

“‘business’ includes,

(i) And trade, commerce,
manufacture or an adventure or concern in the nature of trade, commerce or
manufacture, whether or not such trade, commerce, manufacture, adventure or
concern is carried on with a motive to make gain or profit and whether or not
any gain or profit accrues from such trade, commerce, manufacture, adventure or
concern; and

(ii) Any transaction in
connection with, or incidental or ancillary to, such trade, commerce,
manufacture, adventure or concern”

The said definition is similar, in terms of
coverage, to clause (a) and (b) of section 2(17) of the GST Law. The respective
state enactments also had similar definitions with modifications in terms of
additional clauses widening the coverage of the term. The debate over the scope
of the term business dates back to the decision of the Hon’ble Supreme Court in
State of Andhra Pradesh vs. Abdul Bakhi And Bros [1964] 15 STC 644 (SC),
wherein the Court held that the expression “business” though extensively used
as a word of indefinite import, in taxing statutes it is used in the sense of
an occupation, or profession which occupies the time, attention and labour of a
person, normally with the object of making profit. To regard an activity as
business there must be a course of dealings, either actually continued or
contemplated to be continued with a profit motive, and not for sport or
pleasure.

In another decision (prior to the insertion
of expansive clauses of incidental/ ancillary activity), the Hon’ble Supreme
Court in Raipur Manufacturing Co. Ltd’s case ([1967] 19 STC 1 (SC)) was
examining whether discarded machinery, sale of waste, scrap or unserviceable
material and by-products fall within the scope of the term ‘business’. The
assessee contended that it was not engaged in buying and/or selling of such
material and the said material was not sold with an objective of profit. The Court observed that the term ‘business’ does
not hinge solely on the motive of earning profit though it predicates a motive
which pervades a whole series of transactions effected by the person. The
Court observed that though the volume and frequency of the transaction was
high, the taxable person cannot be said to have the intention of carrying on
business of such items. Though the residuary price may impact the profit and
loss account by reducing the costs, that does not by itself establish an
intention to carry on business in that product.

They are either
fixed assets of the Company or are goods which are incidental to the
acquisition or use of stores or commodities consumed in the factory. Those goods are sold by the Company for a price which goes into
the profit and loss account of the business and may indirectly be said to
reduce the cost of production of the principal item, but on that account,
disposal of those goods cannot be said to become part of or an incident of the
main business of selling textiles. In order
that receipts from sale of a commodity may be included in the taxable turnover,
it must be established that the assessee was carrying on business in that
particular commodity, and to prove that fact it must be established that the
assessee had an intention to carry on business in that commodity. A person who
sells goods which are unserviceable or unsuitable for his business does not on
that account become a dealer in those goods, unless he has an intention to carry
on the business of selling those goods.

In the same judgement, the Court also held
that sale of by-products (caustic liquor) was an incident of the manufacturing
activity of the Company and was includible in the definition of business under
the Bombay Sales Tax Act under the primary clause itself.

‘For reasons
which we have already set out in dealing with “kolsi”, we are of the
view that waste caustic liquor may be regarded as a by-product or a subsidiary
product in the course of manufacture and the sale thereof is incidental to the
business of the Company and the turnover in respect of both “kolsi”
and “waste caustic liquor” would be liable to sales tax.’

Subsequently, in the post amendment period,
the Hon’ble Supreme Court in Burmah Shell Oil Storage and Distributing Co.
of India ltd. [1973] 31 STC 426 (SC) settled some conflicting High Court
decisions and held that the amendment in 1964 has made the intention of
profit as an unnecessary criteria not only to the primary clause,
but also to the secondary clause of the definition of business. In view of this
amendment, canteen sales, sales of advertisement materials and scrap sales were
held to be taxable under the post amendment period even if they were not
conducted with the object of making profit. Though the decision of Raipur
Manufacturing (supra) was held to be not applicable as regard the intention
of profit, in the view of the author, the intention of carrying on trade,
commerce which was cited in the said decision is still relevant.

In a landmark decision of State of Tamil
Nadu and Another Versus Board of Trustees of the Port of Madras, the Court
was examining the taxability of sale of uncleared or abandoned items by a Port
established under a statute performing statutory functions without any objective
of making profit. It was held that, if the main activity was not business then
any connected or incidental activity of sales would not amount to business
unless an independent intention to conduct business is these connected
activities is established. In this backdrop, the Court held that Port Trust was
not engaged in business and hence the activity of sale of uncleared or
abandoned items cannot be termed as a business activity. This ruling is very
important in the context of educational, social and charitable associations and
discussed in later paragraphs.

In another decision in Board of Revenue
vs. A. M. Ansari [1976] 38 STC 577 (SC), auction of forest produce was held
not to be regarded as a business activity in the absence of a frequency of such
activity. The Supreme Court held that volume, frequency, continuity and
regularity of transactions in a class of transactions should ordinarily be
undertaken to be termed as a business activity.

Application of legal principles of the
definition of business under GST Law

The first clause of the definition is the
bedrock on which most of the clauses of definition rest upon. Except for the
inclusion of profession, vocation, adventure, wager, etc., the said
clause is more or less similar to the definition of the business in the central
sales tax and state sales tax statutes. The clause should be understood in a
commercial sense (as understood by the Supreme Court in Abdul Bakshi’s case
supra) except for the requirement of a profit motive. The clause renders the
intention of making pecuniary benefits as an irrelevant factor in deciding
whether an activity is business. Each of the words in this clause could be
attributed a meaning as follows:

– ‘trade’
primarily refers to exchanging of goods for goods or goods for money with a
secondary meaning of being a repeated activity carried on with a profit motive
which is distinguished from agriculture, etc; but in the context of this Act
should also refer to provision of services and not merely goods

– ‘commerce’
refers to a larger volume of trade though there is not specific scale when a
trade is termed as commerce.

– ‘manufacture’
has been used to cover manufacturing activities which do not fall within the
contours of the term ‘trade’.

– ‘profession’
would refer to an occupation requiring intellectual skill or any other manual
skill controlled by intellect.

– ‘vocation’
refers to calling or the way in which an individual passes his/her life; but in
the context of the previous terms should be understood to refer to activities
such as sports, art not undertaken as a professional but for recreation or
pleasure.

– ‘adventure’
would refer pecuniary risks, a venture, a speculation in which there is
considerable risk of loss as well as a chance of gain; and in the context of
the previous terms should be understood as having a feature of trade, commerce,
manufacture, etc. say conducting research activities connected or not with the
primary business.

– ‘wager’
would refer to betting activities where the possibility of success is highly
uncertain.

The second clause includes activities which
are incidental to the primary business activity. The said clause emphatically
requires that the primary activity should be in the nature of business for the
incidental activity also to be included in the definition. This is in line with
the principles laid down by the Madras Port Trust’s case where the primary
activity of the Trust was of non-business character. As rightly pointed out in
the decision, this conclusion should be reached only after ensuring that the
incidental activity should not be an independent activity to fall within the
first clause itself.

The third clause makes the frequency,
continuity or regularity of the primary activity as irrelevant in deciding
whether the activity is in the nature of business, in other words occasional
transactions. This clause overcomes the Supreme Court’s view in H.A.
Ansari’s case which required that there should be some regularity in
dealings for the transaction to be a business and also overcomes a contention
of the assessee that they are not ‘carrying on’ (a degree of continuity) a
business activity.

The fourth clause specifically includes any
transaction in connection with commencement or closure of business. The purpose
of this clause is to remove any ambiguity over such transactions to be ‘in the
course’ of business. Such transactions though strictly not in the course of
business would also be included in the definition of business. Similarly,
transactions which relate to closure of business would be included though they
are strictly not ‘in the course or furtherance of business’.

It can be inferred that the legislature has
intended to cover transactions even having a remote connection with a business
activity and also made the stage of business irrelevant for the definition of
business. As a consequence, the legislature has widened the scope of items
which would be governed under the law. Further, a definition of wide import
would ensure all transactions are eligible for the benefit of input tax credit
since the eligibility of input tax credit (like taxability) revolves around the
transactions being in the ‘course or furtherance of business’. Having said
this, a question arises whether the definition has implicitly excluded
non-commercial activities which are undertaken by social, charitable or public
organisations from its scope. While the definition is qua the activity, in the
view of the author, the status of the organisation performing the activity
should also be kept in mind to understand the intention behind the activity. A
discussion based on the above thought process has been attempted below.

Charitable Trusts and Charitable Activities

The GST Law has conferred certain exemptions
on specified services by charitable organisations; one exemption is with
reference to services of an entity registered u/s. 12AA of the Income-tax Act,
1961 (IT Act) by way of charitable activities; the other is for services by way
of conducting religious ceremonies, renting of religious place meant for general
public and owned or management by an entity registered u/s.12AA or section
10(23C) of the IT Act, provided the rental charges for the room/ hall, etc.
are within the specified limits. The exemption entries are fairly narrow in its
scope and may result in taxation of other non-commercial activities.

The former exemption entry grants benefit on
two counts i.e. (a) the service should be provided by a 12AA registered entity
and (b) such activities are in the nature of charitable activities. One aspect
(i.e. the subject) has been borrowed from the IT Act while the other aspect
(i.e. the subject matter of taxation) has been provided under said notification
itself by way of an explanation.

The coverage of the first aspect of the
exemption entry is purely dependent upon the status of the registration u/s.
12AA of the IT Act. The Income-tax Act provides that exemption would be
available on specified incomes of charitable or religious trusts under the
provisions of section 11 and 12 provided such eligible trusts are registered
u/s. 12AA of the IT Act. The trust may or may not be enjoying complete
exemption from income tax (say in view insufficient recoupment of income for
charitable purposes, etc.). As long as the trust is holding a valid 12AA
registration certificate, it meets the requirement of the first part of the
exemption entry and the said entity would continue to be covered under the said
clause. Therefore, religious trusts, though not strictly carrying charitable
activities exclusively, would still be covered under this clause, since 12AA
registration is applicable even for religious trust.

The other aspect is with reference to the
scope of services which are eligible for such exemption. The trust which is
registered u/s. 12AA is eligible for exemption only for services ‘by way of’
charitable activities. Charitable need not always mean free or without
consideration; charitable would also refer to subsidised or at minimal costs
with an intent to grant a benefit to the recipient over and above what is charged
for that activity. This entry grants exemption from GST on recoveries from such
activities as long as the activities are for charitable purpose i.e. public
health and awareness in respect of specific diseases; advancement of religion,
spirituality or yoga, educational or skill development programmes for specified
persons and preservation of environment.

The said exemption entries are narrow in the
sense that not all social activities would fall within the term ‘charitable
activities’. The larger question that arises is whether an entity not
registered u/s. 12AA or engaged in activities which are not within fold of
‘charitable activities’ under the exemption notification be liable to GST at
all. Framing a legal proposition, would a non commercial entity engaging in
public service, irrespective of whether registered u/s. 12AA of the IT Act or
not, be liable to be taxed under GST. Two simple examples can be taken:

Example 1 – Old Age Homes under a
Charitable Trust (whether registered u/s. 12AA or not)

ABC trust is owning and operating old-age or
orphanage homes. The said Trust owns the land, buildings and the proceeds from
such trust are necessarily required to be applied for the primary object of the
Trust. The Trust has the following sources of receipts – (a) maintenance
charges for the persons admitted at the old age home; (b) renting of precincts
to third parties for their commercial activities; (c) sale of handmade goods by
old age persons; etc. Admittedly, the trust is not a commercial concern
though it is engaging in certain income generating activities. Clause (a) of
the definition requires that there should be an activity in nature of ‘trade,
commerce, etc’ with or without a pecuniary benefit. Though the intention of
profit has been made irrelevant, the intent to engage in business has not been
dispensed with (refer analysis above) in Burmah Shell case. Moreover in the Madras
Port Trust case (supra) the Court held that mere sale of articles cannot by
itself be termed as business unless there is an intention to engage in such
activity. The Hon’ble Supreme Court in Commissioner of Sales Tax v. Sai
Publication Fund [2002] 126 STC 288 (SC) applying the Madras Port Trust
case has held a similar view. Hence, it can be argued that the Old age Trust
should not be subject to any GST on such transaction even though they are
income generating activities i.e. any sale or service cannot be equated to a
business activity, especially in the absence of an intention to engage in such
activity as an occupation.

Example 2 –
NGO engaged in Charitable activities organising a Marathon (whether registered
u/s. 12AA or not)

An NGO which is registered as a 12AA trust
and engaged in charitable activities relating to public health. The NGO
conducts a marathon for collection of funds and uses the same for charitable
activities¹. The NGO collects participation fee for the marathon and
also receives other income from sponsors and advertisers. The said income is
then deployed for charitable activities. The activity may or may not be an
isolated/ non-recurring activity for the NGO. Applying the definition of supply
and business, the question that needs to be answered is whether the aforesaid
income can be said to be part of a trade/ commercial activity and subjected to
GST. Going by the rationale in the previous case study, a stand can be taken
that the NGO is not engaged in trade, commerce, etc. Though clause (c) taxes
transactions which are non-recurring, such transactions should first qualify as
a business transaction as per clause (a). The marathon activity by the NGO
cannot be termed as a trade, commerce activity and hence the NGO cannot be
termed to be in business. However, this is different from an organisation which
organises a marathon and as a practice chooses to donate a portion of proceeds
for a particular social cause. The differentiating factor is the intent behind
the activity which continues to be highly relevant in the scheme of the
definition of business, though the proceeds may meet the same end-use.

____________________________________________________________________________________________

1 There
is a thin line of difference between services ‘for’ charity and service ‘by
way’ of charity. The exemption entry
only covers the latter but not the former.

Example 3 – Employee Welfare Trust

Companies establish welfare trusts wherein
the employees compulsorily contribute a nominal sum towards membership fees.
The trust is established with an objective of medical aid, scholarships to
employees or their dependants. The trust cannot be said to be engaged in a
trade, commerce or such activity and may not fall within the scope of the term
supply. Moreover, the membership fee is strictly not a consideration since the
amount is not paid for a direct inducement of a supply of service of goods
rather it merely establishes an eligibility at the employees to claim a benefit
provided by the trust. It can therefore
be argued that the Trust is not liable for payment of GST.

In summary, the status of the entity, its
objective (incl. that enshrined in charter documents), pattern of dealings and
the importance of the transaction in the scheme of objects would all play a
role in deciding the intent behind the transaction. As repeatedly held by
Courts, the onus of proving taxability qua business transaction is on
the revenue contending the taxability. Similarly, there is a very good case to
argue that the welfare trusts, social trusts and institutions claiming income
tax exemptions u/s. 10(23C), whether charitable or not, can still be said to be
outside the ambit of GST unless they undertake activities which are
predominantly in the nature of trade, commerce, etc.

Mutual Associations (Trade/Non-Trade), etc.

The fundamental requirement for a
transaction to be termed as ‘supply’ in section 7 of the GST law is the
existence of two or more transacting parties (with or without consideration).
The definition of business includes a provision of a facility/ benefit by a
club, association, society or such mutual benefit body as ‘business’. The
question arises is whether in view of this inclusion any activity by a mutual
concern (such as clubs, resident welfare associations, etc.) to its
members results in a levy of GST on the services of such concerns. In order to
answer this question, it may be essential to relook at the principles under income tax and erstwhile service tax regime.

Mutuality Principles under Income Tax
Law

Mutual societies are formed by pooling
resources for the common benefit of all its members. The mutual societies could
be incorporated or otherwise and it would not alter the concept of mutuality.
Under income tax, an association of members forming a mutual group is not
taxable on the surplus resulted in the hands of the association on the doctrine
of mutuality. This is based on the concept that no one can profit from himself
or trade with himself. The profit or surplus merely indicates that the members
have over-charged themselves and they continue to have a right of disposal over
the surplus or even wind up such surplus.

The Hon’ble Supreme Court in Commissioner
of Income-Tax vs. Bankipur Club [1998] 109 STC 427 (SC) laid down certain
requirements to claim the benefit of mutuality:

– Complete identity of the
contributors and the participators i.e. contributors to the common fund and the
participators in surplus should be an identical body

– Legal form of the
association is immaterial

– Mere fact that some of the
members take advantage of the activities
while the others having the right to do so do not avail of this, does not
affect mutuality

– If money is realised from
members and non-members for the same consideration by giving alike facilities
to all, it evidences profit earning motive and commerciality and mutuality
cannot be said to exist (Commissioner of Income-Tax, Bombay City vs. Royal
Western India Turf Club Ltd. AIR 1954 SC 85).

The relevant extract of the judgement is :

“………if the
object of the assessee-company claiming to be a “mutual concern” or “club”, is
to carry on a particular business and money is realised both from the members
and from non-members, for the same consideration by giving the same or similar
facilities to all alike in respect of the one and the same business carried on
by it, the dealings as a whole disclose the same profit-earning motive and are
alike tainted with commerciality. In other words, the activity carried on by
the assessee in such cases, claiming to be a “mutual concern” or “members’
club” is a trade or an adventure in the nature of trade and the transactions
entered into with the members or non-members alike is a trade/business/transaction
and the resultant surplus is certainly profit income liable to tax……”

In a more recent case of Bangalore Club
vs. CIT [2013] 350 ITR 509 (SC), the Court denied the benefit of mutuality
on the basis that surplus funds which were loaned to a member bank against
interest were at the disposal of such member who used it for commercial
operations. In other words, diversion of funds to third parties or even members
for exclusive use would adversely affect the concept of mutuality and taint the
society with a commercial nature, though to the extent the mutual operations
continue, such benefit would be available.

Mutuality Principles under Service
Tax Law

The service tax law vide Finance Act, 2006
and subsequently in the negative list scheme had by insertion of an explanation
treated a club or association and its members as distinct persons. The
explanation was attempted to dissect the principle of mutuality and impose
service tax on the services of a club or association to its members. A dispute
arose with regard to the impact of the explanation on the club or association
services provided by such mutual associations. The High Court in Ranchi Club
Ltd vs. CCE, Ranchi (2012) 26 STR 401 (Jhar) differentiated between a
‘members club’ and a ‘propreitory club’ for incorporated associations. In a
members club, every member is a shareholder and every shareholder is a member
with no third party transaction and there is no separate legal person in such
case. However, in a propreitory club, where certain shareholders are members or
certain members are shareholders; or members are not owner of the property of
the club, then the club and its members are distinct persons. The Court
followed the decision of the Supreme Court in Joint Commercial Tax Officer
vs. The Young Men’s Indian Association – 1970 (1) SCC 462, which held that
in a member’s club, the club is merely acting as an agent for its members in
the matter of supply of various preparations and there could not be a ‘sale’ in
such arrangements.

In order to tax a mutual concern, it is
imperative that the legislature breaks through the concept of mutuality by
fictionally delinking the mutual society from its members. In the current GST
law, the provisions do not fictionally define the club or its members as
distinct persons or alter the status of mutuality, The inclusion in the
definition of business merely treats the activity as a business activity.
Neither does the current definition of ‘supply’ nor the charging section of GST
law treat the club and its members as distinct persons. In fact, the case of
seeking GST from clubs or mutual society is on a weaker footing in comparison
to the service tax law as there is no parallel to Explanation 3 of section
65B(44) of the Finance Act, 1994, in the current GST law. In fact, in few
specific instances, the deeming fiction to treat branches in two States or in
two countries as distinct persons or supplies between principal and agent as
deemed supplies has been introduced. In the absence of such deeming fiction, it
can be argued that the limited role which the said clause performs is include
the activity as a business activity for the club, association or mutual
society. The said analysis could be applied in the following case studies:

Example 1 – Resident Welfare associations
(RWAs)

RWAs are established for the mutual welfare
of the residents of a particular locality. RWAs collect maintenance fees, rent
out space for commercial establishments, hoardings, etc. The said
associations are formed by the residents with periodical contributions which
are utilised for the maintenance of common areas of the resident establishment.
In the process, it derives income from third parties from the common area but
for the sole purpose of reducing the maintenance costs to residents of the
establishment. Section 7 defining supply requires that there has to be a supply
to another for consideration for it to be termed a supply. The maintenance fee
collected by the RWAs from its members cannot be termed as a transaction
between two parties (in view of the concept of mutuality) and consequently be
outside the scope of taxability. The exemption entries for RWAs (Rs. 5,000/-
per month) may really not have any application to associations which are
conforming to the concept of mutuality.

Renting service by the RWAs to third parties
would not fall within the concept of mutuality. Yet, in such transactions, a
contention can be made that the renting services by RWAs are for the purpose of
reduction of costs of the RWAs and therefore not a business activity in the
sense of being a trade, commerce, etc. It may also be noted that section
2(17)(e) covers only services and facilities to members within the scope of
business and not services and facilities to non members.

Another example would be with respect to the
club facilities which are housed in the RWAs. If the in-house club is
maintained and operated by the third party and the association merely rents out
the place which houses the club, the principle of mutuality would not apply and
GST would be applicable on the services rendered by the third party club. But
where the club is being operated by the association itself, the ground of
mutuality can certainly be taken and GST may not apply in such circumstances.

Example 2 – Clubs or association services
(RWAs)

Clubs provide several facilities to its
members including recreation, restaurants, renting of space, etc.
Member’s clubs operate on the principle of mutuality, own properties on behalf
of the members and hold the funds/ contribution for the members. The club would
have to conforn to the conditions to establish mutuality based on the
principles in Bankipur’s case. While article 366(29A) contains a specific
clause to tax on ‘supply’ of goods by an unincorporated association or body of
persons to a member for consideration as a sale of goods by such association to
its members, the said clause cannot on its own trigger taxation in GST regime
on account of the following reasons:

– The
Calcutta Court in State of West Bengal and Ors vs. Calcutta Club Limited
[2008] 14 VST 499 (Cal) held that though article 366(29A) has been amended,
the vital requirement of consideration continues to be present in the sales tax
law. In a members’ club, the charges paid for the services are merely
reimbursement of the costs incurred by the club and cannot be termed as
consideration between the club and the members².

2 It may be noted that this matter has been
referred to a larger bench of the Supreme Court vide decision [2016] 96 VST 20
(SC) State Of West Bengal And Others vs. Calcutta Club Limited, but in the view
of the author, the decision of the Calcutta High Court states the correct
position of law.

– The
effect of the deeming fiction of Article 366(29A) has not been percolated in
the GST law in the definition of supply or taxable persons (and only in a
limited way in Schedule II of the Act). The requirement of two persons and a consideration
in mutual societies is still wanting in the current GST law.

– Article
366(29A) applies to ‘supply of goods’ and does not apply ‘supply of services’ –
also refer Entry 7 of Schedule II of the GST law. Therefore, a restaurant
services by a mutual society is deemed to be a supply of service & would
not be covered by the said entry.

– Section
25(4) and (5) of the GST law does not seem to cover the aspect of distinct
persons for a club and its members.

The author does see a certain challenge in
taking the stand over non-taxability in view of entry 3 of Schedule I which
deems a supply of goods by an agent to its principal as a GST transaction. This
is in view of the Court observations that clubs operate as an agent of the
members in performing its function. But it may also be noted that the
definition of ‘agent’ does not strictly cover the classes of persons like a
club, society, etc. and hence, may stand excluded.

The exercise of examining the business
aspect of a transaction is a double-edged sword since any attempt to exclude an
act from the term business would have potential consequences over the input tax
credit claim u/s. 17(1), on the ground of it being used either wholly/ partly
for a non-business activity.

This is on the basis that an input or input
service or capital goods on which credit is proposed to be claimed should
necessarily be used ‘in the course or furtherance of business’ for it to be
eligible for credit. But there would certa inly be fresh litigation on the
definition of business and last word is far from being stated.

shailesh.kwebmaker

GST

8. [2018-TIOL-04-HC-ALL-GST] M/s. Continental India Pvt. Ltd. and Another vs. Union of India

Respondents directed to re-open the GST portal for filing Trans-1 on account of failure of system on the due date.

FACTS
The petitioner seeks a writ of mandamus directing the GST council   respondent no. 2 to make recommendations to the State Government to extend the time period for filing of GST Tran-1, because his application was not entertained on the last date i.e. 27.12.2017 and application is complete for the necessary transactional credit. It was stated that despite several efforts the GST system did not respond as a result the petitioner is likely to suffer loss.

HELD
The High Court directed the Respondents to reopen the portal within two weeks from the date of the decision. In the event they do not do so, they will entertain the application of the petitioner manually and pass orders on it after due verification of the credits as claimed. The Court will also ensure that the petitioner is allowed to pay its taxes on the regular electronic system also which is being maintained for use of the credit likely to be considered for the petitioner. _

shailesh.kwebmaker

Deposition in Investigation Proccedings – Binding effect

Introduction

Under fiscal
statutes, there are provisions for investigation. Such provisions were there
under Bombay Sales Tax Act, 1959 also.

Normally, when investigation action takes place, a statement (also referred to as deposition) is recorded during the course of investigation. The intention of such deposition is to get the facts recorded which can be used further for assessments and for raising liability, if applicable. However, practical experience shows that under heavy pressure and threats, etc., the contents get recorded (admitted) in favour of revenue. In other words, the concerned dealer/party is forcibly made to admit tax evasion and thus commitment is taken for discharging the liability.

The issue arises whether such statement is binding in the course of assessment.

There are various instances where the parties have retracted the statements and judiciary has approved such retraction. Normally, such retraction is required to be done immediately and as early as possible after giving the statement. It should also be supported by reasonable ground for retraction. However, in spite of above general position, it can still be said that the statement given during investigation is not binding, if by circumstances and facts, it can be shown that the statement is factually incorrect. And under such circumstances, even late retraction or no retraction is also not an issue. In other words, inspite of admission in statement or deposition, if the factual position is shown to be different with satisfactory supporting, then the judiciary will certainly take into account such a changed position.

Judgement in case of Trilok Enterprises (VAT SA No.136 to 138 of 2011 dt.19.7.2017).

Recently, Hon. M.S.T. Tribunal had an occasion to deal with such an issue in above judgement. The facts as recorded by the Tribunal are as under:

“2. The appellant, a person not registered under Bombay Sales Tax Act, 1959 was visited by officers of Enforcement Branch, Mumbai on 21.01.1997. During the visit, no books of accounts found, however, details of Bank transactions were found which show that during 1994-95, 1995-96 and 1996-97, large amounts were deposited and withdrawn from the bank account. A statement of the appellant was obtained by Enforcement Officer. In this statement the appellant, viz. Bharat Deepchand Vora, proprietor of M/s.Trilok Enterprises, appears to have admitted that he has done trading with M/s. Gurjar Steel, so also business on commission basis in Iron and Steel during that period. The rate of commission is stated as 10 paise. The enforcement branch, treating the appellant as unregistered dealer, issued him notices for assessment for those three years period. The appellant is assessed on the basis of a statement of sales, furnished by him. The appellant appears to have filed return and deposited some tax with the same. The assessment orders were challenged by the appellant before the 1st Appellate authority. Main contention of the appellant was that, he has not done any business of sales and purchases, during those periods. The First appellate authority, vide its order dated 17.6.2000, had been pleased to set aside the assessment orders and remanded the matters to assessing authority, with a direction to assess the appellant afresh. On remand, it is stated, that the assessing officer gave opportunity of hearing to the appellant, and again he has passed identical assessment orders, as per earlier orders passed by him. The appellant appears to have maintained his stand in reassessment after remand that he has not done any business of buying and selling during relevant period. The assessing officer however, has assessed the appellant on the basis of record available before him and he has levied tax, interest and penalty. Against that order, passed after remand, the appellant had filed first appeal, which was dismissed on merit, by the first appellate authority, by the order impugned by the appellant in the instant appeal.”

On merits, on behalf of appellant, it was argued that the party has not done any business of sale/purchase but only financial transactions. It was argued that no sales or purchases have been established. It was further argued that mere statement before the officer of Enforcement cannot be allowed to form a basis for determining sales/purchase transaction particularly in absence of other cogent, reliable and trustworthy evidence. It was further brought to notice of Tribunal that the statement was obtained under threat. The returns filing and payments were also under threat of prosecution.

On behalf of the Revenue, the star argument was that since the appellant himself has admitted sale/purchase in the deposition and by filing returns and payment, there was no need for revenue to further bring any supporting material.

Hon. Tribunal examined the factual position vis-à-vis legal position. In para 15 & 16, Hon. Tribunal made remarks about the effect of deposition. The relevant paras are reproduced for ready reference.

“15. Now if we carefully look at this statement and the statement made by the appellant before the visiting officer at the time of visit admittedly books of accounts were not found. Firstly it is unlikely that a dealer having such a volume of trading would not maintain any books of accounts. Further he certainly does not know the changes in the rate of tax S. S. Patta from 1% to 4% and it is unlikely that he would calculate the interest exactly up to the date, and would show that the same is payable. Thus, though it is signed by the appellant, in all probability, it is a statement prepared by somebody else and not by the appellant and signature of the appellant appears to have been obtained on the same.

16. If we look at the bank statement available on record, it will be seen that firstly there has been no attempt to match the same with the list of bills mentioned above. Secondly, it is seen, that the appellant has deposited amounts in cash and has issued cheques to M/s.Gurjar Steel. In this statement before investigating officer, he had stated that he was dealing with Gurjar Steel. If cheques are issued to Gurjar Steel, at the most there could have been purchases from Gurjar Steel, who was a registered dealer. Admittedly bank account of Gurjar Steel was provisionally attached by the department for recovery of the dues, but subsequently the attachment was withdrawn. If the appellant had made payment by cheques to Gurjar Steel, who is registered dealer, there was no reason for not showing these transactions as purchases as that would have been instances of resale in the hands of appellant and would not have attracted any liability for payment of tax. It does not appear from the record that department has made any attempt to confirm the genuineness of the transactions from M/s. Gurjar Steel or from any other party, despite the fact that matter was remanded back by the first appellate authority with direction to bring additional material on record to establish the factum of sales. The assessing officer, without considering these directions appears to have passed same order on remand.”

In para 19, the Hon. Tribunal has made reference to judgement of the Hon. Supreme Court about relevance of statement, in the following words.

“19. In CBI vs. V. C. Shukla and others (1988) 3 SCC 410, Hon’ble S. C. while speaking about relevancy of evidence u/s.34 of Evidence Act has observed, that first part of section 34 speaks about relevance of entry in the books of account as evidence, and the second part speaks in a negative way, of its evidentiary value for charging a person with a liability. To make an entry relevant thereunder it must be shown that it has been made in a book, that book is book of account and that books of account has been regularly kept in the course of business. Even if, the above requirements are fulfilled and the entry becomes admissible as relevant evidence, still the statement made therein shall not alone be sufficient to accept it as substantive evidence to charge any person with liability of paying tax.”

Observing that there is no independent evidence gathered by the revenue to establish sale/purchase transactions, the Tribunal held that the levy of sales tax on alleged sales in instant appeal is unsustainable. Accordingly, the Tribunal allowed the appeals by quashing assessment orders.

CONCLUSION
The above legal position laid down by the Tribunal will also be relevant under other fiscal laws. The sum and substance is that the tax can be levied only if there are established taxable transactions and not merely on admission. Therefore, in due cases, the parties are entitled to demonstrate their non-liability inspite of any wrong admission made in assessment or in investigation proceeding. Ultimately, the correct legal position will prevail. _

shailesh.kwebmaker

IGST Framework – Constitutional Aspects

This article is limited to examining the Integrated Goods and Service Tax (‘IGST’) framework in the backdrop of the provisions of Indian Constitution. Specific case studies/ challenges arising under the IGST law would be examined in a separate article.

CONCEPT OF IGST UNDER THE INDIAN CONSTITUTIONAL SCHEME
The Indian constitutional system possess features of a federation with strong unitary elements making it a ‘Union of States’. On these lines, Article 246 of the Indian Constitution provides for the demarcation of legislative powers between the Union and States, with residuary powers resting with the Union. In the context of fiscal powers, the legislative lists clearly demarcate the fields of legislation between the Union and the States and restricts each of them from encroaching the other’s arena. This constitutional set up posed a mammoth task for policy and law makers in designing a suitable GST model for India; ultimately leading to the promulgation of the 101st Constitutional Amendment.

DEVIATION FROM THE CONSTITUTIONAL SCHEME PREVALENT UNTIL NOW
The taxation scheme prevalent after the 101st Constitutional Amendment is a fundamental departure from the mutual exclusivity of fiscal powers between the Union and the States. The policy makers were faced with a tight balancing act of harmonising the tax structure in India across States on the one hand and retaining their constitutional independence on fiscal matters on the other. Instead of granting mutually exclusive taxing powers to Governments by creating specific entries in their respective list of the Seventh Schedule to the Constitution, it was decided to confer parallel/ simultaneous powers (not part of the Concurrent List) through a specific article in 246A. The Union and the respective States would legislate and the corresponding Governments would administer the laws within their respective territory. A parallel power structure was a conscious attempt to ensure harmony in fiscal decisions among the Union and Group of States.

This gave rise to the next challenge over addressing the geographical jurisdiction of States specifically over transaction such as inter state transactions, export, import etc having an element of another geography. It also leads to a supplementary issue of revenue allocation between the States on such transactions. To avoid the tax chaos prevalent in the Pre Central Sales Tax period, ie multiple States seeking to tax the same transaction on the claim that one of many aspects of a sale transaction occurred in their State (such as delivery, transfer of property, etc), which resulted in overlap in taxation on the same event, the Parliament was placed with the responsibility of laying down a robust law governing principles over the jurisdiction of transaction between the States, Dispute Resolution and also international transactions. The idea of implementation of IGST model in India was mooted to tackle this particular problem.

ECONOMICS BEHIND THE IGST LAW
Economically speaking, IGST is a bridge enabling flow of the SGST component of revenue from the Supplier State to Recipient State. Under the erstwhile origin based scheme of CST/ VAT, the State collecting the tax at the point of origination retained the revenue arising from such sale, contrary to the principle of taxing consumption. On this count, it hampered the consuming state to give any tax credit on inter-state purchases and resulted in CST being loaded on the purchase costs.

The GST law, which is guided by consumption (elaborated later) has adopted a modified version of taxing such transactions enabling the flow of revenue to the State of Consumption. The broad modalities are as follows:

– Inter-state supplier will collect the IGST and remit it after adjusting available credit of IGST, CGST and SGST on his purchases

– Supplier state will transfer to the Union Government the credit of SGST payment, if any, used in payment of IGST

– Union Government would apportion the SGST component to the State in which the consumption of the supply takes place (place of supply)

– Importing consumer will consume the goods or services in the State and the State would be entitled to retain revenue on this consumption (B2C transactions)

– Importing dealer will claim credit of IGST while discharging his output tax liability in his own state (B2B transactions) and the chain would continue until final consumption either in the same State or else-where.

Prior to venturing into the IGST laws and the specific provisions, it would be appropriate to understand the basic concepts/ definitions of the IGST Law which would have to be applied to IGST transactions. The concepts are sequentially examined.

1. Territorial Jurisdiction v/s Extra-territorial Nexus

Section 1 of the IGST Act defines the extent of the law and states that the Act extends to the whole of India except to the State of Jammu and Kashmir. With the Integrated Goods and Services Tax (Extension to Jammu and Kashmir) Ordinance 2017, the words “except Jammu and Kashmir were omitted”. This Ordinance came into force w.e.f. 08-07-2017.

Without examining the scope of the term India and its statutory extensions, it would be important to examine the legislative limits of the enactment. The general principle, flowing from the sovereignty of States, is that laws made by one State can have no operation in another State. An issue arises in case of transactions which are said to be undertaken wholly or partly outside India. In the context of Income tax Act, 1922 a challenge was made to the vires of the then section 4(1)(b)(ii) of the said Act which imposed income tax on a branch of the assesse which earned income outside of British India. The Privy Council examined pari-materia provisions of the Article 245(2) (in the Government of India Act, 1935) and upheld the imposition stating:

“The resulting general conception as to the scope of Income tax is that given a sufficient territorial connection between the person sought to be charged and the country seeking to tax him Income-tax may properly extend to that person in respect of his foreign income.”

Subsequently, the Hon’ble Supreme Court in Electronics Corporation vs. CIT & Anr 1989 AIR 1707 (SC) was examining whether technical services provided abroad could be taxed in India on the ground of extra-territorial applicability of law. The Court upheld the doctrine that territorial nexus is an essential ingredient for exercising jurisdiction over a transaction though it left the parameters of determination of nexus slightly open ended.

Subsequently, on a reference made in the above case to the constitutional bench in 2017 (48) S.T.R. 177 (S.C.) GVK Industries Ltd vs. Income tax Officer wherein the Court made detailed observations on the inter-play between territorial limits and exterritorial operation of a law. Furthering the case in Electronics Corporation of India, the Court set down four extreme views for consideration on the proposition of ‘nexus’:

i.   Rigid view – State would have powers if “aspects or causes that occur, arise or exist, or may be expected to do so, solely within India”.
ii.   Slightly liberal view – State would have powers if the event had significant or sufficient impact on or effect in or consequence for India
iii.   Even more liberal view – State would have powers as long as some impact or nexus with India is established or expected
iv.   Extreme view – State has powers to legislate for any territory without any limits.

The Court also explained the contextual meaning of the terms for purpose of application of the nexus theory:

– “aspects or causes”
events, things, phenomena (howsoever commonplace they may be), resources, actions or transactions, and the like, in the social, political, economic, cultural, biological, environmental or physical spheres, that occur, arise, exist or may be expected to do so, naturally or on account of some human agency.

– “extra-territorial aspects or causes”
aspects or causes that occur, arise, or exist, or may be expected to do so, outside the territory of India

[1] [1948] 16 ITR 240
(PC) PRIVY COUNCIL Wallace Brothers & Co., Ltd. v.Commissioner of
Income-tax

[1] Article 245(2)
holds that any statute would not be declared invalid on the ground of
extra-territorial operation

– “nexus with India”, “impact on India”, “effect in India”, “effect on India”, “consequence for India” or “impact on or nexus with India”

any impact(s)on, or effect(s) in, or consequences for, or expected impact(s) on, or effect(s) in, or consequence(s) for : (a) the territory of India, or any part of India; or (b) the interests of, welfare of, wellbeing of or security of inhabitants of India, and Indians in general, that arise on account of aspects or causes.

The Court finally held that the Parliament is certainly restricted from enacting laws with respect to extra-territorial aspects or causes which are not expected to have any direct or indirect tangible / intangible impact to the territory of India. The Court had also strongly refuted the reliance on Article 245(2) and distinguished extra-territorial ‘applicability’ from extra-territorial ‘operation’ of law.

2. Territorial Aspects Theory

Furthering the point of the Court, we may now dissect the law to identify the ‘aspects’ the IGST law adopted in its structure:
•   Supply of Goods or services
•   Location of supplier
•   Place of supply which is inter-dependent on certain elements of a transaction
•   Location of recipient

In applying the territorial aspect theory, it may be fruitful to understand the conceptual role of each of these aspects in the GST law and look for clues which lead to a reasonable answer on the territorial nexus:

a) Scope of Supply (Section 7 of CGST law) – while this is popularly referred as the definition of supply or as the ‘taxable event’, the placement and the verbiage do not clearly suggest so. In fact, the specific inclusion of ‘import of services’ within the scope perhaps may provide an indication that this provision also somewhere examines the situs.

b) Location of Supplier (Section 8 and 9 of IGST Law) – this phrase assists in deciding the location of the supplier of goods or services. It plays a role in deciding the character of the transaction (inter-state or intra-state). Generally speaking, it is the supplier who is the taxable person in GST and the jurisdiction exercised by Central & State authorities is based on his location.

While the location of supplier of goods has not been defined, the location of supplier of services has been defined. The definition states the location would generally be the place for which registration has been obtained. As it is defined, place of business refers to a physical and sufficiently permanent structures for which registration is obtained. It also states that where a service has been rendered from a fixed establishment, the said fixed establishment would be termed as the location of supplier. In case of such multiple establishments, the establishment most concerned may be considered as the location. In the absence of any such location, the usual place of residence of the supplier. In effect, the said concept fixes the situs of the ‘from’ location of a supply of goods or services. It identifies the origination of a supply which is relevant for the purpose of collection of taxes.

c) Place of Supply (Section 10-13 of IGST Law) – Place of supply represents the place of consumption (place of supply is a misnomer). In the context of goods, the IGST law is guided by the destination of goods to ascertain the place of supply except in stray cases where a destination cannot be pointed to a particular location (such as supply of goods on board a conveyance). Services, being an intangible activity cannot be fixed to a destination; but being an economic activity, it is generally presumed that the location of the recipient is its place of consumption (except for transaction where consumption can be clearly tagged to a location say immovable property services, etc.). Even in the context of cross border transactions, goods and services are generally considered as consumed at their destination or location of recipient of registered person.

The Place of supply is also a proxy for the State which would be entitled to the SGST component of the revenue in terms of the Apportionment and Settlement Provisions of IGST Law (Section 17(2)(2) of IGST Law). This is significant from two counts (a) it enables transfer of GST revenue to the State of consumption; (b) enables the State to maintain the value added tax chain (in B2B transactions). Therefore, the place of supply determines the place of consumption (as per law) and the geography which is entitled to the revenue on account of its consumption. It is on this principle that exports are zero-rated as the place of consumption is said to occur outside India. Similarly, imports are taxed under reverse charge provisions on the basis that the place of consumption is in India. The IGST has pivoted on the place of supply for identification of consumption and assigning the revenues to the jurisdiction in which the consumption has taken place.

d) Location of Recipient (Section 2(14) of IGST Law) – This aspect of a supply transaction is primarily inter-twined into the place of supply provisions for services. It is generally assumed internationally that services are consumed at the location where the recipient is located and registered. Where the services are consumed at an establishment elsewhere, the location of such establishment would be considered as the place of consumption. The location of recipient enables the law makers to fix the place of consumption of services.

GST is a fiscal law aimed at garnering revenues for a State. Among the four aspects stated above, it appears that the Place of Supply (i.e. consumption) assumes significant importance in the scheme of things. Though the place of the supplier is the point of ‘collection’ of taxes from the taxable person, it ultimately narrows down to the place of supply of every transaction. Even if a supplier state has collected taxes, it cannot retain this revenue and would have to transfer it to the account of the state where the ultimately consumption takes place. In the context of services, the State in which the recipient is located which would be entitled to revenue on this transaction.

Even placing an eye on export of goods and services, one gets a view that destination of such activity drives the benefits of zero-rating. In the context of import of services, the law makers through a provision of reverse charge directed the State of consumption itself to collect and retain the tax on such transactions.

In order to further cement one’s view on this proposition (having ramifications on cross border trade and commerce), it may be useful to extract further clues from the law on this front:
•   Proviso to section 5 of the IGST law carves out an exception from applicability of IGST law on imported goods until they cross the custom borders for home consumption. Therefore, even if goods arrive at the customs port for purpose of transhipment to another country, the IGST law refrains from taxing such transactions on the destination principle. Circular No. 33/2017-Cus dt. 01.08.2017 clarifies in the context of High seas transactions that only the last buyer of the chain would be required to pay IGST.
•   One may also test an out and out transaction from a State territory perspective and possibly extrapolate this to the Central law to examine international territorial aspects. Say A stationed in Mumbai buys goods from Madhya Pradesh and asks the transporter in Madhya Pradesh to directly deliver the same to a customer in Gujarat. Even-though the dealer is located in Maharashtra, the law makers have excluded this transaction from the purview of MH-GST and brought the same under the IGST law. Looking at it from a MH GST perspective (also see Article 286), this transaction would be an ‘outside State’ transaction for Maharashtra inspite of the supplier being located in Maharashtra. The limited point which emerges is that the location of the supplier is not a conclusive aspect for territorial nexus. Applying this at an international scenario, IGST law should also not tax goods movement from China to Singapore merely because the supplier is located in India. Now it seems simple for goods, it becomes slightly more complex for merchanting services in the absence of a physical trail of events.
•   While the law has placed dependence on the location of the supplier and recipient to identify the trail, in which case, it may be considered as import of services coupled with export of services, in cases where the services can be demonstrated to have been supplied outside India and consumed outside India, can these proxies result in a tax liability or will it amount to an extra-territorial jurisdiction?.
•   Under the IGST law, there is a residual clause (section 7(5)(c)) which deems a transaction as an inter-state transaction if it is neither classified as intra-state nor inter-state. Importantly, the clause uses the phrase ‘in the taxable territory’ implying that some aspect of the transaction (specifically the place of supply) should take place in the taxable territory for the law to apply. Simple example could be of services being delivered to off shore structures in the exclusive economic zone which would be termed as inter state supply on this count since the place of consumption is attached to the structure located therein.
•   In the context of cross border transactions (incl. tax on United Nation Organisations, and similar institutions), emphasis has been to tax the inward supply into India in the hands of the recipient. Inward supply refers to ‘receipt of goods or services’. Unless the goods or services are strictly received by the recipient of such supply, the transactions cannot be taxed in India.

In summary, among all the aspects of a transaction, is seems evident that the place of supply drives the taxability and among all aspects, the legislature intends tax on only transactions where the place of supply is in India. The location of the supplier though important in law for operation of law, it is only for the limited purpose of collection of tax. A transaction can be considered as extra-territorial if the place of supply is outside its fiscal limits.

3. Meaning of India

“India” has been defined in section 2(56) of the CGST Act (reference from Section 2(24) of the IGST Act) to mean the territory of India as referred to in Article 1 of the Constitution, its territorial waters, seabed and sub-soil underlying such waters, continental shelf, exclusive economic zone or any other maritime zone as referred to in the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976 (80 of 1976) (Maritime Zones Act) , and the air space above its territory and territorial waters .

As per Article 1 of the Indian Constitution, India is defined as a Union of the territories of the State and Union Territories specified in the First Schedule of the said constitution. India exercises sovereign rights over this land mass. International UN convention has laid down principles for defining the territorial jurisdiction over international waters extending beyond the land mass of coastal States. Part V of the said convention (specifically article 57 and 60) specifically grant India exclusive jurisdiction in matters of customs, fiscal, health, safety, etc over the artificial islands, installation / structures for explorative and research activities in such zone. In line with the international UN Conventions, the aforesaid Act was legislated in 1976 giving India specific powers over these Maritime zones.

Section 7 of the Maritime Zones Act grants powers to India to exercise sovereign rights over the exclusive economic in line with the rights and limitations under the UN convention. Sub-section (7) grants powers to the Central Government to notify any enactment to extend over this territory and the area would be considered as part of India under the enactment.

A question arises on whether the Central Government has to necessarily issue a notification under the IGST law for it extend to the exclusive economic zone (similar to the Customs Act) or is the definition of India spreading its wings over to such maritime zones itself sufficient. Section 7 and 8 of the Maritime Zones Act, 1976 empowered India to exercise exclusive rights for specific purposes enlisted therein (such as exploration, research, etc). Sub-clause (6) of the said sections grant powers to the Central Government to extend any enactment for the time being in force to such maritime zones. The Customs Act 1962, Excise Act 1944 contained respective notifications extending itself to the said zones. However, the Central Sales Tax Act, 1956 (CST) did not contain such notifications on this aspect. A challenge was made in the Gujarat High Court on the applicability of CST on transactions which were moved to the off-shore rigs in the exclusive economic zone. The High Court in Larsen & Toubro vs. Union of India (2011) 45 VST 361 (Guj) struck down the imposition on the ground that no such notification has been issued under the CST law and the enactment cannot extend to such areas until such effect is given. In the context of service tax, the Bombay High Court in Greatship (India) Ltd. vs. CST, Mumbai 2015 (39) S.T.R. 754 (Bom.) was interpreting a subsequent notification which enlarged a preceding notification with respect to the exclusive economic zone. Since the preceding notification was limited to services rendered to off-shore rigs, services by off-shore rigs was held as not taxable. The Court stated that the subsequent notification both services to or by off-shore rigs or vessels cannot be read as clarificatory.

However, it may be noted that the above propositions held good in the context of the specific laws. It can be argued that no such notification is required under the CGST/ IGST law for the Act to apply to such maritime zones on account of the following reasons:

•   The Parliament has itself defined the extent of India’s area in the enactment to spread to such maritime zones, which power it derives under Article 297(3) of the Constitution
•   The Central Government has been empowered to extend an enactment for the law which is in force at the time of enactment of the Maritime Zones Act, for obvious reasons to avoid a legislative amendment to laws prevailing at that time. Subsequent enactments which itself covers such areas need not depend on a notification for its applicability
•   The Customs law had a restricted meaning to ‘India’ to its territorial waters and hence warranted such a notification. However, the IGST law itself expands its definition to such maritime zones. When Act itself has defined India, it need not seek any support from a delegated legislation to give effect unless the enactment states so.
•   The Maritime Zones Act and the UNCLOS itself state that India can exercise ‘sovereign rights’ for specific purposes which also includes in itself taxation rights provided it is limited to the specific purposes.

Therefore, the decision of the Gujarat High Court in Larsen & Toubro’s case can be distinguished in the context of the GST Law.

4. Applicability of the above Concepts

We would apply the above concepts in a merchanting trade transaction. Assuming the IGST law has to be applied on A located in Maharashtra (India), certain variants have been tabulated and the possible views have been provided:

[3] The said Act was
legislated drawing powers from Article 297 of the Indian Constitution which
stated inter-alia that all resources of exclusive economic zone vest with the
Union of India

[4] Geneva Conventions
on Territorial Sea and Contiguous Zone, Continental Shelf and High Sea, and the
United Nations Conventions on the Law of the Sea (UNCLOS) which was adopted on
29 April 1958 and 10 December 1982

No	Scenario – Supply of Goods	Taxability	Reasoning
1	Goods purchased from UK and directly shipped to USA from UK	Neither purchase nor sale transaction is taxable on extra-territorial grounds. Of course, additional customs duty equivalent to IGST can be imposed u/s.3(7) of the Customs Tariff Act, 1975	‘Place of Supply’ – Aspect and impact of law is outside India and hence outside the scope of IGST Law. Moreover, proviso to section 5(1) of IGST law excludes its applicability until the goods are imported into India (i.e. territorial waters)
2	Goods purchased from UK and transferred by endorsement in High Seas (beyond 200 Nautical Miles) to a person outside India	Neither purchase nor sale transaction is taxable on extra-territorial grounds.	Same as above, with additional reliance from the Customs Circular 33/2017 dt. 01.08.2017 which states that High Sea Sales are not taxable and it is only the last buyer in the chain who clears the goods at the customs station that would subject to tax.
3	Goods purchased from UK and document to title of goods was transferred while the goods are within 12 nautical miles from India	Neither purchase nor is taxable on account of proviso to section 5(1) of the IGST Law. One cannot take the plea of extra-territorial levy	Place of supply may be said to be in India but the proviso to section 5(1) excludes such transactions from the purview of IGST law. The customs law on the other hand imposes the duty (incl. IGST) only at the time of custom clearance. Above customs circular supports this position.
4	Goods purchased from UK and document to title of goods was transferred to a person in India while goods in continental shelf	Same as above	Same as above. Moreover, rights of taxation under the Maritime law is limited to explorative activities only.
5	Goods purchased from UK and document of title of goods transferred to a person in India while the goods are under customs bonding	Same as above	Same as 3. Customs law has exclusive rights to tax this transaction. Until the goods form part of home consumption, IGST law has no powers to tax this transaction. Customs Circular No. 46/2017-Cus dt. 24.11.2017 has failed to articulate the tax position clearly (refer note below).
6	Goods purchased from UK and re-exported to Singapore while under customs bonding	Same as above	Same as 3. Section 69 of the Customs law permits re-export of warehoused goods without payment of import duty.

Scenario – Supply of Goods

Taxability

Reasoning

Goods purchased from UK and directly shipped to USA
from UK

Neither purchase nor sale transaction is taxable on
extra-territorial grounds.

Of course, additional customs duty equivalent to IGST
can be imposed u/s.3(7) of the Customs Tariff Act, 1975

‘Place of Supply’ – Aspect and impact of law is
outside India and hence outside the scope of IGST Law. Moreover, proviso to section 5(1) of IGST
law excludes its applicability until the goods are imported into India (i.e.
territorial waters)

Goods purchased from UK and transferred by
endorsement in High Seas (beyond 200 Nautical Miles) to a person outside
India

Neither purchase nor sale transaction is taxable on
extra-territorial grounds.

Same as above, with additional reliance from the
Customs Circular 33/2017 dt. 01.08.2017 which states that High Sea Sales are
not taxable and it is only the last buyer in the chain who clears the goods at
the customs station that would subject to tax.

Goods purchased from UK and document to title of
goods was transferred while the goods are within 12 nautical miles from India

Neither purchase nor is taxable on account of proviso
to section 5(1) of the IGST Law. One
cannot take the plea of extra-territorial levy

Place of supply may be said to be in India but the
proviso to section 5(1) excludes such transactions from the purview of IGST
law. The customs law on the other hand
imposes the duty (incl. IGST) only at the time of custom clearance. Above customs circular supports this
position.

Goods purchased from UK and document to title of
goods was transferred to a person in India while goods in continental shelf

Same as above

Same as above.
Moreover, rights of taxation under the Maritime law is limited to
explorative activities only.

Goods purchased from UK and document of title of
goods transferred to a person in India while the goods are under customs
bonding

Same as above

Same as 3.
Customs law has exclusive rights to tax this transaction. Until the goods form part of home
consumption, IGST law has no powers to tax this transaction. Customs Circular No. 46/2017-Cus dt.
24.11.2017 has failed to articulate the tax position clearly (refer note
below).

Goods purchased from UK and re-exported to Singapore
while under customs bonding

Same as above

Same as 3.
Section 69 of the Customs law permits re-export of warehoused goods
without payment of import duty.

Note – CBEC Circular 46/2017-Cus has taken a contradictory stance while clarifying the taxability of Bond to Bond Transfers.

In short, the said Circular states that sales while the goods are under bonding are subject to IGST in the hands of the seller in terms of section 7(2) read with section 20 on the entire sale price. Further, the customs duty applicable on import transaction would be payable at the time of ex-bonding of goods for home consumption. The circular is incorrect in its interpretation on account of the following:

• The circular failed to appreciate the presence of proviso to section 5(1) of the IGST law which excludes the applicability of GST until clearance of home consumption of such goods
• It has also lost sight of its preceding Circular No. 11/2010-Cus., dated 3-6-2010 which categorically states that the levy of custom duty is fixed at the time of import and filing of the into-bond bill of entry and deferred until ex-bonding of such goods.

Incidentally, the Finance Bill, 2018 has proposed an amendment to the Customs Tariff Act, 1975 which requires that additional customs duty (in the form of IGST) in case of bonded goods would be calculated on the last transaction value of such goods prior to de-bonding (ie purchase consideration of the last buyer). Use of last transaction value as the basis of collection of IGST, by implication, affirms the stand that only the last buyer of the chain is liable to pay IGST. The law does not intend to tax the intermediate transactions under the IGST law. It is a case of deferment of payment of tax until clearance of such goods for home consumption.

5. Implications from this conclusion

It should be appreciated that the IGST model is a novel idea for implementation of GST. Many federations across the globe have struggled to implement a hybrid model. India has taken the bold step of implementing such a model in the form of a IGST law. The Centre is given more importance in this scheme. It would receive its share of revenue (CGST component) one way or the other. The tussle would be on the SGST component wherein each State may claim to be the Consumption State and extract a share of the IGST revenue. While the industry would hope that it is not transported back to the pre-CST period, certain pockets of the IGST law would require intervention of the Courts, else the tax payer would be sandwiched in this tussle for tax revenue. Other detailed aspects of the law would be examined in a subsequent article. _

shailesh.kwebmaker

GST on Re-development of Society Building, SRA and JDA – Part II

In Part-I, we discussed the taxability of
Development Rights and Re-development of Co-operative Housing Society
Buildings. In this part, we shall discuss the issue of taxability of
Transferable Development Rights, Slum Rehabilitation Projects and Land Development
Agreements, popularly known as Joint Development Agreements (‘JDA’) under GST.

Taxability of Transferable Development Rights
(‘TDR’)

Taxability of TDR can be examined in two
different situations:

– When
granted by a local authority

– When
sold by one developer to another

a. Taxability of TDR when granted by a local authority:

Let us examine the taxability of TDR granted
by a local authority in pursuance of Development Control Regulations (‘DCR’).
In lieu of the area relinquished or surrendered by the owner of the land, the
Government allows construction of additional built-up area. The landowner can
use extra built-up area, either himself or transfer it to another who is in
need of the extra built-up area for an agreed sum of money. TDR is, thus, an
instrument issued by the government authorities which gives the right to person
to build over and above the permissible Floor Space Index (FSI) within the
permissible limit of DCR. The TDR certificates can also be traded in the market
for cash. Developers purchase and utilise them for increasing their development
rights.

Against this factual background, it is to be
considered whether TDR is ‘goods’ or ‘services’ and whether the ‘supply’
thereof is taxable under the GST laws or not.

FSI vs. TDR

Not all development rights are TDR as grant
and use of FSI is development right, a specie of right in land embedded in the
same piece and parcel of land and cannot be divested to another piece of land
to load development potential on it. FSI is not transferable for use of
development on another piece of land unlike TDR which is transferable for use
on any other piece of land and therefore tradable by its very name and nature.
Secondly, TDR is initiated and issued by a local authority unlike FSI which a
private land owner also owns or possess as incorporeal right in his land with development potential as per prevailing town planning or DCR.

Is TDR an ‘Immovable Property’?

We shall now examine whether TDR or right to
obtain extra FSI is an ‘immovable property’ or not. The expression ‘immovable
property’ has not been defined under the GST law. It is, therefore, relevant to
note the definition of ‘immovable property’ under other enactments. Some of
these enactments are General Clauses Act, 1897, Transfer of Property Act, 1882,
Maharashtra Stamp Act, Registration Act, 1908, The Real Estate (Regulation and
Development) Act, 2016. The definition of ‘immovable property’ contained these
legislations are given in the previous article and hence not repeated here.

A perusal of the definitions in the
aforesaid enactments would show that they are more or less similar. Thus, the
definition of “immovable property” not only includes land but also the benefit
arising out of land and the things attached to the earth or permanently
fastened to anything attached to the earth. The scope of the term ‘immovable
property’ is not restricted to mere land or a building but extends even to the
benefits arising out of land.

The “benefit to arise of land” is that
benefit whose origin can be traced to existence of land. It owes its source to
land. Such benefit is inextricably linked to land.

The expression “development right” is not
defined in DCR issued under the Maharashtra Regional and Town Planning Act,
1966. However, a careful perusal and harmonious reading of various provisions
of the DCR as also various judicial pronouncements show the artificial manner
in which ‘development rights’ are carved out of the land. This would
establish that ‘development rights’ are the ‘rights in immovable property’.

In Chheda Housing Development
Corporation vs. Bibijan Shaikh Farid – (2007) 3 Mah LJ 402, the
Division Bench of the Hon’ble Bombay High Court has held that “FSI/TDR being
a benefit arising from the land, consequently must be held to be immovable
property and an Agreement for use of TDR consequently can be specifically
enforced, unless it is established that compensation in money would be an
adequate relief”.

After having explained that FSI / TDR is a
right in immovable property, the next issue to be addressed is whether the
transfer of such right is liable to GST or not.

Is TDR/FSI ‘goods’ or ‘service’?

GST is a levy on supply of goods or services
or both for a consideration by a person in the course or furtherance of
business.

Section 2(52) of the CGST Act defines
“Goods” as under:

“S.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”

A perusal of section 2(52) would show that
it is an exhaustive definition. It includes every kind of movable property
including actionable claims. It also includes growing crops, grass and things
attached to or forming part of the land provided they are agreed to be severed
before supply or under a contract of supply. It does not include money and
securities.

Section 2(102) of CGST Act defines
“services” as under:

“S.2(102)
“services” means 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”.

A perusal of the definition of “services”
would show that it is an exhaustive definition and it encompasses anything
other than goods. Just because it includes anything other than goods, does it
mean it can include anything which normally not understood as service? Can it
include living beings? Answer is no. Though the expression “services” means
anything other than goods, it cannot include anything which is not normally
understood as service. Service is never understood to include property. Though service is defined under indirect tax
laws, it is defined in certain other laws. These definitions were considered by
the Hon’ble Gauhati High Court in Magus Construction (P.) Ltd. vs. UOI
[2008] (11) STR 225, wherein it has explained the meaning of the word
“service”. After considering the definition of ‘services’ in various enactments
like MRTP Act, 1969, Consumer Protection Act, 1986, FEMA, 1999, amongst other
enactments, the Hon’ble High Court observed that “…one can safely define
‘service’ as an act of helpful activity, an act of doing something useful,
rendering assistance or help. Service does not involve supply of goods;
‘service’ rather connotes transformation of use/user of goods as a result of
voluntary intervention of ‘service provider’ and is an intangible commodity in
the form of human effort”.

Therefore, the expression ‘services’ as
defined in section 2 (102) of the CGST Act cannot include ‘immovable property’.
Therefore, transfer of immovable property or right in immovable property cannot
be treated as supply of service.

Section 7(2) of the CGST Act reads as under:

“S.7(2)
Notwithstanding anything contained in sub-section (1),––

(a) activities or
transactions specified in Schedule III; or

(b) such
activities or transactions undertaken by the Central Government, a State
Government or any local authority in which they are engaged as public
authorities, as may be notified by the Government on the recommendations of the
Council, shall be treated neither as a supply of goods nor a supply of
services.”

Serial no. 5 of Schedule III of the CGST
Act specifying activities or
transactions which shall be treated neither as a supply of goods nor a supply
of service reads as under:

“5. Sale of land
and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.”

Therefore, by virtue of section 7(2) read
with Schedule III, sale of land and sale of building are treated neither as
supply of goods nor as supply of services. Issue is “can one state that as
serial no. 5 of Schedule III uses the expression “land” and “building”, the
benefit of this entry is not available to right in land or building?” The
answer is no. We have already explained that transfer of immovable property is
not liable for GST as it is neither goods nor service. Immovable property, by
definition, includes even right in immovable property. Therefore, just because right in immovable
property has not been specifically stated in Schedule III, it doesn’t mean that
they are liable for GST. It is a well-settled legal principle that exemption
doesn’t pre-suppose a charge.

Even otherwise, the expression “land” and
“building” in Schedule III includes even right in land/building. This is
evident from Entry 18 of List II of Seventh Schedule of The Constitution read
with Entry 49 of the same list.

It is, therefore, viewed that TDR/FSI is
neither ‘goods’ nor ‘services’ and hence, cannot be subjected to levy of GST.

Can TDR be considered as an ‘Actionable
Claim’?

The entire issue of the ‘taxability of TDR’
can be looked at from a different perspective also.

TDR is a right which has been conferred by
the Government. It is transferrable by endorsement and delivery. When it is
transferred and can be used on any other land, there is no connection with any
particular land. TDR can change many hands before it is used in a particular
land for availing construction right.

Section 3 of the Transfer of Property Act,
1882, defines ‘actionable claim’ as “a claim to any debt, other than the
debt secured by mortgage of immovable property or by hypothecation or pledge of
movable property or to beneficial interest in movable property.” It means
that any beneficial interest in a movable property is actionable claim if the
same is not in the possession of the claimant. ‘Movable property’ has been
defined in section 3 (36) of the General Clauses Act, 1897, as ‘property of any
description except immovable property’. TDR is not a right in respect of an
“immovable property” as defined in section 3 (26) of the General Clauses Act
1897, and, therefore, it is a beneficial interest arising out of a “movable
property” as per the section 3 (36) of the Act. This right is intangible, and
it cannot be said that it is capable of being in physical possession of anyone.
Any movable property that can be possessed, can be handed over by the owner to
another for use. But in case of intangible property, the right to use such
property can be transferred by an agreement and the transferee can enforce the
right, in case of dispute, by going to the Court. Therefore, TDR should be
construed as an actionable claim. Therefore, its arrangements are transactions
in actionable claims. Support can be taken from the Apex Court’s decisions in Sunrise
Associates vs. Government of NCT of Delhi, 2006 (145) STC 576 (SC) and
Vikas Sales ([1996] 102 STC 106 (SC)) (1996) 4 SCC 433.

Applying the ratio of Sunrise Associates’
case (supra), it can be construed that TDR is an intangible valuable
right which can be sold and purchased independent of land and should be
considered as an actionable claim. Actionable claim is also out of the scope of
supply in terms of paragraphs 6 of Schedule III of the CGST Act. Accordingly,
GST is not payable by any person when he transfers TDR to another.

In view of the above, TDR whether as
‘immovable property’ or ‘actionable claim’ remains outside the scope of
levy of GST.

Leviability of GST in case of Slum
Rehabilitation Authority (SRA) Projects

In case of slum encroached private land, the landlord approaches the Slum Rehabilitation Authority (SRA), a
governmental authority covered under Article 243W of the Constitution which
declares the land as slum land and issues order for rehabilitation of slum
dwellers (in pursuance of DCR 33(10) of Brihan Mumbai Municipal Corporation,
and similar regulations in other metropolitan cities). The landlord approaches
a developer to develop the land and SRA grant extra FSI to the developer for
construction of rehabilitation of slum dwellers as per DCR. The developer
constructs a building for slum dwellers and another for landlord including free
sale area and for himself to recover the cost of construction. As an incentive
to construct building for slum dwellers, SRA may issue TDR in form of DRC
(Development Right Certificate) which can be used on another plot or even may
be sold in open market by endorsement and delivery. Registration of document of
transfer of DRC with local authority is a regulatory requirement. Stamp duty is
paid for transfer of TDR as moveable property but is not required to be
registered under Registration Act as conveyance. Over and above this, the
developer may pay cash consideration to the landlord.

In another scenario, the land may belong
to the Government that has been encroached upon by
the slum dwellers. In such a case, the Developer may agree to develop the land,
construct the building for the slum dwellers and allotment of units therein
free of cost to the slum dwellers in terms of the agreement entered into with
SRA. As against this, the Developer would be granted TDR as may be permitted by
the town planning regulations on the recommendations of SRA which can be
exploited by the Developer to construct another building, the units in which
can be freely sold by him. The Developer may even decide to sell TDR in open
market.

A perusal of the regulations relating to
slum rehabilitation schemes would show that it is an integral scheme. The
developer is required to carry out the work of construction of tenements for
slum-dwellers. Some portion of the built-up area is also allotted to the Land
Owner as per terms of DA. The remaining constructed area belongs to the
developer which is freely saleable by the Developer to recover the cost of
construction of the entire project alongwith his margin for the risk and
reward.

Therefore, it is a single contract for
construction under an integral scheme. The entire supply involves
consideration. Just because the scheme states that certain share in the
built-up area is to be handed over free of cost to slum dwellers and land
owner, it is not free in the legal sense. There is consideration for the
built-up area handed over to all them. It is to be noted that the FSI / TDR
that is sanctioned to the developer would enable him to construct units out of
which portion of it is available to him as freely saleable area. Alternatively,
the developer would be able to sell TDR in open market and monetize the same.
Once an area is declared as slum area and SRA frames slum rehabilitation
scheme, Regulation 33(10) of DCR is required to be followed. Once the
redevelopment / construction is carried out in accordance with Regulation
33(10), there are various conditions to be fulfilled. Therefore, different
events cannot be broken to ascertain the GST liability. The supply is only one.
Section 2(31) of the CGST Act defines ‘consideration’, the relevant portion of
which is reproduced below:

“S.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”.

The above would show that consideration is
linked to supply. The expression consideration should not be read in isolation
of supply and scope of supply should not be read independent of the word
consideration. Consideration can move even from third person as per the
definition of consideration as given in section 2(31). This concept is also
recognized u/s. 2(d) of the Indian Contract Act, 1872.

Whether the landlord can be considered to
have made any supply in the above case and whether the free of cost area
allotted by the developer to the landlord in the newly constructed building
(with or without additional cash payment to the landlord) would constitute
‘consideration’ in the eyes of law?

In the first scenario, the landowner whose
land has been encroached by the slum dwellers engages the developer to
construct a building for rehabilitation of the slum dwellers as mandated by the
authorities to make the rest of the land free from such encumbrance and another
building or buildings which is to be shared by the developer and landlord in
agreed manner. Effectively, the land owner is sharing his land with the
developer as against which the constructed area is being shared between them as
per the terms of DA. Hence, landowner is transferring his ownership right in
the land for area of construction of his share as well as construction of the
building required for rehabilitation of the slum dwellers. Transfer of land is
specifically excluded from the meaning of supply on which GST is not payable.
However, the building constructed by developer for landlord is in form of works
contract service, depending on the, terms of contract that whether the land is
transferred to the developer or mere development right is granted. In the first
case, the service may be termed as Construction Service covered in Entry 5(b)
of Schedule II of CGST Act and in later case, it may be termed as Works
Contract Service covered in Entry 6(a) of the same Schedule.

Alternatively, it can be argued that the
Developer constructing building for Landlord and slum dwellers is, in lieu of,
free sale area received by Developer. Viewed from this angle, the consideration
is the market value of land portion received by the Developer and GST is
payable. In this scenario, if the development right is considered taxable under
GST, the land owner may issue invoice for transfer of development right. Based
on this, the developer shall be entitled to avail ITC against under constructed
flats sold from free sale area.

In case of Government land, TDR is issued
against construction of building for slum dwellers which may be encashed by
selling the same in open market. In such a case, the realized value of TDR may
be liable as consideration for construction of SRA building.

In the case of Sumer Corporation vs.
State of Maharashtra – (2017) 82 Taxmann.Com 369 (Bombay), the Hon’ble
High Court has held TDR to be a valuable consideration equivalent to money.
However, we may here hasten to add that the Hon’ble High Court has, with due
respect, not examined certain broader issues as accepted by itself in the
judgment. The Hon’ble Court has confined itself only to finding out whether
consideration was present or not and have held that TDR is a consideration for
the Works Contract Services.

Nevertheless, one may be adopt a
conservative view and apply the ratio of the decision of the Hon’ble High Court
supra. If the TDR is used on the same plot of land to construct a
building for the land owner, slum dwellers and free sale area for the
developer, it can be said that the consideration received from free sale area
shall cover the consideration for the entire works contract for slum
rehabilitation and the landowner’s portion. It may be pointed out here that SRA
being covered by Article 243W of the Constitution, neither SRA nor the
Developer will be liable to GST in respect of issue of TDR by SRA.

In view of the entire transaction being
single supply, it is possible to avail full input tax credit on entire
construction and set off against the sale of under constructed flats.

Leviability of GST on Joint Development
Agreement (JDA)

JDA signifies a landlord entering into
Development Agreement with a Developer to develop his land having development
potential (FSI) and JV is formed. The landlord contribute his land into JV and
transfer the same by virtue of JDA or promise to convey the land to the society
of the purchasers of flats as may be formed by the JV. The landlord may have a
passive or active role in JV. In most of the cases, landowner is not having any
active role in the venture except giving his land for construction through this
arrangement. Contribution in form of land is a form of sale of land and outside
the scope of GST. Even when the development right is granted instead of
transfer of land per se, it is normally in form of available FSI of the
same plot of land on which it is consumed. Grant of FSI is certainly the right
arising out of the land and even on better footing than TDR which is
transferrable. Thus, grant of development right is outside the scope of GST.

We may, however, hasten to say here that the
joint control of the partners over a venture is the essential criterion for
considering such association as joint venture. The landowner has no role to
play after handing over the land to the developer for construction, whether the
revenue is shared or developed area is shared between the owner and the
developer. Hence, there is no joint venture between the landowner and the
developer. The landowner is giving up part ownership of the land to the
developer in exchange for getting share in revenue of constructed area.

Generally, two models are in vogue in case
of JDA between the landowners and a Developer, viz:

1. Revenue Sharing Model

2. Area Sharing Model.

a) Revenue Sharing Model:

In case of a landlord entering into Joint
Development Agreement with Developer wherein development right of the land is
granted to JDA for exploiting full potential of land on the following terms and
conditions:

– Value
of land (FSI value) is credited to the landlord’s capital account;

– All
expense from plan approval to construction cost, supervision, etc. is to be
borne by JDA to be funded by the Developer. In most of the cases landlord has
no further role to play;

– Upon completion of construction, net profit will
be shared between the Landlord and Developer in agreed ratio.

b) Area sharing Model:

Alternative structure of the transaction is
that the landlord appoints the developer by transfer of development right of
the entire portion of the land and in turn the developer agrees to give agreed
percentage of constructed area to the landlord. Balance area shall be retained
and sold in open market by the Developer.

Can the relationship between the landlord
and the developer in area sharing model be considered as ‘barter’ so as to
constitute ‘supply’ and attract the levy of GST ?

In area sharing model, the landowner is
giving development right to the developer in exchange for getting share of
constructed area (works contract service). This is a case of barter. Taking
conservative view, both the landlord and developer will be required to pay GST,
however albeit with entitlement of input tax credit.

However, in case the developer is obliged to
give constructed area to the landlord against the part ownership of land under
the terms of JDA, both the transactions are outside the ambit of GST.

In revenue sharing model, no service is
provided by the developer or JV to the landlord. In fact, the JV sell the flats
and the revenue is to be distributed between the developer and the landlord in
the agreed ratio. The amount received by the landlord is towards sale /
transfer of land which is outside the scope of GST as per Sch. III of CGST Act.
Hence, no GST liability can arise on revenue sharing model.

Time of payment of GST on supply of under
on development right – NN. 4/2018 CT (Rate) dtd. 25.1.2018

By virtue of this notification, the
liability of payment of CGST is deferred from the date of supply of development
rights, i.e. date of entering into DA/JDA to date of grant of possession or
right in the constructed complex by entering into conveyance deed or similar
instrument (eg. Allotment letter). However, the notification can be said to be
a facilitation measure. The developer is not prevented from making payment even
before grant of such possession and avail input credit of the same against the
sale of under constructed units.

Conclusion:

From the indirect tax perspective, the
issues plaguing the Real Estate/Construction Sector are varied and complex. We
have made an attempt to deal with certain crucial issues and shed light on the
legal position and principles set by the judiciary.

What is required is a very critical
examination of the issues and the interpretation of relevant statutory
provisions in light of the principles of the law settled by various judicial
pronouncements. Needless to say, the readers may apply the views expressed in
this article based on the fact of this case and after obtaining expert opinion.
_

shailesh.kwebmaker

Sale Vis-À-Vis Service Qua Treatment In Hospital

Introduction

In pre GST era, whether a particular
transaction is sale or service has always remained debatable issue. There are a
number of judgements involving the above controversy. Recently, in Maharashtra,
there arose a controversy about nature of transaction in treatment of in-house
patients in a hospital. In hospital, when the patient is admitted, he is given
medical treatment. The treatment includes services of doctors as well as giving
medicines as may be required. In this transparent era, normally, hospitals show
charges towards medicines separately and other charges like bed charges, room
charges etc., separately. Although, this entire in-house treatment is
generally considered as single transaction of service, thus not liable for VAT.
But, in case of Saifee Hospital, while deciding first appeal, the
first appellate authority took a view that the receipts toward medicines are
liable to tax under MVAT Act. Similarly, estimations were made towards food
supply out of composite charges for room. There were also receipts towards
special beds and mattresses. These charges were also held to be liable to VAT
under ‘Transfer of right to use goods’.

Against the above first appeal order, second
appeal was filed before Hon. M.S.T. Tribunal. Hon. Tribunal has recently delivered
judgment in case of Saifee Hospital (Second Appeal No.190 of 2016 dated
8.12.2017).

Issues raised by
first appeal order

The
Hon. Tribunal has noted that the following issues are raised by the first
appellate authority and after giving hearing, the first appellate authority
held them as liable to tax under MVAT Act.

“According to the first appellate authority,
the following transactions were liable to tax,

1) The supply of drugs and
medicines and other surgical goods effected by pharmacy/drugstore to indoor
admitted patients, is a sale liable to VAT.

2) Provision of food in hospital to admitted patients received in
the composite charges received from patients for the bed charges is a sale of
food and liable to VAT.

3) Supply of dental materials/implants
by dental Department is a sale liable to VAT.

4) Hire charges for mattresses
are liable to VAT.

5) Provisions of goods like
special beds and equipments where hire charges have been received from patients
is deemed sale in the nature of transfer of right to use any goods.”

Arguments on
behalf of the appellant

The Hon. Tribunal has noted the submissions
made by the appellant in detail. The indicative grounds of appeal are as under:

1. On introduction of VAT,
specific query was made with the Commissioner of Sales Tax about liability of
tax on medicines administered to in-patients for treatment.

The Commissioner of Sales
Tax, vide letter dated 26.12.2007, has clearly stated that the dominant
intention in administering medicines to in-patients is treatment of diseases
and not supply/sale of medicines consumables or implants.

2. The department has further
issued circular no.7A of 2008 dated 13.3.2008, wherein also, following BSNL,
same position is reiterated.

3. Even if pharmacy from where
medicines are supplied is owned by hospital, so far as supply of medicines for
treatment to in-patients is concerned it is not sale. So far as sale by
pharmacy over counter to outpatients or general public is concerned, it is
considered as sale under MVAT Act and due VAT has been discharged.

4. Various judgements on very
same issue were cited like:

(a) Dr. Hemendra Surana (90 STC
251) wherein it is held that taking x-ray and giving report is not a works
contract activity.

(b) Bharat Sanchar Nigam Ltd. (145 STC 91)(SC), where it is observed
that medicines provided by doctor/hospital is not sale.

(c) International Hospital Pvt.
Ltd. (Writ Tax No. 68 of 2014 decided on 6.2.2014) in which use of stents for
treatment of patient is held as not amounting to sale.

(d) Tata Main Hospital (2208
NTN Vol-36 149) and Fortis Healthcare (CWP 1922 to 1924 of 2012 dated
23.1.2015).

In the above judgements, the respective High
Courts have held that treatment of in-house patients is not amounting to
sale.

5. Even the extended meaning
of ‘sale’ under Article 366 (29A) does not cover such services. Various
judgements were cited in support of the same.

6. In relation to charging the
medicines at MRP used for in-patient, it was contended that there is no tax
collection. Reliance was placed on the judgement of Hon. Supreme Court in case
of Hindustan Lever Ltd. (93 VST 452).

Arguments on
behalf of Department

Supporting the order of the first appellate
authority, the department made elaborative arguments. Indicative arguments are
noted as under:

(1) In pharmacy, there is common stock and there is no difference
between supplying medicines over the counter and supplied for treatment of
in-patient.

(2) To show sales of goods,
Department also cited instances that the patients take away unused medicines
with them while taking discharge.

(3) Judgements cited, including
BSNL were tried to be distinguished on ground that they relate to composite
transaction sand not the one where sale is discernible.

(4) The judgments relating to
medicine services were also tried to be distinguished on ground that the facts
were different, mainly that there was no sale from pharmacy owned by very same
hospital.

(5) Judgements of Kerala High
Court in case of Malankara Orthodox Syrian Church (135 STC 224)(Ker) and
PRS Hospital vs. State of Kerala, 2003 (11) KTR 176 were relied
upon. In those judgements, based on facts and legal position under respective
Act, the activity of Hospital was held as covered by Sales Tax Acts.

(6) The arguments were also
made to treat these transactions as deemed sales by Works Contract or transaction
of hotel service on ground there is transfer of medicines/food for human
consumption.

(7) The provisions of MRP/Drug
Price Control Order relied upon to suggest that the prices are inclusive of
tax. It was contended that tax is collected which cannot be allowed to be
retained by hospital.

The Hon. Tribunal has analysed arguments
from both sides in elaborate manner.

The Hon. Tribunal held that the basic nature
of transaction is of rendition of services. The intention of parties is not to
sell/purchase medicines, but to be administered by doctors in course of
treatment.

The Hon. Tribunal examined position whether
there is discernible sale or not, in following words.

“44. The next question is whether the supply
of medicine in the course of treatment are discernible sale so as to attract
the main definition of sale i.e. sale as per the Sales of Goods Act. The
Appellant Officer in para 116 of his order remarks that intention of private
hospital is to sell the medicine and earn profit. This may be so, but whether
the patient intends to purchase medicine when admitted to hospital? Even in a
composite contract, for a sale to be discernible, it must satisfy all the
criteria for sale as per sale of goods Act. In Gannon Dunkerley (8 STC) the concept
of sale has been discussed.

In para 16 the Court has said :

“.. In order to constitute a sale, it is
necessary that there should be an agreement between the parties for the purpose
of transferring goods which of course presupposes capacity to contract, that it
must be supported by money consideration and that as a result of the
transaction property must actually pass in goods. Unless all these elements are
present, there can be no sale.”

“We are accordingly of the opinion that on
true interpretation of expression ‘sale of goods’ there must be an agreement
between the parties for the sale of very goods in which property eventually
passes.”

45.Thus, when a patient is admitted to
hospital, his intention is not to buy medicines, nor the medicines identified
or agreed to be delivered to patient before administering the same during
course of the treatment. It is not correct to say that as soon as bills are
prepared by pharmacy, the goods are ascertained and delivered to the patients.
These bills to inpatient according to appellate authority himself, are as per
requirement of DCPO and for the purpose of books to be maintained according to
DCPO. In large organisations, which to an outsider is single entity, there may
be internal divisions incorporating the concept of profit centre for each
division. Such divisions do not make them a separate entity from the single
whole for transaction with outside person. Internal dynamism may allow pharmacy
to operate as a profit Centre, treating everything issued from it same as any
other sale, but that does not make it a sale same as over the counter sale to
customer. The fact that billing from over the counter and to a patient in same
and same price is charged also does not make it different. In a restaurant,
there may be sale from counter as well as service. The billing may be same and
even price may be same for the both
types of sales, yet first is sale simplicitor and second is a deemed sale.”

The Tribunal refuted each and every argument
of department by giving elaborate explanation.

The argument that it can be deemed sale
under clauses 366(29A) is also rejected.

It is held that the circular issued by
Commissioner of Sales Tax is binding. It is also held that though charges for
medicines are at MRP, there is no collection of tax but it is price.

The Hon. Tribunal thus concurred with
appellant hospital and set aside the order of first appellate authority.

In respect of argument about charges for
special bed etc. also the Tribunal held that there is no lease
transaction. The patient cannot take such goods outside. Therefore, there is no
lease sale in respect of such goods also.

Similarly, there cannot be tax on food
included in room rent as it is not separable nor provided for in Rules. Rule 59
of MVAT Rules is meant for hotels and not for hospitals. Tribunal deleted such
levy also.

Finally, the Hon. Tribunal allowed appeal in
favour of appellant in all respects.

Conclusion

The judgement will definitely give respite
to worried hospitals. The Hon. Tribunal has set guidelines for levying tax
under MVAT Act. This judgement will be useful in various other situations. _

shailesh.kwebmaker

GST – Case Studies On Valuation (Part-2)

This feature of the article
contains certain case studies where the valuation principles discussed in the
first part are given a practical perspective.

Case
Study 1 : Barter/ Exchange Transactions (say Redevelopment Projects)

In a typical redevelopment
project, the developer agrees to deliver redeveloped flats to the existing
occupants in exchange for land/development rights. A diagrammatic presentation
of the arrangement is as follows:

The developer provides
construction services to two categories of customers (a) existing
occupants/land owner; and (b) new occupants/customers. As regards the former,
the developer delivers newly constructed flats of similar or larger areas (S1);
provides alternative accommodation until delivery of the new flat and also
provides some monetary payment (especially where the value of the land rights
given up is substantially high in comparison to the construction cost: S3
should be understood as excess of C1 over S1 & S2). These are in exchange
for undivided rights over the land as well as entitlement for additional flat
construction over the existing superstructure for sale to new occupants. As
regards the latter, the developer constructs the new flats and allots the same
to its customers for monetary consideration (C2). For the purpose of examining
the valuation provisions, the said transactions are assumed to be taxable in
terms of section 7 r/w Schedule II of the CGST Act.

Developer-Land Owner Arrangement

Section 15 of the CGST Act
states that the transaction value (being the price) would be the taxable value
of this transaction. In this transaction set-up, the developer receives
development rights as the consideration for the construction services. There is
no price (money consideration) which is agreed between the developer and the
land owner and therefore, reference would have to be made to the valuation
rules as per section 15(4) of the said Act. Valuation norms under Rule 27 may
be applied as follows:

(a) OMV
of such supply (identical value of S₁and S₂): Under this
clause, the money value of an identical supply at the same time at which the
supply being made to land owners would have to be ascertained. The subject
matter of valuation is the supply (ie. value of developed flats (S₁)
and not the non monetary consideration/development rights (C₁). The
flats which are sold to external customers may not qualify as identical flats
since the valuation of those flats includes a host of other costs (such as land
value, etc.) which are not present in the value of flats delivered to
the existing occupants. Further, the risks undertaken by the external customers
are distinct from the risks taken by the existing occupants. At times, the
amenities are also different. Therefore, the OMV rule fails to provide a
reliable basis of valuation.

(b) Monetary
value of non-monetary consideration (C₁): Unlike its
predecessor, this clause attempts to identify the monetary value of the
consideration rather than its supply i.e. value of the development rights
should be ascertained and not the value of the developed flats. It is
practically impossible to identify the monetary value of the development rights
associated with a particularly property as there is no open market for such
rights. However, in most of the cases, the development agreements attract
payment of stamp duty and hence, there is a ready reckoner valuation of the
development rights on the basis of which the stamp duty is calculated. It can
be argued that this valuation which is endorsed by the stamp duty authorities
can be the basis for identification of the monetary value of non-monetary
consideration.

(c) Value
of like kind or quality (comparable value): If the above clause fails, then
we need to proceed to this clause. This clause attempts to ascertain the value
of similar supplies i.e. value of similar flats in the same society. While the
flats can be said to be similar on parameters such as quality, materials,
reputation, etc., the value of such flats also includes the value of
land, etc. which does not form part of the bargain between the developer
and the existing occupant. The general practice of using the guideline value of
land and extracting this value does not have legal force under this rule (refer
2016 (43) S.T.R. 3 (Del.) Suresh Kumar Bansal vs. Union Of India).
Therefore, resorting to this practice at the first instance without testing
other rules may not be advisable (until Rule 31 is invoked). Hence this rule
also fails to provide a reliable basis of valuation.

(d) Cost
of non-monetary component: This clause invokes Rule 30 which requires that
the cost of provision of the service with a 10% markup can be adopted as the
value of construction service. In the absence of clear costing guidelines on
‘provision of service’, principles issued by autonomous professional bodies
could be relied upon. For example, as per the revised AS7 – Construction
Contracts issued by ICAI, contract cost is defined to comprise the following:

– Costs directly relatable to the contract;

– Costs attributable to contract activity in
general; and

– Such other Costs as are specifically
chargeable to the customer under the terms of the contract.

The developer can ascertain
the cost of construction of a project and allocate the costs to the respective
flats using the accounting/costing principles and load such value with the 10%
markup. In effect, cost of S1 and S2 would be the value of the development
rights in terms of section 15 of the GST law. S3 cannot be adopted as the cost
of the developed flats since it is a payment towards value of land/development
rights (excess of land value over construction value). Though this rule is
optional for service providers, it may be beneficial to opt for this rule in
projects (say Mumbai CBD) where land value is substantially high in comparison
to the construction costs. Moreover, with the advent of Real Estate Regulatory
Authority Act being legislated, project wise bank accounts would give
additional information to the builders to identify the cost of construction.

(e) Residual
Rule: Rule 31 can be invoked only when it is established that all preceding
rules have failed to provide a value in such exchange transaction. Moreover,
the option of skipping Rule 30 vests in the hands of the tax payer and not the
Revenue. Therefore, unless the revenue authorities categorically conclude that
Rule 30 is not providing a reliable basis of valuation in such arrangements,
the residual rule cannot be invoked.

Comparison with Service Tax Valuation
Rules

The valuation scheme under
the Service tax regime was not as comprehensive as present in the GST Law.
Section 67 followed a pattern of first identifying the money value of the
non-monetary component (C1); else, obtaining the value of similar services (C2)
and if both these mechanisms failed, it permitted the assessee to arrive at a
value not below the cost of services.

However, the CBEC vide
its Circular No. 151/2/2012-S.T., dated 10-2-2012 had stated that in
such cases, value of similar flats to the new occupants (C2 excluding the land
value) would form the basis of valuation for flats delivered to the existing
occupants, in a way bypassing the statutory scheme of valuation and directly looking
for an external value. On the contrary, the CBEC education guide (which was
subsequently withdrawn by a High level Committee report dated 20-1-2016) stated
that the value of land would form the basis of valuation in such scenarios.
Under the GST law, Q17 of a FAQ issued for builders has toed the line of its
earlier CBEC circular and stated that value of similar flats should be adopted
for the purpose of valuation. The said FAQ has deviated from the structured
valuation mechanism in Rule 27 and consequently gives contradictory results. In
view of the author, either the value of development rights or the cost of
construction can be adopted as the basis of valuation for land owner’s share of
flats.

Case
Study 2 – Exclusion on account of Pure Agency (say CHA services/ Advertising
Agency services)

Rule 33 provides a specific
exclusion for recoveries towards expenditure or costs incurred by a supplier as
a pure agent of the recipient. The said rule provides multiple conditions in
order to be termed as a pure agent.

But prior to examining the
issue of exclusion from the point of pure agency, one should first examine
whether the said amount is includible in taxable value in the first place.
‘Price’ is considered narrower than the phrase ‘gross amount charged’. Price
refers to the money consideration for supply and the term ‘consideration’ has
been defined in a very concise manner to mean such payments/acts (i.e.
monetary/ non-monetary) which are in respect of or in response to
or as an inducement of the supply (refer discussion on nexus theory in
earlier article). These phrases suggest that there has to be direct nexus
between the payment and the supply for the said payment to be termed as
consideration and cannot include extraneous recoveries by the supplier. Thus,
where an expense recovery is excludible from price itself and not part of any
other inclusion under valuation, the pure agency tests have no application at
all.

Further, the tests of pure
agency are relatively liberal in comparison to the erstwhile service tax
regime. A comparative chart of these tests under both regimes has been
provided:

Service Tax Law	GST Law	Implications
Section 67 used the words “gross amount charged”	Section 15(1) uses the word “price”	The word ‘price’ is narrower than gross amount charged
Rule 5(1) specifically included all costs incurred during the course of provision of service	No similar inclusion. Section 15(2)(c) is restricted to pre-supply expenses recovered which are incidental in nature	Extraneous expense recoveries (including post delivery expense recoveries) are excludible from valuation
Rule 5(2) exclusion subject to 12 (8+4) conditions as under:	Rule 33 exclusion subject to 7 (3+4) conditions as under:
(i) the service provider acts as a pure agent of the recipient of service when he makes payment to third party for the goods or services procured;	the supplier acts as a pure agent of the recipient of the supply, when he makes the payment to the third party on authorisation by such recipient;	Refer discussion on pure agent below
(ii) the recipient of service receives and uses the goods or services so procured by the service provider in his capacity as pure agent of the recipient of service;	Deleted	Supplier need not establish receipt and use by recipient
(iii) the recipient of service is liable to make payment to the third party;	Deleted	Supplier can claim deduction even if the invoice is not directly addressed to the recipient
(iv) the recipient of service authorises the service provider to make payment on his behalf;	Deleted, can be inferred from clause (i)	Similar provisions
(v) the recipient of service knows that the goods and services for which payment has been made by the service provider shall be provided by the third party;	Deleted, can be inferred from clause (i)	Similar provisions
(vi) the payment made by the service provider on behalf of the recipient of service has been separately indicated in the invoice issued by the service provider to the recipient of service;	the payment made by the pure agent on behalf of the recipient of supply has been separately indicated in the invoice issued by the pure agent to the recipient of service	No change
(vii) the service provider recovers from the recipient of service only such amount as has been paid by him to the third party; and	Deleted, Can be inferred from Clause (d) – One can argue on difference between incurred and paid	No substantial change
(viii) the goods or services procured by the service provider from the third party as a pure agent of the recipient of service are in addition to the services he provides on his own account.	the supplies procured by the pure agent from the third party as a pure agent of the recipient of supply are in addition to the services he supplies on his own account.	No change
*Explanation 1*. – For the purposes of sub-rule (2), “pure agent” means a person who –	*Explanation* – For the purposes of this rule, “pure agent” means a person who –
(a) enters into a contractual agreement with the recipient of service to act as his pure agent to incur expenditure or costs in the course of providing taxable service;	enters into a contractual agreement with the recipient of supply to act as his pure agent to incur expenditure or costs in the course of supply of goods or services or both;	No change
(b) neither intends to hold nor holds any title to the goods or services so procured or provided as pure agent of the recipient of service;	neither intends to hold nor holds any title to the goods or services or both so procured or supplied as pure agent of the recipient of supply;	No change
(c) does not use such goods or services so procured; and	does not use for his own interest such goods or services so procured	Permits use of the services by the supplier though chargeable to the account of the recipient (eg. lodging in a hotel during an audit of a client)
(d) receives only the actual amount incurred to procure such goods or services.	receives only the actual amount incurred to procure such goods or services in addition to the amount received for supply he provides on his own account.	No change

Service Tax Law

GST Law

Implications

Section
67 used the words “gross amount charged”

Section
15(1) uses the word “price”

The
word ‘price’ is narrower than gross amount charged

Rule
5(1) specifically included all costs incurred during the course of provision
of service

No
similar inclusion. Section 15(2)(c) is restricted to pre-supply expenses
recovered which are incidental in nature

Extraneous
expense recoveries (including post delivery expense recoveries) are
excludible from valuation

Rule
5(2) exclusion subject to 12 (8+4) conditions as under:

Rule
33 exclusion subject to 7 (3+4) conditions as under:

(i)
the service provider acts as a pure
agent of the recipient of service when he makes payment to third party for
the goods or services procured;

the
supplier acts as a pure agent of the recipient of the supply, when he makes
the payment to the third party on authorisation by such recipient;

Refer
discussion on pure agent below

(ii)
the recipient of service receives and
uses the goods or services so procured by the service provider in his
capacity as pure agent of the recipient of service;

Deleted

Supplier
need not establish receipt and use by recipient

(iii)
the recipient of service is liable to
make payment to the third party;

Deleted

Supplier
can claim deduction even if the invoice is not directly addressed to the
recipient

(iv)
the recipient of service authorises
the service provider to make payment on his behalf;

Deleted, can be inferred from clause (i)

Similar
provisions

(v)
the recipient of service knows that
the goods and services for which
payment has been made by the service provider shall be provided by the third
party;

Deleted,
can be inferred from clause (i)

Similar
provisions

(vi)
the payment made by the service
provider on behalf of the recipient of service has been separately indicated
in the invoice issued by the service provider to the recipient of service;

the
payment made by the pure agent on behalf of the recipient of supply has been
separately indicated in the invoice issued by the pure agent to the recipient
of service

No
change

(vii)
the service provider recovers from the
recipient of service only such amount as has been paid by him to the third
party; and

Deleted,
Can be inferred from Clause (d) – One can argue on difference between
incurred and paid

No
substantial change

(viii)
the goods or services procured by the
service provider from the third party as a pure agent of the recipient of
service are in addition to the services he provides on his own account.

the
supplies procured by the pure agent from the third party as a pure agent of
the recipient of supply are in addition to the services he supplies on his
own account.

No
change

Explanation 1. – For the purposes of sub-rule (2), “pure agent” means a
person who –

Explanation – For the purposes of
this rule, “pure agent” means a person who –

(a)
enters into a contractual agreement
with the recipient of service to act as his pure agent to incur expenditure
or costs in the course of providing taxable service;

enters
into a contractual agreement with the recipient of supply to act as his pure
agent to incur expenditure or costs in the course of supply of goods or
services or both;

No
change

(b) neither intends to hold nor holds any title
to the goods or services so procured or provided as pure agent of the
recipient of service;

neither
intends to hold nor holds any title to the goods or services or both so
procured or supplied as pure agent of the recipient of supply;

No
change

does
not use for his own interest such
goods or services so procured

Permits
use of the services by the supplier though chargeable to the account of the
recipient (eg. lodging in a hotel during an audit of a client)

(d) receives only the actual amount incurred
to procure such goods or services.

receives
only the actual amount incurred to procure such goods or services in addition
to the amount received for supply he provides on his own account.

No
change

As is evident from the
above table, the pure agency test has been substantially borrowed from the
service tax law. Unlike the GST law, valuation under the service tax law is
focused on the ‘Gross Amount Charged’ which is definitely wider than the term
‘price/ consideration’. This is also evident from the Explanation to section 67
which stated that all amounts payable for services provided would be includible
as ‘consideration’. Moreover, by Finance Act, 2015 the service tax law
specifically included reimbursements as part of the Gross Amount Charged.
However, the GST law is narrower to the extent it focuses on the ‘price’ agreed
between the contracting parties – the intention emerging from the contract
plays a pivotal role in drawing the line between price and other amounts
charged. Further, section 15(2)(c) only includes expenses which are incidental
to the supply and incurred prior to the delivery/ completion of the supply.
Therefore, an assessee is definitely in a better position to claim the benefit
of pure agency vis-à-vis the earlier service tax law.

Case Study
2A : Travel/ Lodging Costs during Audit

An auditor during the
course of audit incurs certain expenses which are to the account of the auditee
(such as travel/lodging costs, reprography costs, etc.) and reimbursable
to an auditor. The auditor claims these expenses are part of the Out of Pocket
Expenses (OPE) while invoicing its client for the audit services. These expense
recoveries do not fall within the scope of the term ‘price’ of the audit
services. But, such expenses can be considered as incidental expenses which are
incurred prior to supply of services and hence included by virtue of section
15(2)(c) of the GST law. Now, by applying the pure agency tests, an auditor can
claim such expense recoveries as an exclusion on account of the following:

– Though the Travel and lodging services are
used by the auditor, they are incurred during the course of and for the
purposes of the audit assignment and not for the auditor’s own account.

– Audit engagement letters contain an
authorisation to incur OPEs for the purpose of conduction of an audit which
stand recoverable from the auditee.

– The auditor does not hold any title or claim
ownership over the said services.

– The auditor recovers only the actual expense
from the supplier.

Thus, OPE expenses are
excludible from taxable value in view of the pure agency rule. This is a clear
departure from the service tax regime where the practice of applying service
tax even on the OPE component was prevalent on account of the fairly stringent
pure agency tests provided under that law.

Case Study
2B : Custom House Agency Services

Typically, the role of a
CHA is to clear the goods at the customs port and place the goods on a
conveyance for delivery to the factory premises. In the process, a CHA agent
incurs many expenses on behalf of the importer for clearance of the goods and
delivery upto the factory /premises of the importer. The CHA directly interacts
with multiple agencies in view of their proximity with such agencies such as
Port Trust, Steamer Agents, Cargo Handlers, Warehouse keepers, Packers, Goods Transport Agents.

The service tax law was
plagued with disputes over inclusion of many costs incurred by such an agent.
The CBEC Circular No. 119/13/2009-S.T dated 21-12-2009 had in substance
clarified that the pure agency tests would have to be complied with in order to
claim exclusion of any expense incurred by the CHA. However, Tribunals (relying
on the Delhi High Court in case of Intercontinental Consultants &
Technocrats Pvt. Ltd.) have consistently held that as long as the expenses
were in the nature of reimbursements, they are excludible from the value of the
CHA services itself. The Tribunals have not resorted to the pure agency tests
to reach such a conclusion.

In the context of GST, a
question arises with respect to inclusion of expense recoveries u/s. 15(2) (b)
or (c). Clause (b) is applicable only in reverse scenarios i.e. where the
primary responsibility of incurring the costs is on the supplier but is
eventually borne by the recipient, whereas in a CHA’s case, the expenses are
primarily required to be incurred by the recipient, but incurred by the CHA.
Clause (c) applies to all incidental expenses which are charged in respect of
and until supply of services.

The role of a typical CHA
is to perform the customs clearance formalities. Services are said to be
completed once all custom clearance formalities are completed and the goods are
available for dispatch to the relevant destination. Expenses incurred until
customs clearance would definitely be included under this clause (such as
customs duty, port charges, steamer agent charges, DO charges, etc.).
But, post customs clearance expenses may technically not fall within this
clause, even if it is said to be incidental in nature to the CHA services.

Thus, an expense recovery
should be tested on two grounds i.e. firstly, whether it is incidental in
nature and secondly, whether the same is until completion. In cases of
pre-supply incidental expenses, pure agency tests become relevant since they
are includible by virtue of section 15(2)(c). However, post supply expense
recoveries need not comply with the pure agency tests as long as they are
claimed as reimbursements – such expense recoveries are neither forming part of
price nor includible u/s. 15(2)(c).

Case Study
2C : Advertisement Agencies

Advertisement Agencies
provide a bundle of both creation and production work for their clients.
Typically, once the creative work is completed, the advertisement is required
to be posted on a particular media (such as newspaper, television, radio, etc.).
Where the contracts entered into by Advertisement agencies are lumpsum
contracts inclusive of the cost of production, the said services would be taxed
at the gross value including the production work. In contracts where the
production work is separately chargeable, it is important to apply the pure
agency test and ascertain the includibility of such incidental recoveries.

In such contracts, the
appropriate media is mutually decided between the advertisement agency and the
customer. The invoice raised by the media agency is addressed to the customer
with reference of the advertisement agency through which the advertisement is
placed. The media agency collects the invoice from the advertisement agency and
recovers the costs from the customer by way of a reimbursement. The
advertisement agency also earns a sales commission from the media agency as an
incentive.

In such cases, the question
which arises is whether the advertisement agencies can claim the media costs as
a reimbursement under pure agency rules inspite of the fact that it makes a
profit on an overall basis. If we are to dissect the transaction, there are two
distinct transactions in this arrangement – the first pertains to the media
agency recovering the costs of the advertisement from the customer and the
second pertains to payment of commission to the advertisement agency as an
incentive. In the first leg, the advertisement agency acts as a pass through
and recovers the actual media cost. The invoice is addressed to the end
customer with the payment being routed through the advertisement agency. The
second leg is an independent leg wherein the advertisement agency claims its
commission/ incentive from the media agency. Thus, there is a good case to take
a stand that the commission generated does alter the character of reimbursement
by the advertisement agency and hence such reimbursement satisfies the pure
agency tests under Rule 33.

The CBEC has issued a press
release on the point of inclusion of advertisement costs in print media as
follows:

a. Where
an advertisement agency works on a principal to principal basis (i.e. profit
model), it would be liable to tax on the entire value of such transaction but
at the rate applicable to sale of advertisement space.

b. Where
an advertisement agency works as an agent (i.e. commission model), it would be
liable to tax only on the commission generated from such business.

This press release can
certainly be resorted to contend that the production costs are excludible even
if commission is generated from the media agency. More importantly, the press
release has not specifically resorted to the pure agency tests to conclude that
the advertisement costs with the media are excludible and GST is limited to
commission earned from the media.

Case
Study 3 – Grossing up of TDS, esp. on foreign exchange payments

Income tax law requires the
assessee making foreign exchange payments to gross-up the TDS component for
calculation of TDS, particularly in contracts where the agreed price is net of
Indian taxes (section 195A of the Income-tax Act, 1961). In such cases, a
question arises is whether the gross up component is includible in calculation
of taxable value for discharging the GST on reverse charge basis. Section
15(2)(b) of GST law requires that the taxable value should include all costs/
expenses which are liable to be incurred by the supplier but incurred by the
recipient.

Income tax law collects
taxes in three ways: direct levy (advance tax/ self-assessment tax), tax
deduction at source (TDS) and tax collected at source (TCS). Direct levy
implies imposition of tax on the person earning the taxable income. TDS/ TCS
are part of machinery provisions where the obligation to remit the taxes is
placed on the payer/ seller but subject to a final assessment in the hands of
the person earning the income.

Section 191 of the Income
Tax Act, 1961 provides that even in cases where TDS / TCS is not deducted, the
assessee earning the income is liable to pay the income tax on such income.
This is a clear indication that the primary liability of payment of income tax
always rests on the person earning the income. TDS/TCS provisions are purely
mechanisms to collect the income at source from the income earner. Section
195A, which is part of the TDS provisions, is also based on this principle that
the income chargeable to tax in the hands of the foreign recipient is the
grossed up value (TDS being a mechanism of collection) and not just the
contractual price agreed between the parties.

Applying the above
understanding, the TDS component borne by the remitter should ideally stand
included in the taxable value in terms of section 15(2)(b) of the GST law, in
other words the income tax liability (payable as TDS) of the supplier is borne
by the recipient (as a remitter). Reverse charge tax should hence be computed
on the grossed up value of the remittance in such cases.

Comparison with Service Tax Valuation
Rules

This issue fell under
debate before the Tribunal in Magarpatta Township Dev. & Construction
Co. Ltd. vs. C.C.E., PUNE-III¹, wherein it was held by reference to the
earlier Rule 7 of the Service Tax Valuation Rules, 2006 that such TDS cannot be
included in the taxable value. Rule 7 refers to actual consideration ‘charged’
for the purpose of determination of taxable value which is unlike the GST law
wherein all costs incurred by the recipient on behalf of the supplier fall
within the ambit of taxation. Hence, in view of the author, TDS gross up is
includible in the taxable value of import of service transactions.

________________________________________________

1 2016
(43) S.T.R. 132 (Tri. – Mumbai)

Case
Study 4 – Valuation in case of notified Valuation schemes (say Air Travel
Agents)

The valuation scheme for
air travel agents can be understood as follows:

– This scheme is applicable to services in
relation to book of air tickets by an air travel agent

– The term ‘air travel agent’ has not been
defined, but if understood as per industry norms, refers to the persons who
perform the service of booking of air tickets on behalf of the airline (as per
International Air Travel Association (IATA) policy)

– Air travel agents charge a commission from
the airline, receive a booking fee from customers and in many cases make a
profit on the booking fee (especially in inventory models where ATAs hold
inventory of seats in specific sectors)

– The scheme overrides the other valuation
provisions and requires tax to be computed only 5%/ 10% of the base fare.

The primary question that
arises is whether all the three sources of income of an ATA are includible in
the said valuation scheme. If yes, the ATA has to merely charge GST on 5%/10%
of the base fare as applicable and need not separately charge/ collect GST. The
ambiguity arises since the provision does not refer to any particular service/
HSN category, rather states that services ‘in relation to’ booking of tickets
are covered under the said scheme. It must be appreciated that the phrase ‘in
relation to’ is much wider than ‘in respect of’ and a broader scope should be
attributed to it. In the view of the author, all the three categories of income
stand included in the scope of the valuation scheme as all the three sources of
income arise from the booking of air tickets. The phrase ‘in relation to
booking’ certainly widens the scope of the subject matter, of valuation and
hence such a stand can be taken by ATAs on their booking services.

Case
Study 5 – Discount Policy variants

Companies have
innovative/peculiar methods of passing on benefits of discounts through the
supply chain. Though there is no exhaustive list, the general terminology used
are – trade/ invoice discount; discount on list price, cash discount,
turnover/off-take/target discount, seasonal discounts, gold/ silver incentive,
price protection/support, free/ promotion items etc. The GST law
classifies discounts given by supplier into two broad categories – pre-supply
discounts and post supply discounts. As stated in the earlier article,
pre-supply discounts are eligible on the invoice value itself and post supply
discounts are eligible for deduction by issuance of credit notes with
corresponding matching and input tax credit reversal by the recipient. While
trade/invoice discounts fall within the ambit of pre-supply discounts, the rest
would generally fall within the scope of post supply discounts, since they are
provided after the transaction of supply.

In the case of post supply
discount, can a supplier issue a credit note without any GST impact and
overcome the rigours of Credit note matching? The answer is a definite ‘Yes’.
The GST law prescribes the issuance of a credit note (with GST reversal) only
if the supplier wishes to avail a reduction from his taxable turnover. This
does not prohibit a supplier from issuing a commercial/accounting document for
settlement of transactions/accounts in respect of a particular sale/purchase
transaction. It is not necessary that a supplier should always link an
accounting/ commercial credit note with its original supply invoice for
commercial purposes. In contract law terminology, it is merely an alteration of
the original contract price (section 62 of the Indian Contract Act, 1872). GST
law cannot override the contract/commercial terms and make it mandatory for the
supplier to raise a credit note with a GST reversal.

Even speaking from a
practical perspective, a tax officer cannot recover any additional tax from the
supplier since no tax benefit has been claimed by the supplier in this case.
From a recipient’s perspective, as long as the conditions of section 16 are
complied with, input tax credit cannot be denied merely on account of an
additional discount given by the supplier. The additional discount is a
mechanism of settlement of accounts between the parties and the proviso of
non-payment cannot be invoked against the recipient. Moreover, since this
transaction is revenue neutral without any revenue loss to the exchequer, it is
definitely permissible for suppliers to issue credit notes without any GST
reversal to their customers.

Summary

In the context of
valuation, the biggest challenge that anyone would face is to reconcile certain
elements of a duty based law (such as excise/customs) with certain elements of
a transaction based law (such as sales tax/ service tax). Both are distinct
fields of taxation and GST being a composition of both would certainly create
confusion over the interpretation of the law. The litigation on this front
would also depend on the background of the assessing authority. An erstwhile
excise/customs official would certainly lean towards applying legacy duty based
principles and an erstwhile VAT official may follow the contractual terms.
There is bound to be some disparity in administration of tax laws itself and
the Government(s) should take proactive steps to issue appropriate circulars
clarifying legal position in order to maintain uniformity in administration.

From an economic perspective,
transaction value approach ensures that economy drives tax collection and not
the other way around. The revenue has to appreciate that in a multi-point tax
system where credit flow is robust, it is only the last leg of the value chain
which would generate revenues for the government. The purpose of introduction
of GST was to facilitate market forces to operate independent of tax
structures. It is in light of this principle, the rigours of valuation as
existed in the First and the Revised Model GST law have been diluted and the
discretion granted to revenue authorities on the point of valuation is fairly
limited. Unless the revenue authorities appreciate the larger picture, disputes
around valuation would ultimately burden the industry with onerous taxes. _

shailesh.kwebmaker

Sale In Course Of Export U/S. 5(3) – An Update

Introduction

Under
VAT era, import and export transactions were exempted from levy of sales tax
(Vat). The export transaction is defined in section 5(1) of the CST Act.
However, section 5(1) granted exemption to direct export sale. Therefore, the
sale prior to export i.e. penultimate sale was deprived of exemption as export.

To
mitigate the said issue section 5(3) was inserted. The said sub-section is
reproduced below for ready reference.

“S.5. When is a sale or
purchase of goods said to take place in the course of import or export. –

(3)
Notwithstanding anything contained in sub-section (1), the last sale or
purchase of any goods preceding the sale or purchase occasioning the export of
those goods out of the territory of India shall also be deemed to be in the
course of such export, if such last sale or purchase took place after, and was
for the purpose of complying with, the agreement or order for or in relation to
such export.”

Thus
one sale prior to export is also exempt. However, the real issue is
interpretation of the scope of said sub-section.

Till
today, there are a number of judgements on this issue. However, still it cannot
be said that the issue is fully resolved.

Recent judgement

Recently
Hon. Kerala High Court had an occasion to decide one such issue about scope of
section 5(3) in case of Gupta Enterprises vs. Commercial Tax Officer,
Munnar and Ors. [2018] 48 GSTR 252 (Kerala).

The
petitioner was purchasing goods in auction and was objecting to charging of tax
on him by seller on ground that his purchase i.e. corresponding sale by seller
to him is covered by section 5(3) and no tax is applicable. Not able to
succeed, this petition was filed.

Facts
of case, as narrated by High Court, are as under:

“3. The appellant filed
W.P. (C). No. 6210/2005 inter alia contending that he is an exporter of
sandalwood and on receipt of prior orders and satisfying the same, he attended
the auction held by the respondents. The sale was eventually confirmed in his
favour. He was called upon to pay the entire sales tax along with the balance
amount. He replied that the transaction is exempted u/s. 5(3) of the Central
Sales Tax and sought for release of the goods against his furnishing bank
guarantee. The authorities refused to release the goods. But the respondents
insisted on payment of tax before the goods are released. Placing reliance on
the decision of the Madras High Court in W.A. Nos. 94 to 96/2000 it was
contended that the demand is against the dictum laid down in the said decision
and being aggrieved by the insistence of the Sales Tax Authorities, writ
petition was filed for the following reliefs:

(i) Issue a writ of mandamus
directing respondents 3 and 4 to release the goods purchased vide Ext. P. 3
without collecting sales tax and on the petitioner furnishing documents in
support of claim of exemption u/s. 5(3) of the CST Act and on the petitioner
paying the amount due under the auction,

(ii) Direct respondents 3 and 4
to release the goods without collection of sale tax land on the petitioner
furnishing bank guarantee for the entire tax amount pending adjudication on
sales tax exemption by the 2^ndrespondent and other consequential
reliefs.”

The
issue which arose was, whether the purchase of sandalwood was in course of
export u/s. 5(3). If goods purchased are exported in same form then the
exemption is invariably allowable. However, where goods purchased are processed
then question of integrated connection between export and prior purchase
arises. If no integrated connection or inextricable link is proved, the prior
transaction cannot fall u/s. 5(3). Hon. Kerala High Court referred to
historical background about interpretation of this section and then arrived at
conclusion.

The
observations of High Court are as under:

“7. The learned Single Judge after referring to the relevant provisions of
the Foreign Trade (Development and Regulation) Act, 1992, (FDTR Act), held that
while export of sandalwood can be only in such forms permitted by the DGFT,
there can be no export of sandalwood in any other form. Any export of
sandalwood except in the forms permitted by the DGFT would be an illegal export
contravening the provisions of the FTDR Act and the Customs Act. Placing
reliance on Ext. R. 3(a) addressed by the Zonal Joint DGFT to the Conservator
of Forests and Ext. R. 3(b) public notice issued by the DGFT in exercise of the
powers under “exim policy” show that sandalwood is not covered by
open General Licence, but one falling under the restricted list for which an
exporter has to make specific request for licence to DGFT, who releases quota
from time to time and that the categories of Sandalwood allowed for export are
“sandalwood chip class” in the form of heart wood chips upto 50
grams, mixed chips upto 50 grams, flakes upto 20 grams of the sandalwood
classes (Jajpokal I class, Jajpokal II class, Antibagar, Cheria Milvanthilta,
Basolabjukni, saw dust, charred billets), sandalwood chips/power sandalwood
dust obtained as waste after the manufacturing process and sandalwood in any
other form as approved by the Exim Facilitation Committee in the Directorate
General of Foreign Trade. Ext. P. 18 export licence was also issued to the
petitioner under the FTDR Act and licence to export is granted only for the
categories mentioned therein. The learned Single Judge also entered a positive
finding after referring to Ext. P. 18 export licence issued to the petitioner
under the FTDR Act that licence to export is granted only for the categories
mentioned therein, namely, sandalwood in the form of heart wood chips upto 50
grams, mixed chips not exceeding 30 grams and flakes upto 20 grams of the
sandalwood classes, Jajpokal I class, Jajpokal II class, Antibagar, Cheria
Milvachilta, Basolabukhi, saw dust, charred billets, sandalwood power, dust,
chips and flakes.

The
petitioner placed reliance on Ext. P. 17, the rules regarding selection,
cleaning, classification and disposal of sandalwood etc. issued by the
Tamil Nadu Forest Department and it was contended based on Ext. P. 17 that
various classes of sandalwood are described in Ext. P. 17 and it will be seen
therefrom that the classification is purely on the basis of weight of billets,
defects noticed in the billets and the length of the billets etc. and
these are not different types or varieties of sandalwood. The learned Single
Judge exhaustively referred to various items in Ext. P. 17 and found that the
classification of sandalwood as per Ext. P. 17 when juxtaposed with the
documents evidencing the items bid by the petitioner, as evidenced by different
documents and were put in a tabular form in paragraph 22 of the judgement. It
was concluded that export orders of foreign buyers produced by the petitioner
evidenced that they were only sandalwood chips, below 50 grams.

After
referring to the various materials as noticed above, the learned Single Judge
found that on facts the sandalwood as purchased by the petitioner from the
Forest Department is in the form of billets, roots, or even chips weighing over
50 grams, could not have been exported in consonance with exim policy and the
export licence, without converting the same into chips of the description
covered by the export licence.

There
is a prohibition, in law, for export of sandalwood in any form, other than that
permitted under the exim policy and the export licence, with an order releasing
quota for the export. So much so, the sandalwood purchased form the Forest
Department as billets, roots etc. had to be converted into flakes, power
etc. weighing below not more than 50 grams to make them exportable
goods. In commercial parlance, the goods prohibited from being exported stood
converted to exportable goods. It is also held that for the purpose of section
5(3), what is relevant for consideration is whether the goods that formed the
subject matter of the penultimate sale or purchase are the self-same goods that
are exported and in the light of the decision in Sterling Foods vs. State of
Karnataka (MANU/SC/0423/1986 :

(1986)
3 SCC 469) of the Apex Court, the words “those goods” in section 5(3)
are clearly referable to “any goods” mentioned in the preceding part
of that sub-section and it is, therefore, obvious that the goods purchased by
the exporter and the goods exported by him must be the same. On the other hand,
in the present case the goods purchased by the assessee from the Forest
Department are those which were incapable of being exported in terms of the
relevant laws. The only types of goods that can be exported as sandalwood are
those which fall under the categories permitted for export. Hence, the goods
purchased by the petitioner from the Forest Department had to undergo the
change from the commercial status of non-exportable goods to that of exportable
goods, by change in its form from billets, roots etc. to flakes of the
dimension or as dust, permitted for export, in terms of the laws relating to
export. Thus, there occurs a conversion of the goods purchased so as to facilitate
the export and as such ceased to be “such goods” which were purchased
from the Forest Department. Hence, the claim for exemption u/s. 5(3) of the CST
Act was negatived.

Though
the appellant placed reliance on the decision of the Apex Court in Consolidated
Coffee vs. Coffee Board, Bangalore (AIR 1980 SC 1403), the learned Single
Judge accepted that merely on the basis
of the condition of sale notice, one could not be compelled to pay tax provided
the exemption applies. But the decision in W.A. Nos. 94 to 96/2000 of the
Madras High Court, which in turn referred to the case of Consolidated Coffee’s
case (supra) did not support the case of the petitioner on the issue
regarding the identity of the goods to be found among that purchased and those
exported. In the Madras decision the goods purchased by the appellant therein
(petitioner herein) were contended to be different from the goods sought to
export. But the said contention was not pursued further by the Tamil Nadu
Government.

The
different varieties of sandalwood purchased by the appellant were reduced to
small pieces for the purpose of export, though noticed by the court in the said
decision, none of the decisions on which reliance was placed by the learned
Single Judge, were referred to and there was no serious argument raised by the
State of Tamil Nadu in that regard and it was in such circumstances that the
Court accepted the assessee’s case therein.”

Further
para 9 reads as under:

“9. It was then contended by the learned
counsel that the Apex Court in the decision reported in State of Karnataka
vs. Azad Coach Builders Pvt. Ltd. (MANU/SC/8024/2006

: (2006) 145 STC 176), has
doubted the correctness of the decision in Sterling Food’s case
(MANU/SC/0423/1986 : (1986) 3 SCC 469) and also the decision in Vijayalaxmi
Cashew Company’s case ((MANU/SC/1015/1996 : (1996) 1 SCC 468), and has referred
the case to a larger Bench. It is true, the Court observed, that the said
decisions need reconsideration and the matter is placed before the larger
Bench. In the above case M/s. Tata the exporter and also a manufacturer of
chassis had a pre-existing order of export of ‘Buses”. The chassis were
moved under customs bond for body building and export to the premises of the
assessee (Bus body builder).

The
assessee then delivers the completed bus which is moved under the bond directly
to the port and exported, so that chain never breaks. The question arose was
whether in such circumstances the bus body builder is entitled to claim the
benefit u/s. 5(3) of the CST Act. It is in that context the Apex Court
considered the expression “in relation to such exports” which did not
get due weightage in the earlier decision.

But
even in the said case, the assessee only contended that the test of “the
same goods” is evolved only to explain that the exporter should not have
undertaken any process to change the identity of the goods brought by him in
order to confer the benefit of exemption on the penultimate sale. Thus there
was no dispute that if the goods undergo changes in the hands of the exporter
after the purchase and before export, he will not be entitled to claim the
benefit of section 5(3) of the CST Act, which is the main issue in the present
case. Be that as it may until a final decision is rendered by the Apex Court pursuant
to the reference order in State of Karnataka vs. Azad Coach Builders Pvt.
Ltd. (MANU/SC/8024/2006 : (2006) 145 STC 176), the decision in Sterling
Food’s case and Vijayalaxmi Cashew Company’s case beholds the field as a
binding precedent under Article 141 of the Constitution of India.”

Observing
as above Hon. High Court rejected claim of section 5(3).

Conclusion

The
judgement is well reasoned to understand the scope of section 5(3) of CST Act
and more particularly, the effect of judgment of Supreme Court in case of State
of Karnataka vs. Azad Coach Builders Pvt. Ltd. (145 STC 176)(SC).

We
hope above will be a guiding judgement for deciding further cases.

shailesh.kwebmaker

Place Of Supply – Immovable Property Based Services

Introduction

In the previous article, we had examined the Integrated Goods and
Service Tax (‘IGST’) framework in the backdrop of the provisions of the
Constitution. The IGST framework dealt with the concept of location of supplier
and place of supply (‘POS’) which aids in determining whether a supply is to be
treated as intrastate or interstate and accordingly, helps in determining the
applicable tax (CGST + SGST in case of intra-state and IGST in case of
interstate).

There are specific provisions prescribed for determination of place
of supply for both goods as well as services under Chapter V of the IGST Act.
Sections 10 & 11 thereof deal with goods while Section 12 deals with
services where both the supplier as well as recipient are located in India and
section 13 deals with services where either the supplier or recipient is
located in India.

The general rule for determination of place of supply is that the
location of the recipient is to be treated as POS except for cases where the
recipient is unregistered and his address on record is not available, in which
case location of supplier is treated as the POS.

This general rule
is subject to various exceptions where the POS is to be determined in a
different manner. One such exception pertains to cases where services relate to
immovable property and the same is covered u/s. 12 (3) in cases where both the
service provider and the service recipient are located in India. In cases where
either the service provider or the service recipient is located outside India,
Section 13(4) is applicable. In this article, we shall specifically deal with
the said exception and the issues revolving around it.

Relevant
Provisions

Section 12
of the IGST Act

(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

(b) by way of lodging accommodation by a
hotel, inn, guest house, home stay, club or campsite, by whatever name called,
and including a house boat or any other vessel; or

(c) by way of accommodation in any
immovable property for organising any marriage or reception or matters related
thereto, official, social, cultural, religious or business function including
services provided in relation to such function at such property; or

(d) any
services ancillary to the services referred to in clauses (a), (b) and (c),
shall be the location at which the immovable property or boat or vessel, as the
case may be, is located or intended to be located:

Provided
that if the location of the immovable property or boat or vessel is located or
intended to be located outside India, the place of supply shall be the location
of the recipient.

Explanation.––Where the immovable
property or boat or vessel is located in more than one State or Union
territory, the supply of services shall be treated as made in each of the
respective States or Union territories, in proportion to the value for services
separately collected or determined in terms of the contract or agreement
entered into in this regard or, in the absence of such contract or agreement,
on such other basis as may be prescribed.

Services directly in relation to Immovable
Property

The practice of treating the place of supply as the location of
property in case of transactions involving immovable property is not new. Even
under the service tax regime, Rule 5 of the Place of Provision of Service
Rules, 2012 which dealt with the determination of place of provision of service
was similarly worded. However, with the concept of dual GST, this provision has
its’ own ramifications. This is because GST is a state specific law. Therefore,
deciding the type of GST applicable (CGST + SGST vs. IGST) is very important.
More importantly, in cases where the recipient of supply is not registered in
the State where the immovable property is located, the credit is lost even if
the recipient uses the services in the course of his business.

For instance, if a supplier is providing services of renting of
immovable property, in such a case, he will have to consider the Place of
Supply as the state in which the immovable property is located, whether or not
the recipient is registered in that state. Same position will apply even in
case of other transactions such as supply of maintenance and repair services
relating to immovable property. All these services apparently have a direct
relation with an immovable property and therefore, would rightly get classified
under this particular rule.

While in general, the recipient of renting service would be
registered in the state where the immovable property is located if he is into
business, the challenge may arise in case of hotels. Most companies use hotel
facilities in other states for the stay of their executives while on business
trips. Such companies may not have any branches or fixed establishments in
other states and therefore may be unregistered. This results in loss of credit
since the hotel would charge CGST & SGST relevant to that State in view of
the place of supply provision mentioned above.

Moving forward, what is meant by the phrase “directly in relation to
immovable property” needs to be analysed, as there are many other transactions
where the services involve use of immovable property as well, but there are
other factors which are also related with the supply of service and hence,
classification under this rule might not be applicable. Let us understand this
with the help of following examples:

Example 1 – ABC is a container freight
station located in Nhava Sheva. DEF, a manufacturer exporter has received an
order for export of goods from Nhava Sheva and has accordingly dispatched the
goods from his factory. When the goods reach Nhava Sheva, the exporter is
informed that the ship in which the goods are to be exported out of India will
berth at the port after 15 days and hence, DEF is required to make temporary
arrangements to store his goods. DEF enters in to a contract for the same with
ABC. The issue in this case would be whether the POS is Maharashtra, being the
location of immoveable property or Gujarat, being the location of recipient? If
ABC, taking a conservative view, classifies the service under this clause, it
would impact the credit availment for DEF as they are registered only in
Gujarat and hence, the credit of taxes for supplies consumed in Maharashtra
would not be available to them. Therefore, they are contending that the
exception clause is not applicable as the services provided by DEF are not
directly in relation to the immovable property.

Example 2 – An advertising service provider provides service in the
context of Out Of Home Advertisements. Under this model, the advertiser takes
on rent advertising space across the country by entering into agreements with
various landlords. Subsequently, the service provider enters into advertising
contract with various clients to allow the display of the advertisements from
such locations. In this context, while the services supplied by the landlords are
directly in relation to an immovable property, can the same be said for the
second leg of the transaction since the service is in relation to advertising
activity, which is distinct from leasing of an immovable property?

Before actually
analysing the above issues, we shall first discuss the following two terms,
which form the crux of this particular entry:

Scope of the phrase
“in relation to”

Directly in relation to – to be applied to what extent

The scope of the phrase “in relation to” has been dealt with by the
Supreme Court in the case of Doypack Systems Private Limited vs. Union of
India [1988 (036) ELT 0201 SC] in the context of Swadeshi Cotton Mills Co.
Limited (Acquisition and Transfer of Undertakings) Act, 1966. The issue was
whether the investments owned by the undertaking were also covered under the
provisions of the said Act and liable for acquisition? The Act provided that on
the appointed day “every textile undertaking” and “the right, title and
interest of the company in relation to every textile mill of such textile
undertakings” were transferred to and vested in the Central Government and such
textile undertakings would be deemed to include “all assets”. The contention of
the Appellants was that the investment in shares of the company were not in
relation to textile mills/undertakings and hence, they were not liable for
nationalisation.

The Supreme Court in the above case held that the expression “in
relation to” is a very broad expression which pre-supposes another subject
matter. These are words of comprehensiveness which might both have a direct
significance as well as an indirect significance depending on the context. The
Court also referred to 76 Corpus Juris Secundum at pages 620 and 621
where it is stated that the term “relate”’ is defined as meaning to bring into
association or connection with. It has been clearly mentioned that “relating
to” has been held to be equivalent to or synonymous with as to “concerning
with” and “pertaining to”. The expression “pertaining to” is an expression of
expansion and not of contraction.

From the above, it is more than evident that the term “in relation
to” has to be given a very wide interpretation. This however gives rise to the
next issue, and that is when a service is said to be in relation to immovable
property. While the GST law is silent about this respect, under the service tax
regime, the Education Guide issued by CBEC at the time of introduction of
negative list-based taxation explained that for a service to be considered in
relation to immovable property, the same should consist of lease, right to use,
occupation, enjoyment or exploitation of an immovable property or service
should have to be performed on the immovable property.

In this background, let us try to understand the above clarification
with an example. A lawyer, having his office in Delhi, provides chamber
consultancy in the form of discussion with client (based in Mumbai) on a legal
matter concerning a real estate in his Delhi Office. The client had travelled
from Mumbai for the specific meeting. Can it be said that the services in this
case are in relation to immovable property and not legal advisory?

Taking a more practical approach to the above aspect, let us take
another example of a supplier providing document management services.
Generally, this service includes receiving the documents from the customer,
scanning & storing them at supplier location. Only when the customer
requires them, they are retrieved from the respective warehouse and provided to
the customers. The customer is not aware about the location where his documents
are stored. In this context, can it be said that the services are in relation
to an immovable property merely because in supplying the services, there is an
element of immovable property involved. Both the above situations clearly
demonstrate that the service in none of the cases is in relation to immovable
property, if the interpretation of the Education Guide is accepted.

In fact, this distinction was applied even under the service tax
regime wherein Rule 4 specifically dealt with the aspect of place of provision
for performance-based services in the context of which, the Education Guide had
provided that the service of storage of goods is actually in relation to goods
and not immovable property. Relevant extracts are reproduced for reference:

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. ….

The above interpretation has been followed even in the context of EU
VAT which contains similar provision for determination of place of supply of
services. In this context, reference to the decision of the First Chamber Court
in the context of EU VAT in Minister Finansow vs. RR Donnelley Global
Turnkey Solutions Poland (RRD) is also 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 1^st
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
u Drawing up of plans for a building / parts of a building designated for a particular plot of land u On site Supervision / Security services u Survey and assessment of risk and integrity of the immovable property (Title search by advocates) u Property management services (other than REITs) u Estate agent services	u Drawing up of plans for a building / parts of a building not designated for a particular plot of land u Storage of goods in an immovable property if no specific part of immovable property earmarked for the exclusive use of the said customer u Provision of advertising, even if involves use of immovable property (Out of Home Advertising) uIntermediation in the provision of hotel accommodation services acting on behalf of another person uBusiness exhibition services uPortfolio management of investments in real estate (REIT)

In Connection with Immovable Property

Not in connection with Immovable property

u Drawing up of plans for a building /
parts of a building designated for a particular plot of land

u On site Supervision / Security services

u Survey and assessment of risk and
integrity of the immovable property (Title search by advocates)

u Property management services (other than
REITs)

u Estate agent services

u Drawing up of plans for a building /
parts of a building not designated for a particular plot of land

u Storage of goods in an immovable
property if no specific part of immovable property earmarked for the
exclusive use of the said customer

u Provision of advertising, even if
involves use of immovable property (Out of Home Advertising)

uIntermediation in the provision of hotel
accommodation services acting on behalf of another person

uBusiness exhibition services

uPortfolio management of investments in
real estate (REIT)

One another issue that is being faced
is from the view point of location of supplier where the services are in
relation to an immovable property. For example, ABC is a property investment
company which has acquired commercial / residential property across the country
and provides the same on lease basis to various customers. ABC has physical
presence only in Mumbai. All the lease agreements specifically provide that the
agreement has been entered into with ABC, Mumbai and the customer for leasing
the respective property which may be located anywhere across India. While
admittedly the POS in case of transactions entered in to by ABC will have to be
the location where the immovable property is situated, the issue that arise is
whether ABC is required to bill the customer from the locations where the
immovable property is located or can they continue to bill from Mumbai treating
Mumbai as the location of supplier of service?

In this regard, reference to Section 22 of the CGST Act might be
necessary which provides that registration has to be taken in each state from
where the taxable supply is being made. Therefore, it needs to be analysed as
to whether the location of supplier of service in this case will be Mumbai or
the respective locations where the property is situated? To analyse the same,
let us refer to the definition of location of supplier of service which
provides that the location of supplier of services shall mean:

(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;

(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 provisions of the supply; and

(d) in absence of such places, the location of the usual place of
residence of the supplier;

As can be seen from the above, location of supplier of service has
to be either a Place of Business or a Fixed Establishment, which have been
defined under the GST law as under:

Place of Business	Fixed Establishment
(85) “place of business” includes–– (a) a place from where the business is ordinarily carried on, and includes a warehouse, a godown or any other place where a taxable person stores his goods, supplies or receives goods or services or both; or (b) a place where a taxable person maintains his books of account; or (c) a place where a taxable person is engaged in business through an agent, by whatever name called;	(50) “fixed establishment” means a place (other than the registered place of business) which is characterised by a sufficient degree of permanence and suitable structure in terms of human and technical resources to supply services, or to receive and use services for its own needs;

Place of Business

Fixed Establishment

(85) “place of business” includes––

(a) a place from where the business is
ordinarily carried on, and includes a warehouse, a godown or any other place
where a taxable person stores his goods, supplies or receives goods or
services or both; or

(b) a place where a taxable person
maintains his books of account; or

(50) “fixed establishment” means a place (other than the
registered place of business) which is characterised by a sufficient degree
of permanence and suitable structure in terms of human and technical
resources to supply services, or to receive and use services for its own
needs;

While there is no concern in treating the
Mumbai office of ABC as its Place of Business, the issue arises in the context
of other locations where ABC owns immovable property. Whether they can be
classified as POB/ FE? Evidently, ABC does not carry out any business from such
locations. The business continues to be carried out from Mumbai, only the
underlying service is delivered at such locations and hence, it can be
concluded that clause (a) of the definition of POB will not be applicable.
Similarly, clause (b) and (c) shall also not be applicable. Therefore, the only
question that needs to be determined is whether such locations can be treated
as FE or not? Even that seems improbable because for a place to be classified
as FE, the same needs to be characterised by
a sufficient degree of permanence and suitable structure in terms of human and
technical resources to supply services, or to receive and use services for its
own needs. While one can say that the locations have a sufficient
degree of permanence, the second limb, that is human & technical resources
to make the supply will not get satisfied. That being the case, such locations
cannot be even classified as FE.

Therefore, it would be safe to conclude that such locations, since
not classifiable as either POB/ FE, the question of the same being classifiable
as Location of Supplier of Service may not arise.

In this context,
one may even refer to the FAQ issued by the CBEC in this context where in one
of the questions, it was clarified that there can be interstate billing for
rental services as well.

Service by
way of lodging accommodation

This clause applies to lodging accommodation services provided by a
hotel, inn, guest house, home stay, club or campsite including a house boat.
This rule makes lodging accommodation costly as in cases where the supplier and
recipient are located in different states, it makes the transaction tax
ineffective. For example, if a hotel in Maharashtra provides accommodation
service to an employee of Gujarat based company, even if the transaction is B2B
in nature, yet the company in Gujarat will not be able to claim the credit of
taxes as the POS will be Maharashtra. In fact, the businesses are in a losing
situation as credit was eligible under the pre-GST regime.

However, one particular issue for this kind of transaction is where
transactions are routed through online portals / agents. As stated above, this
entry is applicable only in cases where the services are provided by hotel,
inn, guest house, home stay, club or campsite including a house boat.
Therefore, in cases where the transaction is routed through online
portals/agents, the rule may not apply. Let us try to understand with the help
of following example.

A Hotel in Goa has entered into a contract with two selling agents,
one located in Bangalore and another in Mumbai. The arrangement with the
Bangalore selling agent is on a Principal to Principal basis wherein the Hotel
blocks specified number of rooms for the Bangalore based agent to sell and
whether or not the Bangalore agent is able to sell the rooms, the charges are
recovered from the agent. However, the terms of the transaction with the Mumbai
based agent are different. In that case, it is provided that the Mumbai based
agent shall merely facilitate the supply on behalf of the hotel for which they
would charge service charges.

The issue arises in the case of transactions through Bangalore
agent. The reason being:

In case of billing by Hotel to Agent – whether the supply is to be
treated of lodging / accommodation service or some other service? In case the
same is treated as lodging / accommodation, the POS will be Goa, and since the
agent is located in Bangalore, credit will not be eligible resulting in a tax
inefficient structure. Further issue arises when the agent bills to the
customer. The agent is not registered in Goa. Will he treat the place of supply
as Goa or will he treat the place of supply to be that of the recipient of the
service? Will one consider the service as directly in relation to an immoveable
property and covered under sub clause (a) or will one believe that sub clause
(b) is applicable? If sub clause (b) and not subclause (a) should be the
correct classification, the issue is that the service provider is not a hotel,
inn, guest house, home stay, club or campsite including a house boat though the
actual provision of service might be by a hotel and in such a case, one can
take a view that since the supply is not by the specified class of supplier,
the exception is not applicable and accordingly, POS may have to be determined
as per the general rule. This position will have to be tested at judicial
forums.

Similarly, in the
case of second set of transactions routed through Mumbai agent, since the Hotel
will be billing directly to customer, the POS will be determined as per the
exception. The Mumbai agent billing to Hotel / Customer for arrangement fees
will be as per the applicable rule and may not get classified under this
basket.

There is one more aspect on credit front in case of B2B transactions
involving lodging accommodation. Let us take an example of a company having
operations in two states, say Maharashtra & Gujarat and hence, registered
in the two states. An employee working with Gujarat office travels to Mumbai
for a client meeting and stays in hotel. Since the company is registered in
Maharashtra, he provides the company with the GSTIN of Maharashtra and asks the
hotel to issue invoice to Mumbai office. Is there any issue in this practice?

The probable answer
to the above question may be found in section 16 of the CGST Act, which
provides that every registered person shall be entitled to take credit of input
tax charged on supply of goods / services which are used / intended to be used
in the course or furtherance of his business. The issue that can be raised here
is whether the credit can be denied on the grounds that the invoice pertained
to a different registered person (being Gujarat) and was used in the course or
furtherance of a different registered person. If this conservative view is
accepted, the credit claim might be in danger. However, to counter this view,
can it be argued that while the GST law provides for deeming branches in
different states as distinct person, the same does not apply for business? That
is, the concept of business will have to be considered at entity level and not qua
the registration and accordingly, credit should be available.

Immovable property in multiple states –
Determining POS

There can be transaction for supply of services wherein under a
single contract, services for multiple immovable properties located across
multiple states might be provided. Lets’ take an example of Clean Ganga
initiative undertaken by the Central Government and awarded to an engineering
company. The river passes through multiple states.

The Government has entered into a single contract with the company
for undertaking the task of cleaning the river. Evidently, there is no issue
with respect to whether the services are in relation to an immovable property
or not? The only issue here that arises is how the POS has to be determined as
one can say that the POS is all such states through which the river flows.

While the proviso to section 12 (3) does deal with such a scenario,
it merely provides that the supply shall be treated as made in each of the
respective States / UT in proportion to the value for service separately
collected / determined in terms of the contract or agreement and in absence of
such contract/ agreement, the POS shall be determined on such other basis as
may be prescribed.

Therefore, in cases where the agreement provides for breakup of
consideration basis the work done in each state, the POS shall be determined
accordingly. However, in case the agreement is silent, one needs to be
determined in the prescribed manner. Unfortunately, no such manner has been
prescribed as on date for determining POS for such supplies. Even if the manner
for determination of POS is prescribed, even then it has to be noted that there
is no provision under the GST law for splitting of value / supply itself. The
provisions exist only for splitting of POS.

Therefore, the
issues that arise is whether the levy will sustain in the absence of proper
provision for determination of value of supply, even if the notifications are
issued in this regard? In this context, reference can be made to the decision
of the Supreme Court in the case of CIT vs. B. C. Srinivasa Shetty wherein
it was held that the charging sections and the computation provisions together
constitute an integrated code and the transaction to which the computation
provisions cannot be applied must be regarded as never intended to be subjected
to charge of tax.

Conclusion

While there are
specific provisions for determining the place of supply in the context of
property-based services, the same has its’ own share of interpretation issues
as well as interlinkages with other aspects of the law, viz., valuation,
credits, registration, etc. and such exception rules can result in breaking the
credit chain and the intent of the GST Law to enable free flow of credit and
open up trade and commerce amongst the States.

shailesh.kwebmaker

Analysis Of Decisions Taken At The 22ND & 23RD Meetings Of The GST Council

This article provides an analysis of the
changes made or proposed in the 22^nd and 23^rd GST Council
meetings. A wide range of changes have been brought about in these Council
meetings which seem to aim at reducing the tax and compliance burden. One gets
a feeling that GST is turning out to be another law entangled in a complex web
of notifications which is perceived to be more dynamic than the stock exchange.
Some attribute the dynamics to a premature introduction of the law.

There were lots of speculations around the
outcome of the 23^rd Council meeting after the Hon’ble Prime Minister
had promised relief. The top most highlight of all proposals was the relocating
of almost 178 items from the 28% slab to 18% slab. On one hand, it appears that
the rate change was purely to please the aam aadmi, while on the other hand it
seems the move is aimed at discouraging tax evasion on fast moving consumer
goods. If we consider this as a move to discourage tax evasion, it may lead to
tax buoyancy with more transactions in these goods coming into the system. In
the subsequent paragraphs, the major changes brought about by the 22^nd
and the 23^rdCouncil meetings are analysed.

1. REDUCTION IN TAX RATES

The reduction of GST rate
on almost 178 items from 28% to 18% is a major move by the Government. Most of
the daily use items like chocolates, custard powder, polishes, sanitary ware,
etc. are the goods where the rate reduction is done. However, luxury and sin
goods like pan masala, aerated water and beverages, cigars and cigarettes,
tobacco products, cement, paints, perfumes, ACs, dish washing machines, washing
machines, refrigerators, vacuum cleaners, cars and two-wheelers, aircraft and
yacht continue to be in the highest tax bracket of 28%.

The rates were reduced
with effect from 15^thNovember 2017; however, the goods bearing the
original MRP were in stock with the distributors and retailers. Most of the big
players have announced that they will ask their logistical partners to ensure
that the rates that get charged to consumers are below the MRP affixed on the
package to take care of the rate reduction.

2. 5% GST RATE FOR RESTAURANTS

As a consequence of
recommendations of the GST Council, another major move affecting the restaurant
industry was notifying 5% GST for restaurants. Prior to this change in rate of
tax, airconditioned restaurants and
restaurants serving liquor had to bear GST @ 18% and other restaurants had to
bear 12% GST. As per the amended rate notification, the rate of GST on certain
restaurants, eating joints including canteen or mess has been notified @ 5%
(with no Input Tax Credit). It is felt that this change seems like a mandatory
scheme for eateries. Prior to introducing this change, the Hon’ble Finance
Minister had stated that all members of the Council felt that restaurants were
not passing on the benefit of ITC to consumers and GST was being levied on
existing card rates. There is no doubt in the fact that we all must have felt
our restaurant bills going up post implementation of GST. The million dollar
question that comes up here is whether this change is going to actually reduce
our restaurant bills.

Few questions that arise
in this regard are enumerated hereunder:

Is the amendment against
the objective of GST

GST as we all know is a
value added tax and the objective of this tax is to allow seamless flow of
credit. Such a move of restricting the ITC in the hands of eateries may go
directly against the stated objective.

The terms ‘restaurant’
& ‘eating joint’ is not defined

The rate notification (5%)
covers within its ambit restaurants, eating house including mess or canteen.
This implies that this rate applies only in case where the activity of supply
of food is undertaken by a restaurant, eating joint including a mess or
canteen. This also means that when the food is supplied by a retail outlet like
a banya shop or a super market, 5% rate shall not apply. There is no clarity on
status of bakeries located in hotels (run by third parties), standalone ice
cream parlours. These tax payers are nothing but re-sellers of ready to eat
food and in most cases there is no preparation or serving done at the store or
retail outlet. There is an urgent need for the Government to clarify the
coverage of this entry, else the basic objective for which the GST rates were
reduced may not get fulfilled. Rather, there is always a possibility that end
consumer prices may increase to cover the increase in cost of supply due to denial of ITC.

Whether charging 5% is
mandatory

On a perusal of the
notification it is apparent that the rate of 5% prescribed in the notification
at Entry no. 7(i) is subject to the condition that no ITC on inward supplies of
goods or services that are used for providing the service is claimed. A
residuary entry at serial no. 7(ix) which prescribes 18% rate for all
accommodation, food and beverage services that are not covered by other entries
excludes restaurants and eating joints covered by entry no 7(i). Further, an
explanation in entry 7(ix) specifically excludes restaurants covered by entry
at serial no. 7(i). A question that arises here is whether 5% is a mandatory
rate or a rate that is conditional to not claiming ITC. On a strict and
conservative interpretation, 5% seems to be mandatory rate for those covered by
entry 7(i) of the above notification.

Another school of thought
is that 5% rate attaches a condition to it and hence is applicable only where
the condition is satisfied. Hence, it cannot be read to be mandatory. Then in
such a case where should such cases get classified. Can they be classified
under entry 35 as “Other miscellaneous services not covered elsewhere” is a
question which needs immediate attention of the government.

Would the move lead to a
reduction in restaurant bills?

Every business activity is
run with an intention to earn profit and it is a simple math that profit is
sales – cost. Tax is charged on sales value. Hence, there is no doubt that 5%
should be charged on the base sale price. So let’s go back to base sales price.
Base sale price would be decided based on a certain mark up over the cost. With
the denial of ITC under the 5% scheme the operating costs are bound to go up
(especially across the counter sale of ready food). The logical outcome would
be increase in base sale price. Most of the restaurants operate in leased
premises and the lease rentals are liable for payment of GST. This would
constitute a huge ITC loss for the restaurants. The amount of ITC that shall
hit the Profit and Loss account debit side would vary from restaurant to
restaurant and only restaurants that operate on a low ITC may perhaps be in a
position to reduce the base sale price along with the reduction in the rate of
tax.

3. CHANGES IN COMPOSITION
SCHEME

(A) Changes already implemented

The 22^nd GST
Council meeting proposed an increase in the threshold limits for composition.
Section 10 of the CGST Act, 2017 empowers the Government to raise the maximum
threshold as under:

Rs. in lakhs

States

Old Threshold

New Threshold

Special Category

Other States

100

Subsequent to the above
change an order¹ was issued to clarify certain aspects relating to
composition scheme. This order was issued in terms of powers of the Government
to remove difficulties arising in giving effect to any provisions of the Act.
The following was clarified in the above order:

a) A tax payer engaged in
supplying restaurant and other services specified in Para 6(b) of Schedule II
to the Act and also supplying exempt services (including interest income) shall
be allowed to go for composition u/s. 10 if all other conditions are satisfied.

b) Further, it was clarified
that while computing his aggregate turnover for determining eligibility for
opting for composition, the value of these exempt services shall not be
included.

As per the Press Release
dated 06-10-2017, it was also decided to constitute a Group of Ministers who
shall work towards making composition scheme even more attractive.

[1] Order No. 01/2017-CT, dated 13-10-2017 issued
under section 172 of the CGST Act, 2017.

(B) Changes proposed at 23^rd
GST Council meeting to be implemented after making legislative changes

(i) It has been proposed to
enhance the current threshold to 200 Lakhs. However, this proposal can come
into effect only after making changes to the law

(ii) Uniform composition rate
of 1% to be made applicable to manufacturers and traders. However, no change is
proposed to composition rate applicable to restaurants.

(iii) Supply of services up to
Rs. 5 lakh per annum will be allowed by exempting the same

The notifications relating to (ii) and (iii)
above are still awaited. It may be noted that the changes as per 22^ndCouncil
meeting and proposals by 23^rd Council meeting would imply the
following:

(i) Rule 3(3A) has been
inserted in the CGST Rules,2017 allowing entry into composition scheme any time
till 31-03-2018.

(ii) The option for composition
shall be applicable only in the month succeeding the month in which the option
opting for composition is exercised by filing Form GST CMP-02.

(iii) Such persons shall also
have to intimate details of inputs and capital goods in stock and pay ITC
attributable to such stock as per section 18(4) and computed in the manner
prescribed in Rule 44 of the CGST Rules. The intimation has to be given in Form
GST ITC-03.

The question here is whether introducing
such changes in the scheme of composition would really make it attractive at a
time when we are approaching the end of the financial year.

4. RELIEF IN COMPLIANCE
PROCEDURES PROPOSED AT THE 22^nd AND 23^rd GST COUNCIL MEETINGS

A. Filing of GSTR-2, 3
suspended:

Inspite of the glitches
and the OOPS! on the GSTN portal tax payers did manage to file returns in Form
GSTR-3B and GSTR-1. However, when it came to furnishing details of inward
supplies, it seemed to be a task on hand for matching various elements (with
the biggest challenge being Invoice number and date). It was highly unfair for
a genuine tax payer where his credit claim is made depended on the timely
furnishing of outward supplies by his vendor. Considering the hardships faced
by tax payers, the Government has suspended filing of GSTR-2 which is viewed as
a very practical and bold step.

It
may be noted here that filing of GSTR-2 has been suspended for the time being
but at some point in time this compliance has to be faced.The press release
dated 10-11-2017 states that a committee of officers would work out the time period for filing of GSTR-2 and
3.

From an industry perspective, what seems to
be the most desirable is:

a) Invoice number level and
date matching should be done away with and only the tax element be matched.

b) Alternatively the matching
of ITC may be done after the end of the financial year or on a quarterly basis
instead of monthly basis.

c) If the ITC matching is done
on an annual or quarterly basis Forms GSTR-1, 2 and 3 should be consolidated
and a single return containing details of outward and inward supplies and the
tax computation for each period should be filed at the end of the month or
quarter, as the case may be.

B. Quarterly returns for SME
sector

Another welcome move
relates to reduced periodicity of filing of returns by small and medium sized
businesses with annual aggregate turnover up to Rs. 1.5 crore, and it was proposed at the 22^nd
council meeting to allow such SME businesses to file GSTR-1, 2 and 3 and
also pay taxes on quarterly basis. Consequent to the 22^nd
council meeting, the notification giving effect to this proposal was long
awaited.

However, the above
decision was tweaked at the 23^rdcouncil meeting where filing of
GSTR-2 and 3 was suspended for the time being for all tax payers and quarterly
filing due dates and eligibility for the SME sector were notified as under:

Quarter for
which details to be furnished in Form GSTR-1

Due Date

Jul-Sep,
2017

31-12-2017

Oct-Dec,
2017

15-02-2018

Jan-Mar,
2018

30-04-2018

Form 3B and payment of
taxes continue to be a monthly affair

It may be noted here that
even though periodicity has been changed for filing Form GSTR-1, the
periodicity for payment of taxes and filing of Form GSTR-3B is still a monthly
affair for all tax payers (unlike what was the original proposal at the 22^nd
Council Meeting).

The efforts that are
required for computing the tax liability for a month and preparing Form 3B are
no less than filing of Form GSTR-1. In such a situation, would just changing
periodicity of filing GSTR-1 to quarterly really help the SME sector?

Clarity on applicability

The eligibility of a tax
payer for filing quarterly returns as notified²is reproduced here
under:

“The registered persons
having aggregate turnover of up to 1.5 Crore rupees in the preceding financial
year or the current financial year,
as the class of registered persons who shall follow the special procedure as
detailed below for furnishing the details of outward supply of goods or
services or both

The confusion that is created
here is the reading of the word “or” used in the notification. Whether a tax
payer whose turnover in the preceding year was below the 1.5 crore mark but who
has crossed this threshold already in the current year can still avail the
benefit of quarterly filing. The same question arises in a vice versa
situation. However, if we go by the intention, it seems that the word “or”
should be read literally and not as “and”. Hence, even if the aggregate
turnover is above 1.5 crore in the current year, the benefit should be
available.

5. NO GST PAYABLE ON ADVANCES
RECEIVED FOR SUPPLY OF GOODS

The liability to pay tax
arises when the time of supply gets triggered. The provisions relating to time
of supply state that the liability shall arise on the earlier of the date of
invoice or date of receipt of payment. This implies that GST becomes payable on
advances received prior to making of the supply. While the service tax law
already contained provisions for taxing advances, similar provisions were not
present under the VAT laws and central excise law. The concept of taxing
advances relating to supply of goods was fairly new to suppliers of goods under
the GST law and had its own inherent issues, especially when it is difficult to
determine the classification of the goods to be supplied at the time when the
advance is received. Further, at times, it was also difficult to determine the
location of the supplier where advances were centrally received at the head
office.

As proposed by the council
at its 22^nd Council Meeting, the requirement for making payment of
GST on advance was exempted only in cases of tax payers (not being under
composition) whose preceding year turnover did not exceed Rs. 1.5 crore or
current year turnover is not likely to exceed the above threshold³.
At the 23^rdCouncil Meeting, this relaxation was extended to all
suppliers of goods⁴. It may be noted that in case of supplier
of services the tax shall be payable on advances received.

[2] Notification No. 57/2017-CT, dated 15-11-2017

6. CLARIFICATION IN CASE OF
INTER-STATE MOVEMENT OF RIGS, TOOLS, ETC.

It has been clarified⁵
that inter-state movement of various modes of conveyances between distinct
persons carrying passengers, goods or for repairs and maintenance shall neither
be treated as a supply of goods or services and hence, no IGST shall be
payable.

A similar issue was faced
in case of inter-state movement of rigs, tools and spares, and all goods on
wheels like cranes. These goods may move to various locations for providing
services. The press release states that no IGST shall be payable in case these
goods move for the purpose of providing services to customers or for the
purpose of getting these goods repaired. The press release further states that
applicable tax shall be payable on services that are provided using such goods.

Consequent to the Council
decision, a clarification⁶in this regard was issued which simply
states that circular 1/2017 shall mutatis mutandis apply to inter-state
movement of such goods, and except in cases where movement of such goods is for
further supply of the same goods, such inter-state movement shall be treated
‘neither as a supply of goods or supply of service,’ and consequently, no IGST
would be applicable on such movements. It further states that the applicable
GST shall be payable on repairs of such goods. There seems to be a disconnect
between the press release and the Circular to the extent that there is no
specific mention that no GST shall be payable even when these goods are used
for providing services to customers located in other States.

Further, it is not clear whether the clarification would hold good where
the distinct person is registered in the other State and the billing location
is from that State.

[3] Notification No. 40/2017-CT, dated 13-10-2017

[4] Notification No. 57/2017-CT, dated 15-11-2017

[5] Circular No. 1/1/2017-IGST, dated 07-07-2017

[6] Circular No. 21/21/2017-GST, dated 22-11-2017

7. Other
changes

a) Tax payers who have paid
late fees for July, August and September, 2017 shall be re-credited to their
Cash ledger under the “Tax” head.

b) Late fees for return in Form
3B for the period Oct-2017 onwards have been reduced⁷ as
provided in the table below. It may be noted that the waiver applies only
for Form 3B and not other returns.

Particulars

Original Late Fees per day

Reduced Late Fee per day

CGST

SGST

CGST

SGST

Cases where tax payable is NIL

100

Other Cases

100

[7] Notification No. 64/2017-CT, dated 15-11-2017

c) A facility for manual
filing of advance ruling applications has been introduced. Rule 97A has been
inserted in the CGST Rules⁸.

d) Exemption from registration
in case of small service providers (having aggregate turnover less than Rs. 20
lakh making inter-state or intra state supply of services through an E-Commerce
operator)⁹.

e) Input Tax Credit has been
allowed¹⁰ in respect of supply of services to Nepal and Bhutan
despite the said services being treated as exempted services.

f) Date for filing Form
TRAN-1 extended to 27-12-2017¹¹.

g) Date for furnishing details
of goods sent to job worker in Form ITC-04 extended¹² to 31-12-2017
for the period Jul. to Sept., 2017. _

______________________________________________________________________

8      Notification No. 55/2017-CT, dated 15-11-2017
9      Notification No. 65/2017-CT, dated 15-11-2017 issued under section 23(2) of the CGST Act, 2017
10    Explanation inserted in Rule 43 of the CGST Rules, 2017 vide Notification No. 55/2017-CT, dated 15-11-2017
11    Order No. 9/2017-GST, dated 15-11-2017
12    Notification No. 63/2017-CT, dated 15-11-2017

shailesh.kwebmaker

Can There Be A Levy Of IGST On Actual Imports?

Introduction

1. It is common knowledge that
the levy of additional duty of customs, commonly known as CVD and special
additional duty, commonly known as SAD, have been replaced for many products
with the IGST, also known as integrated tax on imports of goods. In this
article, we examine whether there can be a levy of such integrated tax on the
activity of actual imports into the country using the present wordings in the
statute.

Legal Analysis

IGST or the integrated tax is a tax which is
levied on inter-State supplies of goods or services. The levy is under an
enactment called Integrated Goods and Services Tax Act, 2017.

2. The charging provision is
section 5 which levies a tax on all inter-State supplies of goods or services.
Proviso to section 5(1) of the IGST Act reads as under:

“Provided that the
integrated tax on goods imported into India
shall be levied and collected in accordance with the provisions of section 3 of
the Customs Tariff Act, 1975 on the value as determined under the said Act at
the point when duties of customs are levied on the said goods under section 12
of the Customs Act, 1962.”

3. Section 7 of the IGST Act,
2017 would talk of determination of what is inter-State supply. For our
purposes, section 7(2) of the IGST Act states that “Supply of goods imported into the territory of India, till they
cross the customs frontiers of India, shall be treated to be a
supply of goods in the course of inter-State trade or commerce”.

4. If one compares the
language used in section 7(2) and proviso to section 5(1), the events
considered are different. Section 7(2) talks about “imported into territory
of India, till they cross the customs frontiers of India….” Proviso to
section 5(1) talks about “goods imported into India”. While the former
deals only with determining what is inter-State supply and states that till
goods cross the customs frontiers, they are treated as supply in the course of
import or export of goods, the latter is the charging section which states that
the charge on goods imported is determined by the Customs Tariff Act.
Therefore, the two seem to operate in two different fields. While one talks of
“in the course of imports or exports”, the other talks of “goods imported into
India”. The former would probably cover instances such as high sea sales, while
the latter deals with actual imports into the country.

5. The net effect of this
would be that u/s. 7, transaction in high seas, would be termed as in the
course of imports or exports and would be treated as inter-State supply of
goods or services. Though the proviso to section 5(1) states that integrated
tax on goods imported into India would be levied and collected in accordance
with the provisions of section 3 of the Customs Tariff Act, there is no fiction
created to stipulate that goods imported into India would be treated as supply
in the course of inter-State trade or commerce. The fiction created in
section 7(2), it seems to the authors, is not sufficient to take care of direct
imports because of inappropriate language used in section 7(2). If this
position is true, then the charge of integrated tax on direct imports is on
precarious grounds. We could read it this way too – the charge under IGST Act
is restricted to tax only on transactions at the high seas or before customs
clearances and cannot be fastened on goods actually imported.

6. We now have to look at the
Constitution of India. The Constitution 101^stAmendment Act has
already created a fiction as to what kind of supply vis-à-vis imports is
deemed to be in the course of inter-State trade or commerce. The Explanation to
Article 269A(1) reads as under:

“For the purposes of this
clause, supply of goods, or of services, or both in the course of import
into the territory of India shall be deemed to be supply of goods, or of
services, or both in the course of inter-State trade or commerce.”

7. The above would show that
extent to which fiction can be created by Parliament to treat any supply vis-à-vis
import is already specified in the Constitution. Only supply in the course of
import into the territory of India alone is deemed to be supply in the course
of inter-State trade or commerce. Direct imports are not covered. This is quite
clearly the case as direct imports were already covered under the customs
legislation.

8. Such being the case,
Parliament cannot create any fiction vis-à-vis imports to treat them as
supply in the course of inter-State trade or commerce except to the extent
provided in the Explanation to Article 269A(1). No fiction can be created by
the Parliament to treat direct imports as supply in the course of inter-State
trade or commerce because the scope of fiction is already defined in the
Constitution i.e., Explanation to Article 269A(1). Article 269A(5) confers
power on the Parliament to formulate the principles for determining the place
of supply, and when a supply of goods, or of services, or both takes place in
the course of inter-State trade or commerce. Section 7 of the IGST Act has been
enacted pursuant to the powers granted by Article 269A(5). The powers given by
Article 269A(5) should be read along with section 269(1). While formulating the
provisions regarding place of supply, the Parliament cannot go beyond
Explanation to Article 269A(1) create any fiction with respect to direct
imports as the scope of fiction is already defined in the said Explanation.

9. We can look at this in
another way too – Article 246A which was introduced by the above Amendment Act,
is a special provision with respect to goods and services tax and therefore, to
that extent would override Article 246 in the matter of vesting legislative
powers. Parliament already had powers under Article 246 read with Schedule VII
List 1 entry 83, to levy a duty of customs and therefore, the special
provisions for levy of GST on goods or services supplied can be restricted to
only two things:

a. Tax on goods or services
supplied inside India

b. Tax on goods or services
supplied in the course of export or import and not on actual imports or exports
which is covered by the customs legislation already.

This reading would clearly
harmonise the two Articles in the Constitution as otherwise, the state
legislatures would have the power to levy import duties which is clearly not
the case.

10. As we are dealing
with the subject of imports, it would be relevant to note what is import.
Section 2(10) of the IGST Act, 2017 defines import of goods to mean bringing
goods into India from a place outside India. Section 2(23) of the Customs Act,
1962 has the same definition. Therefore, we have to examine some decisions on
the concept of import. The Hon’ble Supreme Court discussed when import is said
to take place.

– Kiran
Spg. Mills vs. Collector of Customs, (2000) 10 SCC 228

6. Attractive, as the
argument is, we are afraid that we do not find any merit in the same. It has
now been held by this Court in Hyderabad Industries Ltd. v. Union of India
[(1999) 5 SCC 15 : JT (1999) 4 SC 95] that for the purpose of levy of
additional duty Section 3 of the Tariff Act is a charging section. Section 3
sub-section (6) makes the provisions of the Customs Act applicable. This would
bring into play the provisions of Section 15 of the Customs Act which, inter
alia, provides that the rate of duty which will be payable would be (sic the
rate in force) on the day when the goods are removed from the bonded warehouse.
That apart, this Court has held in Sea Customs Act [ Sea Customs Act, S. 20(2),
Re, AIR 1963 SC 1760 : (1964) 3 SCR 787, 803], SCR at p. 803 that in the case
of duty of customs the taxable event is the import of goods within the customs
barriers. In other words, the taxable event occurs when the customs barrier is
crossed. In the case of goods which are in the warehouse the customs barriers
would be crossed when they are sought to be taken out of the customs and
brought to the mass of goods in the country. Admittedly this was done after
4-10-1978. As on that day when the goods were so removed additional duty of
excise under the said Ordinance was payable on goods manufactured after
4-10-1978. We are unable to accept the contention of Mr. Ramachandran that what
has to be seen is whether additional duty of excise was payable at the time
when the goods landed in India or, as he strenuously contended, they had
crossed into the territorial waters. Import being complete when the goods
entered the territorial waters is the contention which has already been
rejected by this Court in Union of India v. Apar (P) Ltd. [(1999) 6 SCC 117]
decided on 22-7-1999. The import would be completed only when the goods are to
cross the customs barriers and that is the time when the import duty has to be
paid and that is what has been termed by this Court in Sea Customs case [ Sea
Customs Act, S. 20(2), Re, AIR 1963 SC 1760 : (1964) 3 SCR 787, 803] (SCR at p.
823) as being the taxable event. The taxable event, therefore, being the day of
crossing of customs barrier, and not on the date when the goods had landed in
India or had entered the territorial waters, we find that on the date of the
taxable event the additional duty of excise was leviable under the said
Ordinance and, therefore, additional duty under Section 3 of the Tariff Act was
rightly demanded from the appellants.”

One may see with profit the following decisions also:

– The
Hon’ble Supreme Court in Union of India vs. Apar (P) Ltd., (1999) 6 SCC
117

– Bharat
Surfactants (P) Ltd. vs. Union of India, (1989) 4 SCC 21

– Further,
we can see the decision of the Supreme Court in Garden Silk Mills Ltd. vs.
Union of India, (1999) 8 SCC 744

17. It was further
submitted that in the case of Apar (P) Ltd. [(1999) 6 SCC 117: JT (1999) 5 SC
161] this Court was concerned with Sections 14 and 15 but here we have to
construe the word “imported” occurring in Section 12 and this can only mean
that the moment goods have entered the territorial waters the import is
complete. We do not agree with the submission. This Court in its opinion in
Bill to Amend Section 20 of the Sea Customs Act, 1878 and Section 3 of the
Central Excises and Salt Act, 1944, Re [AIR 1963 SC 1760 : (1964) 3 SCR 787 sub
nom Sea Customs Act (1878), S. 20(2), Re] SCR at p. 823 observed as follows:

“Truly speaking, the
imposition of an import duty, by and large, results in a condition which must
be fulfilled before the goods can be brought inside the customs barriers, i.e.,
before they form part of the mass of goods within the country.”

18. It would appear to
us that the import of goods into India would commence when the same cross into
the territorial waters but continues and is completed when the goods become
part of the mass of goods within the country; the taxable event being reached
at the time when the goods reach the customs barriers and the bill of entry for
home consumption is filed.

– Hotel
Ashoka vs. ACCT 2012(276) E.L.T. 433 (S.C.)

18. It is
an admitted fact that the goods which had been brought from foreign countries
by the appellant had been kept in bonded warehouses and they were transferred
to duty free shops situated at International Airport of Bengaluru as and when
the stock of goods lying at the duty free shops was exhausted. It is also an
admitted fact that the appellant had executed bonds and the goods, which had
been brought from foreign countries, had been kept in bonded warehouses by the
appellant. When the goods are kept in the bonded warehouses, it cannot be said
that the said goods had crossed the customs frontiers. The goods are not
cleared from the customs till they are brought in India by crossing the customs
frontiers. When the goods are lying in the bonded warehouses, they are deemed
to have been kept outside the customs frontiers of the country and as stated by
the learned senior counsel appearing for the appellant, the appellant was
selling the goods from the duty free shops owned by it at Bengaluru
International Airport before the said goods had crossed the customs frontiers.

19. Thus,
before the goods were imported in the country, they had been sold at the duty
free shops of the appellant.

20. In view of the
aforestated factual position and in the light of the legal position stated
hereinabove, it is very clear that no tax on the sale or purchase of goods can
be imposed by any State when the transaction of sale or purchase takes place in
the course of import of goods into or export of the goods out of the territory
of India. Thus, if any transaction of sale or purchase takes place when the
goods are being imported in India or they are being exported from India, no
State can impose any tax thereon.

The legal position
therefore is that only when duty is paid can it be said that the goods are
imported.

11. But what do we mean
by the terminology “in the course of import or export”?

12. Article 286 of the
Constitution prior to its amendment read as under:

286. (1) No law of a
State shall impose, or authorise the imposition of, a tax on the sale or
purchase of goods where such sale or purchase takes place—

(a) outside the State; or

(b) in the course of the import of the goods into, or export of the
goods out of the territory of India.

(2) Parliament may by law formulate principles for determining when
a sale or purchase of goods takes
place in any
of the ways
mentioned in clause (1).

(3) Any law of a State shall,
in so far as it imposes, or authorises the imposition of,—

(a) a tax on the sale or purchase of goods declared by Parliament by
law to be of special importance in inter-State trade or commerce; or

(b) a tax on the sale or purchase of goods, being a tax of the
nature referred to in sub-clause (b), sub-clause (c) or sub-clause (d) of
clause (29A) of article 366, be subject to such restrictions and conditions in
regard to the system of levy, rates and other incidents of the tax as
Parliament may by law specify.

13. Section 5(2) of the
CST Act was enacted pursuant to Article 286. Section 5(2) read as under:

“(2) A sale or purchase
of goods shall be deemed to take place in the course of the import of the goods
into the territory of India only if the sale or purchase either occasions such
import or is effected by a transfer of documents of title to the goods before
the goods have crossed the customs frontiers of India.”

14. The above fiction gives
an idea as to what can be treated as to be in the course of imports. It doesn’t
include direct imports and rightly so. No doubt section 5(2) is a fiction. But
the manner in which it is worded, it essentially encompasses the natural
meaning of the expression “in the course of import”. Section 5(2) of CST Act
doesn’t cover direct imports. It covers only sale which occasions import or
sale by transfer of document of title to goods before the goods have crossed
the customs frontier. It is understandable too as the customs legislation is
the one which should cover it.

15. Article 286 has been
amended by the Constitution 101^stAmendment
Act. The amended Article reads as under:

286. (1) No law of a State
shall impose, or authorise the imposition of, a tax on the supply of goods or
of services or both, where such supply takes place —

(a) outside the State; or

(b) in the course of the
import of the goods or services or both into, or export of the goods or
services or both out of, the territory of India.

(2) Parliament may by law
formulate principles for determining when a supply of goods or of services or
both takes place in any of the ways mentioned in clause (1).

– This
is also best expressed in the words of the Supreme Court in State of
Travancore-Cochin vs. Bombay Co. Ltd., 1952 SCR 1112 : AIR 1952 SC 366 :
(1952) 3 STC 434 [popularly known as First case of Travancore].

10. We are clearly of
opinion that the sales here in question, which occasioned the export in each
case, fall within the scope of the exemption under Article 286(1)(b). Such
sales must of necessity be put through by transporting the goods by rail or
ship or both out of the territory of India, that is to say, by employing the
machinery of export. A sale by export thus involves a series of integrated
activities commencing from the agreement of sale with a foreign buyer and
ending with the delivery of the goods to a common carrier for transport out of
the country by land or sea. Such a sale cannot be dissociated from the export
without which it cannot be effectuated, and the sale and resultant export form
parts of a single transaction. Of these two integrated activities, which
together constitute an export sale, whichever first occurs can well be regarded
as taking place in the course of the other. Assuming without deciding that the
property in the goods in the present cases passed to the foreign buyers and the
sales were thus completed within the State before the goods commenced their
journey as found by the Sales Tax Authorities, the sales must, nevertheless, be
regarded as having taken place in the course of the export and are, therefore,
exempt under Article 286(1)(b). That clause, indeed, assumes that the sale had
taken place within the limits of the State and exempts it if it took place in
the course of the export of the goods concerned.

………

12. It was said that,
on the construction we have indicated above, a “sale in the course of export”
would become practically synonymous with “export”, and would reduce clause (b)
to a mere redundancy, because Article 246(1), read with Entry 83 of List I of
the Seventh Schedule, vests legislative power with respect to “duties of
customs including export duties” exclusively in Parliament, and that would be
sufficient to preclude State taxation of such transactions. We see no force in
this suggestion. It might well be argued, in the absence of a provision like
clause (b) prohibiting in terms the levy of tax on the sale or purchase of
goods where such sales and purchases are effected through the machinery of
export and import, that both the powers of taxation, though exclusively vested
in the Union and the States respectively, could be exercised in respect of the
same sale by export or purchase by import, the sales tax and the export duty
being regarded as essentially of a different character. A similar argument
induced the Federal Court to hold in Province of Madras v. Boddu Paidanna and
Sons [1942 FCR 90] that both central excise duty and provincial sales tax could
be validly imposed on the first sale of groundnut oil and cake by the
manufacturer or producer as “the two taxes are economically two separate and
distinct imposts”. Lest similar reasoning should lead to the imposition of such
cumulative burden on the export-import trade of this country which is of great
importance to the nation’s economy, the Constituent Assembly may well have
thought it necessary to exempt in terms sales by export and purchases by import
from sales tax by inserting Article 286(1)(b) in the Constitution.

13. We are not much
impressed with the contention that no sale or purchase can be said to take
place “in the course of” export or import unless the property in the goods is
transferred to the buyer during their actual movement, as for instance, where
the shipping documents are indorsed and delivered within the State by the
seller to a local agent of the foreign buyer after the goods have been actually
shipped, or where such documents are cleared on payment, or on acceptance, by
the Indian buyer before the arrival of the goods within the State. This view,
which lays undue stress on the etymology of the word “course” and formulates a
mechanical test for the application of clause (b), places, in our opinion, too
narrow a construction upon that clause, in so far as it seeks to limit its
operation only to sales and purchases effected during the transit of the goods,
and would, if accepted, rob the exemption of much of its usefulness.

14. We accordingly hold
that whatever else may or may not fall within Article 286(1)(b), sales and
purchases which themselves occasion the export or the import of the goods, as
the case may be, out of or into the territory of India come within the
exemption and that is enough to dispose of these appeals.

16. In our view, the above
passage does conclude that the sale and purchase in the course of import should
be widely construed to cover integrated activities. If that be so, it would
become crystal clear that activities covering actual imports and exports would
be taxed under the customs legislations and other activities relating to or in
the course would not suffer any tax under the earlier regime to soften the tax
impact on such transactions. If this proposition was accepted, then the entire
IGST mechanism should be restricted only to transactions that occur in the
course of import or export and not actual imports or exports themselves.

17. Now it becomes clear that actual imports are covered by customs
legislation and IGST Act can only cover the supply in the course of imports or
exports. Further, as import of goods is already covered under the customs
legislation, it cannot be termed as a supply under the CGST Act, 2017 itself
which definition applies to the IGST Act also. Having understood this, we may
have to look at whether the customs legislation can impose an integrated tax.

18. The expression
‘integrated tax’ has a specific connotation. It is defined by section 2(12) of
IGST Act as means the integrated goods and services tax levied under this
Act;

19. Proviso to section
5(1) states that the integrated tax on goods imported into India shall be levied
and collected in accordance with the provisions of section 3 of the Customs
Tariff Act, 1975 on the value as determined under the said Act at the point
when duties of customs are levied on the said goods u/s. 12 of the Customs Act,
1962.

20. An Act cannot create
a charge on a particular transaction under some other Act. IGST Act cannot
create a charge under Customs Act in respect of a taxable event. The main
provision of section 5(1) does not cover import [ie., there is no fiction
created in the main provision of section 5(1) that inter-State supplies include
imports]. The proviso to section 5(1) is misplaced. It cannot be read as
proviso to section 5(1). There is no provision similar to section 7(4) of IGST
Act so far as import of goods are concerned. A fiction should have been created
similar to section 7(4) of IGST Act so far as import of goods are concerned. So
howsoever one interprets Explanation to Article 269A(1) or Article 286, there
is no provision in IGST Act to create charge on imports. Therefore, the proviso
to Section 5(1) to the IGST Act is completely superfluous and redundant. It can
be saved only by stating that it was done ex abundanti cautela.

21. Section 3(7) of
Customs Tariff Act states that “any article which is imported into India
shall, in addition, be liable to integrated tax at such rate, not
exceeding forty per cent. as is leviable under section 5 of the Integrated
Goods and Services Tax Act, 2017 on a like article on its supply in India, on
the value of the imported article as determined under sub-section (8).”

22. Section 3(7) of the
Customs Tariff Act is creating a charge of integrated tax on imports which is
not permitted, as the customs legislation does not define what is an integrated
tax. As stated earlier, integrated tax has specific connotation. It is a levy
under IGST Act. One might compare the language used in section 3(7) with that
used in sections 3(1) and 3(5) of the Customs Tariff Act [Sections 3(1) and
3(5) deal with additional customs duty]. Sections 3(1) and 3(5) read as under:

3. (1) Any article which
is imported into India shall, in addition, be liable to a duty (hereafter in
this section referred to as the additional duty) equal
to the excise duty for the time being leviable on a like article
if produced or manufactured in India and if such excise duty on a like article
is leviable at any percentage of its value, the additional duty to which the
imported article shall be so liable shall be calculated at that percentage of
the value of the imported article:

(5) If the Central
Government is satisfied that it is necessary in the public interest to levy
on any imported article [whether on such article duty is leviable under
subsection ( 1) or, as the case may be, sub-section ( 3) or not] such
additional duty as would counter-balance
the sales tax, value added tax, local tax or any other charges for the time
being leviable on a like article on its sale, purchase or transportation in
India, it may, by notification in the Official Gazette, direct that such
imported article shall, in addition, be liable to an additional duty at a rate
not exceeding four per cent. of the value of the imported article as specified
in that notification.

23. A perusal of the
above would show that additional duty equivalent to excise duty and sales tax
is levied. Therefore, the nature of duty remained as customs duty. Only the
rate is equivalent to excise duty or the sales tax rate.

24. All along, whenever
any additional duty of customs equivalent to excise duty or special additional
duty equivalent to sales tax were levied on imported goods, the relevant
provisions were made in the Customs Tariff Act. It used the expression
“equivalent to”.

25. A perusal of section
3(7) would show that what is leviable u/s. 3(7) is not additional duty
equivalent to rate of integrated tax. Section 3(7) stipulates levy of
integrated tax on imports. Customs Tariff Act cannot levy integrated tax.
Integrated tax is levied under IGST Act which is a law made pursuant to Article
246A read with Article 269A. Article 269A does not empower levy of tax on
direct imports. Integrated tax which takes its power under Article 269A cannot
be levied on imports. So, can one counter this argument to say that the
terminology used should be ignored, as Parliament has power to make laws with
respect to imports as well as inter-State supplies?

26. One cannot read the
words ‘integrated tax’ in section 3(7) of Customs Tariff Act to mean customs
duty. It is also interesting to note section 17 of IGST Act which deals with
apportionment of ‘integrated tax’.Section 17 states that:[relevant extract]

17. (1) Out of the
integrated tax paid to the Central Government,––

……….

(d) in respect of
import of goods or services or both by an unregistered person or by a
registered person paying tax under section 10 of the Central Goods and Services
Tax Act;

(e) in respect of import
of goods or services or both where the registered person is not eligible for
input tax credit;

(f) in respect of import
of goods or services or both made in a financial year by a registered person,
where he does not avail of the said credit within the specified period and thus
remains in the integrated tax account after expiry of the due date for
furnishing of annual return for such year in which the supply was received, the
amount of tax calculated at the rate equivalent to the central tax on similar
intra-State supply shall be apportioned to the Central Government.”

27. If integrated tax on
imports is to be read as customs duty, how can section 17 of IGST Act deal with
its apportionment.

28. Section 2(62) of
CGST Act defines ‘input tax’ as under: [relevant extract]

“(62) “input tax” in
relation to a registered person, means the central tax, State tax, integrated
tax or Union territory tax charged on any supply of goods or services or both
made to him and includes—

(a) the integrated goods and services tax charged on import
of goods;”

29. Section 42 of CGST Act
reads as under:

42. (1) The details of
every inward supply furnished by a registered person (hereafter in this section
referred to as the “recipient”) for a tax period shall, in such manner and
within such time as may be prescribed, be matched––

(a) with the
corresponding details of outward supply furnished by the corresponding
registered person (hereafter in this section referred to as the “supplier”) in
his valid return for the same tax period or any preceding tax period;

(b) with the integrated
goods and services tax paid under section 3 of the Customs Tariff Act, 1975 in
respect of goods imported by him; and

30. If integrated tax in
section 3(7) of Customs Tariff Act were to be understood as customs duty,
section 2(62) and section 42 of CGST Act should not have been so worded. The
use of integrated tax in section 3(7) of Customs Tariff Act has been
consciously taken, which is vindicated from the language in section 17 of IGST
Act and sections 2(62) and 42 of IGST Act.

31. Taxable event of
import cannot suffer a levy under IGST Act. Customs Act alone can create charge
on imports. Import is a taxable event under the Customs Act. It is not a
taxable event under IGST Act. The same aspect [i.e., import] cannot be taxed
under two Acts. So howsoever one chooses to interpret Explanation to Article
269A(1) or Article 286, charge on imports cannot be created under IGST. Article
286, even prior to its amendment, did not empower levy of CST on imports. Imports
were not treated as part of inter-State trade or commerce. This is evident from
entry 41 and 42 of List I to Seventh Schedule. So, section 3(7) of Customs
Tariff Act and proviso to section 5(1) of IGST Act fail to create a valid charge of integrated tax on imports.

32. Rag-bag legislation
acknowledged by the Hon’ble SC in Ujagar Prints’s case 1989 (38) ELT 535 was vis-à-vis
entries in List I of the Seventh Schedule to the Constitution. It stated that
if one entry doesn’t empower Parliament to make law vis-à-vis a
particular levy, there is no prohibition on relying on the residual entry to
find the source for power to make law in respect of such levy. The Hon’ble SC
did state that Parliament has exclusive power to make laws in respect of those
matters which are not covered either by List II or List III. Would this
principle apply to harmonious interpretation of Article 246, 246A and 269A? If
one were to apply rag-bag legislation principle, one of the fall outs would be
that Parliament is empowered to make law, prescribing two levies in respect of
very same aspect [Factually, Parliament has prescribed only one levy;
Theoretically, it is empowered to prescribe two levies in respect of the same
aspect]. IGST Act has been enacted
pursuant to Article 246A read with Article 269A of the Constitution. Customs
Act has been enacted pursuant to Article 246. Article 269A does not empower levy
of GST on direct imports. Can the Customs Act which is enacted under Article
246 levy integrated tax [though integrated tax is a levy pursuant to Article
269A which doesn’t empower levy of integrated tax on direct imports] on
imports? The Hon’ble SC did not consider a situation where Parliament made
enactment pursuant to two different Articles of the Constitution. If Parliament
is said to be empowered to make a law in respect of a particular levy under
more than one Article, doesn’t it render one of the Articles otiose. Is
it not against the principles of harmonious construction?

33. Interestingly, if
one were to interpret that Explanation to Article 269A(1) and Article 286
empower levy on direct imports, not only 3(7) of Customs Tariff Act but even
the main levy on imports i.e., basic customs duty [i.e., section 12 of Customs
Act read with section 2 of Customs Tariff Act] would fail. This is because if
one were to interpret that Explanation to Article 269A(1) and Article 286
empower levy on direct imports, it means that direct imports are deemed to be
inter-State supplies. Levy on inter-State supplies are governed by IGST Act. So
the natural fall out is that direct imports which are deemed to be inter-State
supplies should be liable only to integrated tax and not customs duty.

34. It would also be
interesting to note that the recent clarification by the government stating
that customs duty would be levied only on actual imports but would include the
price charged in several high sea sale transactions for the purpose of customs
valuation shows that when actual imports do take place, it is only the customs
legislation which would be relevant.

35. Though we have made
passing references to high sea sales while talking about section 7(2) of the
IGST Act at few places in this article, we wish to opine that there is no valid
levy of IGST on high sea sales. The purpose of this article is not to examine
the levy of IGST on high sea sales. Therefore, without going into details, we
would like to mention that the intention of legislators to levy IGST on high
sea sales is not achieved by the manner in which section 7(2) of the IGST Act
is worded. Though the Explanation to Article 269A(1) and Article 286(1)(b) is
intended to empower levy of IGST on high sea sales, the said intention is not
carried out by the legislators. This is because the language used in section
7(2) should have been similar to that in the section 5(2) of CST Act or at the
least, the language similar to Explanation below Article 269A(1) or Article
286(1)(b) should have been replicated in section 7(2). Section 7(2) doesn’t use
the expression “in the course of”. The levy of IGST, therefore, fails
even in case of high sea sales.

Though Article 286 has been amended, there
is no provision similar to section 5(2) of CST Act in IGST Act. This argument
would give additional support to the view that high sea sales are not liable to
IGST.

Conclusion

The conclusions reached could be summarised as under:

a. Levy of customs duty on
actual imports can arise only under the Customs Act, 1962.

b. Levy of integrated tax on
supplies in the course of import or export excluding actual imports/exports can
be made under the IGST Act, 2017, but the present wordings fall short of what
is used in the Constitution and therefore, the same does not seem to extend to
transactions such as on high sea sales.

c. The present levy u/s. 3(7)
of the Customs Tariff Act which states that there shall be levied an integrated
tax is clearly beyond the legislation itself, as the customs legislation can
only levy a customs duty equivalent to the integrated tax and not an integrated
tax per se. This would now need legislative amendments. _

shailesh.kwebmaker

Goods and Services Tax (GST)

1.
2017-TIOL-15-HC-DEL-GST]
Union of India and ORS. vs. Narendra Plastics Pvt. Ltd.

Facts

The petitioner herein, an
exporter had received export orders of the date prior to 1^stJuly,
2017 for the fulfillment of which, it had to undertake imports of inputs. Under
an Advance Authorization Scheme (AAS) of the Government, entitles duty
exemption to the exporter manufacturers such as the petitioner and therefore
the person importing such inputs/goods would not be required to pay basic
customs duty, additional customs duty, education cess, anti-dumping duty
safeguard duty and transition product specific safeguard duty, wherever
applicable.

The petitioner was agitated
that on account of change brought about by GST regime, it would have to pay
IGST out of its own sources on the export order accepted prior to 01/07/2017
and thus faced blockage of working capital until refund thereof, would be
granted by the Government at a future date. It had exhausted its overdraft
limits with the banks and therefore faced a liquidity crunch. The prayer of the
Petitioner therefore was not to be asked to pay the additional IGST on such
imports as that was arbitrary and unreasonable. The petitioner did not question
the legislative competence to levy the additional IGST but only questioned its
applicability for fulfillment of export orders placed and accepted prior to
July 01, 2017 and sought to avail the credit outstanding in respect of
authorisations issued to it prior to 01/07/2017.

Held

Considering prima facie
case for grant of the prayer, the Court issued interim directions to the
Government to allow the petitioner to avail credit against advance
authorisation license issued prior to 01/07/2017, subject to terms as regards
quantity and value of such credit and also subject to other conditions such as
verification by the Customs department as to the export of credit availability vis-à-vis
advance authorisation license, furnishing undertaking by way of affidavit,
fulfillment of export obligation etc. Further, the interim relief was limited to the export
orders placed prior to 01/07/2017 only and not thereafter.

2.
[2017-TIOL-01-HC-Mum-GST] Union of India vs. Dr. Kanaga Sabapathy Sundaram Pillai,
Founder, My Integrating Society India Net NGGO

Facts

A PIL in this case was made
challenging implementation of the Goods and Services Tax chiefly on the grounds
that: (a) there was lack of awareness and preparedness both   by
the   states/UT   as
well   as   public
at large (b)implementation in the
midst of financial year was not valid (c) Acts in their current form were
doubtful to be effective in reducing regulatory and administrative
hurdles. In the scenario, it was
required to defer the implementation till legal hurdles are removed and the
rates for all items are finalised and taken up in February, 2018 in the Budget session of the
parliament for initiation of the proposals from April 1, 2018. During this
time, awareness programmes be conducted to make the traders familiar and they
can be given facilities of software interfaced with the trade account as per
the Tax registration. As against this,
it was argued for the Government that in addition to 30 state legislatures
having passed state GST Acts & necessary rules being notified, over 65 lakh
taxpayers had already migrated to GST network and rates of taxes were
notified. Further, GST Seva Kendra were
set up at every Commissionerate, division and range to answer questions of tax
payers & will continue to do so.
States also followed the same procedure & everything was put in
public domain and 60,000 offices in Central and State Governments were trained
in GST law.

Held

Petition was not
entertained with the observation that since the entire government machinery was
geared up, the petitioner could not urge or seek directions to postpone the
decision of implementation from 01-07-2017.

3.
[2017-83-taxman.com-281-Delhi] Union of India
vs. J. K. Mittal & Co.

Facts

Legal services under
service tax law were taxable under reverse charge mechanism. When GST was to be
implemented from July 1, 2017, among
others, Notification No. 13/2017 – Central
Tax (Rule) dated 28-06-2017 was issued
specifying services wherefore reverse charge mechanism is applicable. Entry
No.2 therein referring to services of advocates gave rise to interpretational
issues. The drafting of this entry created ambiguity as to whether all legal
services and not only representational services provided by legal practitioners
would be governed by reverse charge mechanism. The Finance Ministry therefore
issued a clarification by way of a press release dated 15^th July,
2017. In this background, the petition was filed in Delhi High Court by the
petitioner. During the hearing, the questions that arose interalia included
whether the press release issued had a legal sanctity and whether
recommendations of the GST council could be modified, clarified or amended etc.
by a notification, notice or a circular of ‘press release’ and by whom. The
court expected the Respondents to provide para-wise reply to the petition and
answer various queries raised therein.

Held

Considering
that Respondents desired time to address various legal and constitutional
issues, the Hon. Court directed till further orders, not to take any coercive
action again law firms of advocates including limited liability partnerships of
advocates providing legal services for non-compliance of requirements under the
GST law. The court also stated that if any of such persons already registered
under GST law also would not be denied benefit of this interim order.

shailesh.kwebmaker

Works Contract Under GSTvis-a-vis Plant and Machinery

Introduction

Under earlier regime, the
term ‘works contact’ had a wide meaning. Whether the contract related to
immovable property or movable property, any contract, if involved in both
supply of goods as well as supply of services, it used to be referred to as
works contract.

But, under GST, there is
defined meaning of ‘works contract’ and the scope of the term ‘works contract’
is narrowed down. The definition of ‘works contract’, as given in section
2(119) of the CGST Act, is reproduced below for reference.

“(119) “works contract”
means a contract for building, construction, fabrication, completion, erection,
installation, fitting out, improvement, modification, repair, maintenance,
renovation, alteration or commissioning of any immovable property wherein
transfer of property in goods (whether as goods or in some other form) is
involved in the execution of such contract;”

It can be seen, from the
above definition, that now only those contracts (for supply of goods and
services as specified) will be treated as ‘works contract’ which are relating
to immovable property.

In other words, if the
transaction of supply of goods and services is relating to movable property, it
will not be a ‘works contract’.

Situation of Plant and
machinery

Plant and machinery, which
is installed in a factory, can also be covered in the scope of works contract,
if the upcoming plant and machinery is in the nature of immovable property.
Whether upcoming plant and machinery is movable property or immovable property
may be a debatable issue and it will depend upon the facts of each case.

There are different
judgments laying down criteria for deciding the nature of plant and machinery.

Sirpur Paper Mills Ltd. vs. Collector of
Central Excise, Hyderabad (1998 (1) SCC 400).

In this case, the issue
arose whether Paper Mill is movable property or immovable property. Hon’ble
Supreme Court has observed as under;

“In view of this finding of
fact, it is not possible to hold that the machinery assembled and erected by
the appellant at its factory site was immovable property as something attached
to earth like a building or a tree. The tribunal has pointed out that it was
for the operational efficiency of the machine that it was attached to earth. If
the appellant wanted to sell the paper making machine it could always remove it
from its base and sell it. Apart from this finding of fact made by the
Tribunal, the point advanced on behalf of the appellant, that whatever is
embedded in earth must be treated as immovable property is basically not sound.
For example, a factory owner or a house-holder may purchase a water pump and
fix it on a cement base for operational efficiency and also for security. That
will not make the water pump an item of immovable property. Some of the
component of water pump may even be assembled on site. That too will not make
any difference to the principle. The test is whether the paper making machine
can be sold in the market. The Tribunal has found as a fact that it can be
sold. In view of that finding, we are unable to uphold the contention of the
appellant that the machine must be treated as a part of the immovable property
of the company. Just because a plant and machinery are fixed in the earth for
better functioning, it does not automatically become an immovable property. A
further argument was made that the entire machinery as it is cannot be bought
and sold because the machinery will have to be dismantled before being sold.
The Tribunal has pointed out that the appellant had himself bought several
items and completed the machinery. It had purchased a large number of
components and fabricated a few and manufactured the paper making machine at
site. If it is sold it has to be dismantled and reassembled at another site. We
do not find any fault with the reasoning of the Tribunal on this aspect of the
matter.”

Thus, on the given facts,
Hon. Supreme Court has held the plant and machinery of the mill is movable
property.

Duncans Industries
Ltd. vs. State Of U.P. & Ors JT 1999
9 SC 421 on 3 December, 1999

This is a subsequent case,
wherein again Hon. Supreme Court had an occasion to decide the nature of plant
and machinery installed in the factory. The relevant observations are as under:

“Therefore, it came to the
conclusion that these machineries were immovable property which were
permanently attached to the land in question. While coming to this conclusion
the learned Judge relied upon the observations found in the case of Reynolds
vs. Ashby & Son (1904 AC 466) and Official Liquidator vs. Sri
Krishna Deo & Ors. (AIR 1959 All. 247). We are inclined to agree with
the above finding of the High Court that the plant and machinery in the instant
case are immovable properties. The question whether a machinery which is
embedded in the earth is movable property or an immovable property, depends
upon the facts and circumstances of each case. Primarily, the court will have
to take into consideration the intention of the parties when it decided to
embed the machinery, whether such embedment was intended to be temporary or
permanent. A careful perusal of the agreement of sale and the conveyance deed
along with the attendant circumstances and taking into consideration the nature
of machineries involved clearly shows that the machineries which have been embedded
in the earth to constitute a fertiliser plant in the instant case, are
definitely embedded permanently with a view to utilise the same as a fertiliser
plant. The description of the machines as seen in the Schedule attached to the
deed of conveyance also shows without any doubt that they were set up
permanently in the land in question with a view to operate a fertiliser plant
and the same was not embedded to dismantle and remove the same for the purpose
of sale as machinery at any point of time. The facts as could be found also
show that the purpose for which these machines were embedded was to use the
plant as a factory for the manufacture of fertiliser at various stages of its
production. Hence, the contention that these machines should be treated as movables
cannot be accepted.”

Thus, in this case the Hon.
Supreme Court has considered the installed plant and machinery as immovable
property.

Conclusion

If the transaction of
installation of plant and machinery is considered to be immovable property, the
transaction will be ‘works contract’ and therefore it will be treated as a
transaction of supply of service under GST Act.

Thus, being a service
transaction, the tax will be attracted as one transaction of supply of service.

However, if the transaction
is considered to be for movable property, it will be a transaction of ‘mixed
supply’ or ‘composite supply’ and tax rate will be decided accordingly.

Thus, determination of
nature of transition of installation of plant and machinery is very much
relevant for deciding the correct rate applicable under GST. _

shailesh.kwebmaker

Principles of Classification

1. Indirect Taxes in India
have always witnessed substantial litigation arising out of classification, be
it for determining the nature of transaction (goods vs. service) or taxability
(interpretation of exemption notification to determine eligibility) or the rate
applicable on a transaction (depending on the nature of goods sold or service
provided). Some issues also arose from the fact that the taxing authorities
were different under the earlier laws, with Service Tax, Central Excise &
Customs duty being levied and administered by the Central Government while
Sales Tax & State Excise on specific products being levied and administered
by the respective State Governments.

2. With the introduction
of Goods & Services Tax, it was felt that the issue of classification shall
be laid to rest with a single taxing event of supply becoming applicable for
goods as well as services. However, the charging section of the three primary
GST Acts, i.e., CGST, SGST/ UTGST and IGST Act clearly demonstrate the
continuance of distinct tax treatment for transactions involving supply of
goods, services as well as both, i.e., supplies where an element of goods, as well
as service are involved.

3. In the context of goods,
rate Notifications under CGST and IGST have been issued wherein different rates
have been prescribed for different kinds of goods classified based upon the
HSN. Similarly, rate notifications for services have also been issued. An
Annexure with HSN wise classification of services has been issued and against
each such classification of services, a rate has been prescribed. Further, a
transaction which involves supply of both, goods or services has to be
classified as either composite / mixed supply and different tax treatment has
been prescribed depending on the classification adopted for such composite
supplies.

4. Owing to this fact,
before making any supply, there are two specific steps that need to be
undertaken:

a. Identifying the nature of
supply, i.e., whether the supply is of goods or services or both. In both the
cases,one has to identify whether the supply is a composite supply or mixed
supply?

b. Identifying the HSN
classification of the product or service to determine the rate applicable
thereof.

5. Failure to take the
above steps can have its’ own repercussions.
For example, under
Notification

11-2017, Entry 10 (ii)
provides that rental services of transport vehicles with / without operator
shall attract tax at 9% under heading 9966. However, Entry 17 provides that
leasing or rental services, with / without operator shall attract same rate of
central tax as would have been applicable on supply of like goods involving
transfer of title in goods. This clearly demonstrates the apparent conflict in
the notification as well as, it demands a proper interpretation of both the
entries to determine the correct classification.

Identifying the nature of supply

6. As stated above, the charging
section provides for the levy of GST on supply of goods, services or both.
Further, different tax rates have been prescribed for different kinds of goods
and services. This can result in disputes to decide whether a transaction is
for provision of service or sale simpliciter.

7. For instance, it has
always been a subject matter of dispute as to whether software is a transaction
for sale of goods or provision of service. At the outset, it is important to
note that incorporeal property is also treated as goods. It was further held
that a software, whether customised or not, shall be classified as goods if
they satisfy specific attributes, namely utility, capability of being bought
and sold and capable of transmission, transfer, delivery, storage and possession.
In this context, the Hon’ble SC held that a software embedded in a device shall
be classified as goods¹.

Composite Supplies

8. Even in the context of
works contract, there have been a plethora of cases where the Supreme Court had
a chance to determine whether a contract was divisible or not and how to
determine the taxability of the same. The aspect of divisibility vs. indivisibility
further gave rise to the theory of dominant intention, which is laid down in
the following judicial precedents:

a. The need to determine
whether a transaction is a transaction for sale of goods or not arose with the
decision of the Hon’ble SC in the case of Gannon Dunkerley², wherein
the Supreme Court held that the States had no authority to levy tax on a
transaction supply of goods as well as service when the contract was an
indivisible works contract.

b. Relying on the decision of
Gannon Dunkerley, it was held in Hindustan Shipyard Limited vs. State of
Andhra Pradesh³ that a contract for construction of a vessel
under the instruction of client would amount to sale of goods (as claimed by
the State of Andhra Pradesh) and not works contract (as claimed by the
Appellants).

The Hon’ble Supreme
Court held that in a contract for the sale of specific or ascertained goods,
the property in them is transferred to the buyer at such time as the parties to
the contract intend it to be transferred. When something remains to be done on
the date of the contract to bring the specific goods in a deliverable state,
the property does not pass until such thing is done and brought to the notice
of the buyer. The risk in such case remains with the seller so long as the property
therein is not transferred to the buyer though the delivery may be delayed. On
the basis of these observations, the Hon’ble Supreme Court held that the
transaction was for sale of vessel and not a works contract. Hence, the
contract had to be classified as contract for sale of goods and not works
contract relying on the dominant intention of the transaction.

c. The theory of dominant
intention was again confirmed by the Hon’ble SC in Bharat Sanchar Nigam Limited⁴ wherein the Hon’ble Supreme Court had held
that in a transaction of mobile connection, the predominant intention is to
receive the telecommunication service and not electro-magnetic waves, as
claimed by the Government.

d. However, in Larsen &
Toubro Limited vs. State of Karnataka in 2014 (034) STR 0481 SC, it was
held that the dominant nature test need not be applied to find out the true
nature of transaction as to whether there is a contract for sale of goods or
the contract of service in a composite transaction covered by the clauses of Article
366(29A). The above decision of Larsen & Toubro Limited was approved by the
Constitutional Bench in the case of Kone Elevators India Private Limited vs.
State of Tamil Nadu in 2014 (304) ELT 161 (SC).

9. Despite the subsumation
of taxes on goods and services under a single legislation, the aspect of
composite supply vs. mixed supply under GST has resulted in the principle of
dominant intention being still relevant.

10. The term
composite supply has been defined u/s. 2 (30) to mean
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.

11. Further, the term
“principal supply” has been defined u/s. 2 (90) of the CGST Act, 2017 to mean 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.

12. These two terms, namely
composite supply and principal supply shall clearly result in the revival of
dispute as to whether the supply is of goods or services or both? However, the
task shall be cut short in case of works contract services relating to
immovable property, as Schedule II clearly provides that a composite supply of
works contract service shall always be treated as supply of service and shall
be taxed accordingly.

13. Let us analyse the impact
of GST on the transaction which was the subject matter of dispute in the case
of Kone Elevators referred above. Under the earlier regime, the position was
that the contract was a divisible contract for sale of goods (being elevator)
and provision of services (being commissioning and installation services). It
needs to be decided as to whether the supply can be classified as works
contract or not? For the same, reference to the definition of works contract
becomes necessary. Section 2 (119) of the CGST Act defines the term works
contract as a contract for building, construction, fabrication,
completion, erection, installation, fitting out, improvement, modification,
repair, maintenance, renovation, alteration or commissioning of any immovable
property wherein transfer of property in goods (whether as goods or in some
other form) is involved in the execution of such contract;

14. The first aspect
therefore that needs to be checked is whether the elevator can be considered as
immovable property or not? In this context, the Supreme Court has in the
decision of Kone Elevators already held that once assembled, the elevator
becomes a permanent fixture. This in turn leads toward the conclusion that a
contract for supply and installation of elevator would be for creation of a
permanent fixture in an immovable property and hence, the supply would be
classified as works contract.

15. However, the position
would not be so clear when the supply is in relation to a movable property or
pertains to two or more distinct goods supplied together or two or more
distinct services supplied together. In this context, it becomes more important
to analyse the definition of composite supply which provides that for multiple
supplies to be classified as a single composite supply, following conditions
need to be satisfied, namely:

a. There should be two or more
taxable supplies

b. The supplies should be
naturally bundled

c. The supplies should be in
conjunction with each other

d. One of the supplies should
be a principal supply

16. Since what is meant by
“naturally bundled” has not been dealt with under the GST law, some specific
principles will have to be laid down for determining the same, such as:

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 the
supply would be affected.

Of course, the above
are mere examples and whether supplies are naturally bundled or not will have
to be decided on a case to case basis.

17. An example of composite
supply, in the context of movable property can be supplies made by vehicle
workshops. When a person takes his vehicle for repairs, there are certain parts
which are required to be replaced. At times, there are Annual Maintenance
Contracts undertaken by the workshops wherein they undertake to provide
periodic service for the vehicle along with replacement of specific parts,
whenever required. In this case, the question that arises is whether the supply
can be classified as a composite supply or not?

18. To decide the same, one
needs to go back to the conditions laid down in the definition of composite
supply to decide whether the same are fulfilled or not? The same is analysed in
the subsequent table:

There should be two or more taxable supplies

There are two supplies involved, namely supply of services
(being repair / maintenance services) and supply of goods (being replacement
parts)

The supplies should be naturally bundled

The indicators for “naturally bundled” discussed in
para 16 are getting satisfied

The supplies should be in conjunction with each other

This condition is also getting satisfied as only if there is
a repair activity undertaken will there be a need known for replacement part
and only when replacement part is supplied will the replacement activity also
be undertaken.

One of the supplies should be a principal supply

The predominant element of this transaction is to provide
maintenance service to the vehicle owner and the supply of replacement parts
is only ancillary to the service to be supplied.

19. Thus, it can be concluded
that the contract is a composite contract with the principal supply being
supply of service and hence, the transaction would be taxed as service.

20. However, the situation
could have been different where the customer had approached the workstation for
replacement of tool-box, which the workshop agreed to undertake for a single
consideration. In this scenario also, there would have been two distinct
supplies, namely, supply of tool-kit as well as providing service of replacement
of tool-kit. In such a case, a stand can be taken that the pre-dominant supply
is the supply of tool-kit and hence, the entire supply will have to be taxed as
supply of goods.

21. It
is important to note that whether a supply is a composite or not is a subjective
matter and no hardcore rule can be set for deciding the same. The same will
have to be decided on a case to case basis.

Mixed Supplies

22. If any supply consisting
of multiple sub-supplies fail to satisfy the conditions discussed for composite
supply, the next question that arises is whether the supply is a mixed supply
or not. Section 2 (74) of the CGST Act defines the term “mixed supply” as 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.

23. The definition is further
explained by the following example:

A supply of a
package consisting of canned foods, sweets, chocolates, cakes, dry fruits,
aerated drinks and fruit juices when supplied for a singleprice is a mixed
supply. Each of these items can be supplied separately and is not dependent on
any other. It shall not be a mixed supply if these items are supplied
separately.

24. In other words, when two
or more supplies are made in conjunction with each other, but are not naturally
bundled and there is a single consideration for all the supplies, such supplies
shall be made liable to GST at the rate applicable to supply, attracting the
highest GST Rate. For example, a person taking a residential property for rent
for both commercial as well as residential use. While the former is taxable
service, the latter is exempt from tax. Therefore, the entire transaction would
be subjected to tax, unless separate consideration is fixed for commercial and
non-commercial use.

Classification of Some Specific Transactions

25. Having discussed the
Rules for Interpretation of classification, there are certain specific
transactions where there is an ongoing issue w.r.t classification, such as:

a. Takeaways vs. Restaurant
Dining

b. Alcohol – Separate Invoicing
vs. Consolidated invoicing

c. Sale of Publications vs.
Job-work of Printing of Publications

d. International Job-work –
Job-work vs. export

26. Each of the above
transactions are discussed in detail in the subsequent paragraphs.

Takeaways vs. Restaurant Dining

27. Schedule II, Entry 6 of
the CGST Act provides that 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 (other than alcoholic liquor for
human consumption) where such supply or service is for cash, deferred payment
or other valuable consideration, shall be treated as supply of service.

28. The above entry intends
to cover only transaction where there is supply of food / beverages which is
part of a larger supply, i.e., supplies made in restaurant or as caterer. The
same has been made liable for GST at the rate of 12% / 18% on case to case
basis. This rate will apply irrespective of the products used in providing the
said service. For example, non-alcoholic beverages attract GST at 28% plus
compensation cess while food items such as namkeens, bhujia, mixture, etc.
attract 12%. Since this food / beverage items are supplied as a part of
restaurant service, the same is supposed to attract tax at the rate of 18%.

29. However, the treatment as
composite supply of service is only applicable where the food / beverage is
supplied by way of or as part of a service. Therefore, the question that arises
is whether in case of takeaways, where the customer does not receive any
service, but merely buys the food / beverages from the restaurants, the supply
shall be treated as supply of food and beverages or as composite supply of
restaurants?

30. In essence, the question
that arises in case of takeaways is whether the same is supply of goods or
supply of services? This is where the rules of interpretation discussed in the
preceding paras will come into play.

31. The first thing that
needs to be decided in this transaction is whether the supply is of goods,
i.e., food and beverages or of services? In this transaction, it would be safe
to say that in case of takeaways, the predominant intention is to buy the food
/ beverages and there is no service element involved in the supply. Hence, both
the supplies, i.e., namkeen as well as beverage will have to be treated as
supply of goods and GST will have to be discharged as per the rates applicable on those products.

32. In fact, under the
Service Tax regime also, initially it was clarified that the dominant intention
in the case of takeaways was to sell goods and not provide any service.
However, this clarification was subsequently withdrawn.

Supplies involving alcohol – GST vs. VAT

33. Alcoholic liquor meant
for human consumption has been kept outside the purview of GST. The levy of tax
on the same continues to be governed by the provisions of State Excise and
Value Added Tax. In other words, there cannot be any GST implications on the
sale of alcoholic liquor.

34. Keeping the said aspect
in mind, even the Schedule II entry which provides that supply of food /
beverages by way of or as part of service shall be considered to be as
composite supply of service excludes the supply of alcoholic liquor from its’
ambit. Therefore, the intention of the GST law to ensure that no tax is levied
on the alcohol component is very evident.

35. While legally, the law
has clearly laid down its intention, practical issues arise in the case of cocktails (with
alcoholic content) served in restaurant, which contain both, alcoholic as well
as non-alcoholic beverages? What happens to cakes which may also include
alcoholic content? The question that arises is whether the dominant intention
theory will have to be applied for such transaction and if yes, whether the
transaction will attract VAT or GST?

36. The answer to the above
question will have to be determined on case to case basis. For example, in the
first case involving cocktails, it can be said that the dominant intention was
to consume alcohol while in the second case of cake containing alcoholic
liquor, the dominant intention is to consume the cake and not the alcohol and
hence, the supply will have to be subjected to GST.

Publications – Sale vs. Job-work

37. The term “job-work” has
been defined u/s. 2 (68) of the CGST Act 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.

38. Schedule II, entry 3 also
provides that any treatment or process which is applied to another persons’
goods shall be treated as supply of service.

39. There are multiple
scenarios possible, which are as under:

a. A person prints and
publishes books on his own account, which is sold to consumers.

b. A person in possession of
content gives a contract to a job-worker for printing the books, where the
material for printing the books is given by the principal.

c. A person in possession of
content gives a contract to a contractor for printing the books by using the
principal’s content but using own material.

40. In (a) above, it is more
than evident that the transaction shall be that of supply of books and hence,
the same shall be liable for NIL rate of tax. Similarly, in case of (b) above,
the job-work transaction shall be considered as service owing to the specific
entry in Schedule II treating the activity as supply of service. The actual
issue arises in (c) above, where the content is of the principal, but the
entire activity of printing (including materials) is arranged for by the
contractor. The question that arises is whether the supply has to be treated as
supply of goods or supply of services?

41. Drawing analogies from
the decision of the SC in the case of Hindustan Shipyard, it can be contended
that the supply should be characterised as supply of goods in the nature of
books and therefore, liable for NIL Rate of tax. However, a rate of 12% has
been prescribed for services in the nature of printing of books where the
content is provided by the principal and the paper and ink is used by the printer.
Whether mere supply of content by the principal can result in the
categorisation of the transaction as a service? If so, certain entries
prescribed under the schedule of goods like brochures, letterheads, etc.
may loose relevance.

International Job Work – Goods vs. Service

42. This relates to a
transaction where a foreign principal has supplied certain material for
job-work to the Indian contractor who is required to undertake certain
treatment / process on the said material and send it back to the principal. As
already discussed in the previous case, job-work is treated as service under
GST. Therefore, in terms of the provision of section 13 (3) (a) of the IGST
Act, the place of supply becomes the location where the treatment/ process is
undertaken, i.e., the location of supplier and hence, the transaction cannot be
classified as export of services as well as, it becomes subject to tax.

43. However, another
important point to be kept in mind is that in case of such transactions, the
movement of goods takes place from the principal to job-worker and from the
job-worker to the principal upon completion of the process. The process of
import of goods is governed by the provisions of the Customs Act, 1962 and
hence, when the movement of material takes place from the foreign principal to
the Indian Job-worker, the goods are required to be cleared at the Customs with
payment of appropriate custom duty and IGST by disclosing the same as import of
goods.

44. Subsequently, when the
process is completed and the goods are sent back to the principal, the goods
are again subjected to Custom Assessment as Shipping Bill for export of goods
outside India is prepared. This activity of sending the goods outside India
also falls within the ambit of definition of export of goods, which is defined
to mean taking goods out of India to a place outside India. Further, Section 11
of the IGST Act clearly provides that the place of supply of goods exported
from India shall be the location outside India.

45. One can therefore say
that in transactions of international job-work, the same transaction can be
classified as supply of goods as well as supply of service, which appears to be
incorrect. Therefore, what needs to be decided is whether there is a supply of
goods or supply of services?

46. In such situations,
whether dominant intention will play a role in determining the nature of supply
or the altered facts will also have to be considered in determining as to
whether the supply is of goods or services? In this context, reference to the
decision of the SC in the case of Moped India Limited vs. Assistant
Collector of Central Excise in 1986 (23) ELT 8 (SC), wherein the SC had
held that while interpreting the terms of an agreement, it is the substance of
the transaction which shall prevail over the form of the transaction. That is
to say, while the transaction might have been structured as a Job-work, it
might not necessarily be classified as such depending on the actual conduct of
the parties.

47. The situation becomes
even more evident from the fact that the levy of IGST on imports is under the
IGST Act unlike the earlier proposition of countervailing duty being levied
under the Customs Act only. It may therefore be argued that the activity of job
work gets subsumed in the transaction of import and export of goods and
therefore, no tax should be separately payable on the said labour charges.

Services of advertising agents – P2P vs. P2A

48. There are two types of
agents, namely one, who deal on their own account, i.e., buy advertising space
from publishers and sell it to various advertisers and second, where they act
as agents of either advertisers / publishers and facilitate the transaction for
the sale of advertising space. In the first case, the revenue for the agents is
the net difference between the sale rate and the buying rate, while in the
second case, the agents specifically issue an invoice to their client, being
the advertiser / publisher for the agency services provided.

49. There has been
substantial confusion with respect to the first case as to whether the agency
has to pay GST at the rate applicable on the media or they have to pay GST at
the rate applicable for commission agents? In this context, vide press release,
it has been clarified that in case of agency working on a Principal to Principal
basis, GST shall be applicable on the rate applicable on the media (5% in case
of print media). However, in case the agency is operating on a Principal to
Agency basis, GST will be applicable at the rate applicable on commission
services, i.e., 18%.

50. However, it is imperative
to note that under the pre-GST regime, even when the advertising agencies were
operating on a Principal to Principal basis, there was substantial litigation
on the grounds that they were operating as an agent and hence liable to pay GST
on the net commission income. Similar issue had also plagued the freight
forwarders as well. It remains to be seen how far the Tax Authorities receive
this circular and how it will impact the litigation under the earlier tax
regime.

Harmonised System of Nomenclature

51. Section 9 of the CGST
Act, 2017 provides that tax shall be levied on all goods and / or services at
such rates as may be notified by the Government. Subsequently, the CBEC has
vide general rate notifications 01/2017 and 02/2017 for goods and 11/2017 and
12/2017 for services notified the rates respectively. The notifications have
classified the goods on the basis of HSN which is segregated into Chapter/
Heading/ Sub-heading/ Tariff item. Further, it has been provided that the rules
for the interpretation as provided for under Customs Tariff Act, 1975 shall
apply for the interpretation of headings covered under the said notification.

52. HSN in the context of
goods is a multi-purpose international product nomenclature developed/ identified
by 6-digit code arranged in a legal and logical structure globally. India has
added two more digits to the 6-digit code for further precision, thus making it
an 8-digit HSN. The various components of an 8-digit HSN are as under:

1 2

3 4

5 6

7 8

Chapter

Heading

Sub-

Heading

Tariff Item

53.
In addition to
HSN for goods,
under GST, even

services   have   been
given   an   HSN
code   for

identification by way of an Annexure in Notofication

11/2017 under Chapter 99. The components of HSN

for services are as under:

1 2

6 7

Chapter

Section

Heading

Group

Service Code

Rules for Interpretation of Tariff

54. It is always possible
that the same product / service can be classified under multiple HSN. In order
to assist in deciding the correct classification for such instances, the
notifications have provided that the Rules for interpretation as prescribed
under the Customs Tariff Act, 1975 shall be followed for the purpose of
classification under GST.

55. There are six rules
prescribed, which need to be applied in chronological order. The Rules deal
with different scenarios which can arise at the time of classifying a product /
service and lays down the method in which the classification is to be done.
Each of the above six rules are discussed in detail in the subsequent
paragraphs.

Rule 1 – General Rule

56. This is the general rule
for interpretation of tariff. This rule provides that the words in the Section
and Chapter titles are to be used as guidelines only to point the way to the
area of the Tariff in which the product to be classified is likely to be found.
Classification is to be determined by the terms in the Headings and the Section
and Chapter Notes that apply to them, unless the terms of the heading and the
notes say otherwise.

For example, Heading
9505 deals with articles for Christmas activities. Therefore, Christmas tree
candles would logically get covered under the said heading. However, notes to
the said heading specifically provide that Christmas tree candles will not get
covered under heading 9505 and hence, they will have to be classified under
heading 3406 which specifically deals with candles, tapers & the likes.

Rule 2 (a) – Classification of unfinished,
incomplete, unassembled or disassembled products

57. This rule deals with
classification of unfinished, incomplete, unassembled or disassembled products.
This rule provides that unfinished and incomplete goods can be classified under
the same Heading as the same goods in a finished state, provided that they have
the essential character of the complete or finished article, unless the Heading
/Note specifically exclude unfinished / unassembled products.

Judicial Precedents: Collector
of Customs, Bangalore vs. Maestro Motors Limited [2004(174) ELT 289 (SC)]

Components of car in a
completely knocked down condition shall also be considered as cars for the
purpose of levy of customs duty.

Rule 2 (b) – Classification of products not
classifiable u/r 1 or 2 (a)

58. This rule provides that
any reference in a heading to a material / substance / goods of a given
material / substance shall also include reference to a mixture / combination of
that material / substance / goods consisting wholly or partly of such
substance.

Example: Di-calcium
citrate is a calcium acid salt of citric acid. There is no specific
classification for this product. However, classification 2918 15 deals with “salts
and esters of citric acid”. Therefore, it would be apt to classify di-calcium
citrate under 2918 15.

Rule 3 – Multiple probable classifications

59. This rule is a
continuation of Rule 2 (b) and deals with situations wherein a product is
classifiable under more than one heading. The rule lays down three criteria for
determining the appropriate heading as under:

– Rule
3 (a): Heading with most specific description shall be preferred over a more
general description.

Judicial Precedents: Superintendent
of Central Excise & Others vs. Vac Met Corporation Private Limited
[1985 (22) ELT 330 (SC)]

Metallic yarn (also
known as metallized yarn) manufactured in the form of Silver white or Golden
thin flat, narrow and continuous strip made of metallised polyester from
metallised laminated plastic sheets or foils which are spitted by them by
electrically operated machines, fall within the purview of Tariff Entry 15A(2)
which is a specific entry related to articles made of plastic of all kinds and
not under Tariff Item 18 of the Central Excise Tariff which is of general
nature.

– Rule
3 (b): If 3 (a) is not applicable, the classification of the material /
substances which gives the final product its essential character should be
applied.

Judicial Precedent: Sprint
RPG India Limited vs. Commissioner of Customs, Delhi [2000 (116) ELT 6
(SC)]

Computer Software
loaded on a hard disk drive is assessable on the basis of computer software at
the rate of 10% as per Heading 85.24 of Customs Tariff Act, 1975 read with
Notification No. 59/95-Cus. and not under Heading 84.71 ibid as a ‘hard
disk’ simpliciter, since what was imported was software on a hard disk and not
hard disk in the garb of software.

– Rule
3 (c): If classification as per (a) or (b) is not possible, goods should be
classified under heading which occurs last in numerological order amongst those
classifications which equally merit consideration.

Judicial Precedent: Commissioner
of Central Excise, Goa vs. Waterways Shipyard Private Limited [2013 (297)
ELT 0077 Tribunal Mumbai]

Vessel for use as
casino is classifiable under two entries, namely Heading 8903 which covers all
vessels for pleasure or sport, as well as classifiable under Heading 8901 which
covers cruise ships. Since there were two entries under which goods were
classifiable, vessel to be classified under Heading occurring last in numerical
order among those equally meriting consideration.

Rule 4 – Classification for goods not
classifiable as per Rule 1-3

60. This Rule provides that
goods which cannot be classified as per Rule 1-3 shall be classified under the
heading appropriate to the goods to which they are most similar. This is also
known as “last resort rule” often used with new products.

Judicial Precedent: Collector
of Central Excise, Bombay vs. KWH Heliplastics Limited [1998 (97) ELT 385
(SC)]

Plastic tanks would be
classifiable under Heading 39.25 which also applies to reservoir, tanks,
including septic tank, vats and similar containers to hold liquids or something
in liquid form in the process of manufacture as in tanning and dyeing etc.,
and thus can be used and are capable of being used for water storage in
connection with raising of construction or mixing construction materials and
not under the residuary entry of 3926 as held by the Tribunal.

Rule 5– Classification of containers

61. There are two sub-rules.
Sub-rule (a) provides that containers shall be classified as per the heading of
the article which it is meant to contain if all the conditions, viz.,
specifically shaped / fitted for the article, suitable for long term use,
protect the article, normally sold with such article and presented with article
designed to contain are satisfied, except in cases where the container gives
the article its essential character, in which case classification should be as
per the heading applicable for container and not article.

Example: CD cases
are specifically meant for containing CD and are sold along with CD and hence
they shall be classifiable as CD and not separately.

62. Sub-rule (2) provides
that all other types of containers / packing materials, other than those
covered u/r 5 (a) should be classified with the goods they contain, except in
cases where the container / packing material are meant for repetitive use.

Example: Styrofoam
used in packaging of electronic materials, is not reusable as the same is
handed over to customer and hence, the same will have to be classified as per
classification applicable for electronic material and not Styrofoam.

Rule 6 – Manner of Application of Rules

63. Once goods have been
classified to the Heading level as per Rule 1 – 5, then classification to the
Subheading level can now take place by repeating the said rules and taking into
account any related Legal Notes.

Conclusion

64. It would be sufficient to
say that classification plays a pivotal role in not only determining the rate
of tax, but also other aspects such as place of supply, time of supply,
procedural compliances, etc. and hence, any incorrect classification can
have severe consequences on the business. _

shailesh.kwebmaker

Sale Of Composite Package Vis-À-Vis Levy Of Tax On Component Of Package – Legality

Introduction

Under
VAT laws, tax can be levied on sale of ‘goods’. What is ‘goods’ is always a
question of facts. However, a very peculiar situation arose in taxation under
VAT era.

Normally
when a package is sold, it is considered as single ‘goods’ for levy of tax. The
rate of tax is applied as per rate applicable to goods sold by such package.
The situation was thus very simple and straight.

But,
the Judgement in State of Punjab vs. Nokia India Pvt. Ltd. (77 VST
427)(SC) has brought in a different aspect. In this case, battery of
mobile was sold along with mobile as one unit and tax rate applicable to mobile
i.e. 5% was charged. However, when the battery was sold separately, it was
considered as liable to tax @ 12.5% as other goods.

Hon.
Supreme Court held that, even if battery is sold as one unit with mobile still
the tax on the value of battery should be at 12.5%. Thus, the price was
separated into two rates. This has created many issues in taxation under VAT
era.

Allahabad High Court judgement

Recently
Hon. Allahabad High Court had an occasion to deal with ratio of above
judgement.

The
facts, as narrated by Hon. High Court in case of Samsung (India)
Electronics vs. Commissioner of Commercial Taxes, U.P. (57 GSTR 1) (All)
are as under:

“The
seminal issue which arises in this batch of revisions is whether a mobile
charger when sold as part of a composite package comprising the said article as
well as a mobile phone is liable to be taxed separately treating it to be an
unclassified item under the provisions of the U.P. VAT Act 20081. The issue
itself has arisen consequent to the Department taking the position that the
charger is liable to be taxed separately in light of the decision rendered by
the Supreme Court in State of Punjab Vs. Nokia India Pvt Ltd2. The principal
questions of law as framed and upon which the rival submissions centered read
thus:

“A.
Whether the Tribunal ought to have held that the entire composite set having a
mobile phone and mobile charger having a single MRP was liable to assessed to a
single classification under Entry No. 28 of Schedule-II, Part B of the Act?

B. Whether the Tribunal erred in applying the
judgment dated 17.12.2014 by the Hon’ble Supreme Court, in the case of State of
Punjab V. Nokia Private Limited, to the Applicant’s facts and circumstances and
in view of the fact that Entry No.28 of Schedule-II, Part-B of the Act reads
differently from the entry considered by the Hon’ble Supreme Court?”

This
revision has called in question an order of the Tribunal dated 12^th
January 2017 which has affirmed the view taken by the assessing authority that
the charger although sold as part of a composite package was not liable to be
taxed at the rate of 5% as contemplated under Entry-28 appearing in Part-B of
Schedule-II but as an accessory and therefore liable to be treated as an unclassified item and chargeable to tax @
14%. The relevant entry of the Schedule reads as follows:-

“Cell
phones and its parts but excluding cell phone with MRP exceeding Rs.
10,000/-.”

Both the
assessing authority as well as the Tribunal have rested their decisions on the
judgement of the Supreme Court in Nokia to hold that a charger is liable
to be treated and viewed as an accessory and not an integral part of the mobile
phone. It is in the above backdrop that these revisions have travelled to this
Court.”

Contentions

On
behalf of dealer it was submitted that the ratio of Nokia cannot be
applied when it is composite one package and assumption of separate sale of
charger as an accessory is not permissible.

The
prime submission was that facts in case of Nokia before Supreme Court
were different. It was further submitted that there was no intent to affect a
separate sale of charger and that on an application of the dominant intention
test it would clearly be evident that the charger could not have been taxed
separately. It was the submission that the sale of the charger along with the
mobile phone in a composite package would fall within the specie of a composite
contract and therefore, tax could have been levied only in terms of Entry-28 as
one goods.

It
was explained that since the composite package carried and bore a single MRP,
it was not permissible for the respondents to levy tax separately on the
charger and the mobile phone.

In
addition, other judgements rendered with reference to above Nokia
judgment were brought to notice of High Court as well as Circular issued by
Central Government clarifying upon judgement of Nokia, was also cited.

On
behalf of Department, amongst others, the main thrust was that the ratio of
judgement in Nokia is applicable.

Judgements
were cited to stress that charger is accessory and hence liable at separate
rate.

Holding of High Court

Hon.
High Court analysed judgement in Nokia and about principles of
applicability of judgment of Hon. Supreme Court. It is observed as under:

“From
the aforesaid authorities, it is quite vivid that a ratio of a judgement has
the precedential value and it is obligatory on the part of the Court to cogitate
on the judgement regard being had to the facts exposited therein and the
context in which the questions had arisen and the law has been declared. It is
also necessary to read the judgement in entirety and if any principle has been
laid down, it has to be considered keeping in view the questions that arose for
consideration in the case.

One
is not expected to pick up a word or a sentence from a judgement de hors
from the context and understand the ratio decidendi which has the
precedential value. That apart, the Court before whom an authority is cited is
required to consider what has been decided therein but not what can be deduced
by following a syllogistic process.” (emphasis supplied) As has been
succinctly explained in the decisions noticed above, the ratio is the principle
deducible from the application of the law to the facts of a particular case and
it is this which constitutes the true ratio decidendi of the judgement.

Each
and every conclusion or finding recorded in a judgement is not the law
declared. The law declared is the principle which emerges on the reading of the
judgment as a whole in light of the questions raised. It is on these basic
principles that the Court proceeds to ascertain the ratio decidendi of Nokia.”

Regarding
facts in Nokia vis-à-vis Present case before it, Hon. High Court
observed as under:

“A
careful reading of the entire decision establishes beyond doubt that the Court
found that a charger and mobile phone are not composite goods. This evidently because
a charger cannot possibly be recognised as an integral part or constituent of a
mobile phone. A mobile phone is not an amalgam of various products and a
charger. Since the submission advanced before the Court was that these were
composite goods, the Supreme Court proceeded to recognise a charger to be an
accessory to a mobile phone.

The
contention which is urged before this Court namely that the sale of the mobile
phone along with its charger in a single retail package constitutes a composite
contract and requires the application of the dominant intention test was
neither urged nor considered by the Supreme Court. The Supreme Court
consequently in Nokia did not record any finding nor did it declare the law to
be that the sale of a mobile phone and its charger in a single retail package
would not constitute a composite contract.

On an
overall consideration of the aforesaid aspects, this Court finds itself unable
to hold that Nokia is a precedent at all on the question of a composite contract being subjected to tax.”

Hon.
High Court ultimately decided issue in favour of dealer by observing as under:

“Proceeding
then to the doctrine of “dominant intention” or the “dominant
nature” test [as the Supreme Court chose to describe it in BSNL], what it
basically bids the Court to do is to identify and recognise the “substance
of the contract” and the true intent of parties. The enquiry liable to be
undertaken must pose and answer the question whether in a composite contract
there exists a separate and distinct intent to sell. While BSNL dealing with
the dominant nature test was concerned with the splitting of the element of
sale and service, in the facts of the present case, the application and
invocation of that principle requires the Court to consider whether there was a
separate and distinct intent to effect a sale of the charger or whether its
supply was a mere concomitant to the principal intent of sale of a mobile
phone.

Admittedly,
the mobile phone and charger are sold as part of a composite package. The
primary intent of the contract appears to be the sale of the mobile phone and
the supply of the charger at best collateral or connected to the sale of the
mobile phone. The predominant and paramount intent of the transaction must be
recognised to be the sale of the mobile phone. In the case of transactions of
the commodity in question, the Court must also bear in mind that a charger can
possibly be purchased separately also. However in case it is placed in a single
retail package along with the mobile phone, the primary intent is the purchase
of the mobile phone. The supply of the charger is clearly only incidental. In
any view of the matter, there does not appear to be any separate or distinct
intent to sell the charger.

Regard
must also be had to the fact that the Court is considering the case of a
composite package, which bears a singular MRP. The charger is admittedly
neither classified nor priced separately on the package. It is also not
invoiced separately. The MRP is of the composite package. The respondents
therefore cannot be permitted to split the value of the commodities contained
therein and tax them separately. This especially when one bears in mind that
entry 28 itself correlates the article to the MRP.

The
third aspect which also commends consideration is that the MRP mentioned on the
package is for the commodities or articles contained therein as a whole. It is
not for a particular commodity or individual article contained in the composite
retail package. The Court notes that Shri Tripathi, the learned standing
counsel, was unable to draw its attention to any provision or machinery under
the 2008 Act which may have conferred or clothed the assessing authority with
the jurisdiction to undertake such an exercise. It is pertinent to note that the
only category of composite contracts which stand encapsulated under the 2008
Act are works contract and hire purchase agreements. The other part of Article
366 (29-A) which stands engrafted is with respect to the transfer of a right to
use. The composite contracts which arise from the sale of a composite package
are not dealt with under the 2008 Act. The Act also does not put in place or
engraft any provision which may empower the assessing authority to severe or
bifurcate the assessable value of articles comprising a purchase and sale of
composite packages. This is more so in the absence of a specific, independent
and identifiable element to sell. In the absence of any procedure or provision
in the 2008 Act conferring such authority, the Court concludes that in the case
of a sale of composite packages bearing a singular MRP, the authorities under
the 2008 Act cannot possibly assess the components of such a composite package
separately. Such an exercise, if undertaken, would also fall foul of the
principles enunciated by the Supreme Court in Commissioner of Commercial Tax
vs. Larsen & Toubro14 and CIT vs. BC Srinivasa Shetty15.”

Thus,
after analysing position very minutely, Hon. High Court held that in given
facts there is sale only of mobile phone and not of charger and no separate tax
on charger is permissible. The judgements of Tribunal were set aside.

Conclusion

The
judgement is very important in light of fact that it distinguishes the
judgement of Hon. Supreme Court in Nokia, with reference to facts and
ratio application, relying upon almost all important case laws. This judgement
will also settle down unexpected and unintended result for dealers.

It is
expected that the law laid down will be well followed as amongst others, it is
also held that if there are no provision to bifurcate value, no bifurcation can
be done by revenue authorities.

We
hope above will be a guiding judgement for deciding similar cases.

shailesh.kwebmaker

Place Of Supply Of Services – Part III

Introduction

As discussed in the previous article,
generally, the place of supply is determined on the basis of the location of
the recipient except in cases where the recipient is unregistered and his
address on record is not available, in which case location of supplier is
treated as the POS. This general rule is subject to various exceptions where
the POS is to be determined in a different manner.

While in the previous article we discussed
at length the exception rule in case of services relating to immovable property,
in this article, we shall specifically deal with the following exceptions:

– Certain Performance based services (restaurants, catering services,
personal grooming, health services, etc.)

– Service relating to
training & performance appraisal

– Services relating to events
(admission as well as organisation)

– Transportation services
(goods, passengers, as well as services on board a conveyance)

– Telecommunication services

– Banking & other
financial services

– Insurance services

– Advertising services
provided to Government.

We will now discuss each of the above
exceptions as well as specific issues surrounding the same.

Certain Performance based services:

This exception to the general rule, covered
u/s. 12 (4) of the IGST Act provides that the Place of Supply in case of
services of restaurant & catering, personal grooming, fitness, beauty
treatment, health service including cosmetic and plastic surgery shall be the
location where services are actually performed.

While this rule is not expected to have any
interpretational issues, the same has probable issues on credit front, in case
of B2B transactions. Let us try to understand with the help of following example:

ABC is a film production house operating out
of Mumbai. They have a film titled “###” under production, which is to be shot
extensively in Chandigarh. The local production activities are being managed
in-house by ABC. They have hired a catering company to supply food for their
employees as well as other people involved in the production activity. In
addition, they have make up artists who travel from Mumbai, Delhi as well as
outside India to Chandigarh for the said activity. The entire revenue from this
project will be earned in Mumbai. On account of this exception, in all cases
(including where Reverse charge applies), the Place of Supply will be taken as
Chandigarh while the Location of Recipient of Service is Maharashtra, thus
making the taxes attached with the services as ineligible for credit and thus
increasing the costs.

While admittedly, the performance of the
service is in Chandigarh, owing to the fact that the transaction is a B2B
transaction, the ultimate benefit / consumption of the said service takes place
in Mumbai where the recipient is located and hence, a hybrid rule for the
industry would have been beneficial.

Training & Performance Appraisal:

This exception to the general rule, covered
u/s. 12 (5) of the IGST Act provides for a hybrid rule for determination of
place of supply in case of services in relation to training & performance
appraisal as under:

– If services are provided to
registered person – place of supply shall be the location of such registered
person i.e. the recipient.

– If services are provided to
a person other than a registered person – place of supply shall be the location
where services are actually performed.

The important issue that needs to be
considered here is whether the “and” between training and performance appraisal
has to be read as “and” only or should it be read as “or”? The reason behind
this is if the word “and” is actually read as “and”, it will restrict the scope
of this particular section, as “and” is normally conjunctive.

For example, ABC Limited is a company
engaged in the business of providing education support services. They have
entered into an agreement with CBSE to evaluate the papers of all the students
of HSC / SSC. The papers are located at various locations across the country and
ABC shall send its’ evaluators at all those locations. The issue that needs
consideration is whether these services of performance appraisal will be
classified under this exception rule, since the services provided by ABC
Limited are only of performance appraisal and no element of training is
involved? Similarly, if PQR Limited undertakes training courses and does not
undertake any activity of performance appraisal, will it get covered under this
clause?

It is in this context that the need to
analyse whether “and”, which is normally conjunctive in nature has to be read
as “or”, i.e., give it a disjunctive interpretation or not for the purpose of
interpreting this exception. In this context, reference to the Supreme Court
decision in Union of India vs. Ind-Swift Laboratories Limited [(2011) 4 SCC
635] is made. The case was in the context of Rule 14 of the erstwhile
CENVAT Credit rules which provided for levy of interest in cases where credit
was taken or utilised wrongly or erroneously refunded. The issue in the
case was whether the or had to be read as and necessitating the
satisfaction of both the conditions, i.e., taking as well as utilisation of
credit for invocation of these rules or occurrence of either of the event would
suffice? The Supreme Court, relying on the decision of Commissioner of Sales
Tax, UP vs. Modi Sugar Mills Limited in (1961) 2 SCR 189 held that a taxing
statute must be interpreted in the light of what is clearly expressed and it is
not permissible to import provisions so as to supply any assumed deficiency.

Similarly, in A.G vs. Beauchamp (1920) 1
KB 650, it was held that the words “and” and “or” can be interchangeably
used if the literal reading produces an unintelligible or absurd result even if
the result of such interchange is less favourable to the subject provided that
the intention of the legislature is otherwise quite clear. For instance,
section 7 of the Official Secrets Act, 1920 reads:

“Any person who attempts to commit any
offence under the principal Act or this Act, or solicits or incites or
endeavours to persuade another person to commit an offence, or aids or abets
and does any act preparatory to the commission of an offence”.

The word “and” was read as “or”, for by
reading “and” as “and”, the result produced was unintelligible and absurd and
against the clear intention of the Legislature. (R v. Oakes (1959) 2 All ER 92)

However, in one particular case involving
the use of expression “sports and pastimes” in Common Regulation Act, 1965, it
was held that sports and pastimes are not two classes of activities but a
single composite class which uses two words in order to avoid arguments over
whether an activity is a sport or pastime. As long as the activity can properly
be called a sport or a pastime, it falls within the composite class (R vs.
Oxfordshire County Council (1999) 3 All ER).

It is felt that the test of purposive
interpretation will permit the reading of “and” as “or” and standalone
activities of training or performance appraisal may be covered under this exception
rule.

Event based services – admission &
organisation

There are two different exceptions to be
discussed here, which are covered u/s. 12 (6) & 12 (7) of the IGST Act. The
relevant provisions are reproduced below for ready reference:

(6) The place of supply of
services provided by way of admission to a cultural, artistic, sporting,
scientific, educational, entertainment event or amusement park or any other
place and services ancillary thereto, shall be the place where the event is
actually held or where the park or such other place is located.

(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 toin clause (a), or assigning of
sponsorship to such events,––

(i) to a registered person, shall be the
location of such person;

(ii) to a person other than a registered
person, shall be the place wherethe event is actually held and if the event is
held outside India, the place of supply shall be the location of the recipient.

Explanation.––Where the event is held in
more than one State or Union territory and a consolidated amount is charged for
supply of services relating to such event, the place of supply of such services
shall be taken as being in each of the respective States or Union territories
in proportion to the value for services separately collected or determined in
terms of the contract or agreement entered into in this regard or, in the
absence of such contract or agreement, on such other basis as may be
prescribed.

It is important to note that section 12 (6)
deals with services provided by way of admission to events while section 12 (7)
deals with services of organisation of event as well as services ancillary to
the organisation of such event.

However, the scope of services to be covered
u/s 12 (6) is limited. It is important to note that the said section does not
cover within its’ scope one specific class of events, i.e., business events,
being conferences, seminars, etc. wherein company sponsors delegates for
attending the events. This distinction is also evident from the fact that while
section 12 (6) does not specifically mention the services of admission to
conference, in the context of services classifiable u/s. 13 (5), i.e., cases
where location of supplier or recipient is outside India, the services of
admission to conferences is specifically covered. In fact, it can be said that
the intention of the law is to ensure free flow of credits in case services are
provided to registered persons, which is evident from the example taken in the
next paragraph.

Let us now try to understand the interplay
of operations of sub-sections (4), (6) & (7) with the help of an example in
the context of a charitable institution (XYZ) conducting a Residential
Refresher Course (RRC) for its’ members. The institution may have an inhouse
team which manages the logistics for the organisation of the event. They enter
into a contract with a hotel to provide accommodation, conference and catering
facilities during the course of the RRC. The issue that needs to be determined
is whether the services provided by XYZ to its’ members will get covered under
sub-section (4), (5) or (6) of Section 12?

Before analysing the probable answer to this
query, let us first decide on the nature of supply, i.e., whether the supply
will have to be treated as composite supply or mixed supply considering the
fact that there is only a single consideration charged for the entire RRC
without any breakup? In our view, it would be safe to conclude that this is a
composite supply with the principal supply being the participation in
conference. Having concluded so, let us now proceed to analyse the exception
rule in which the services provided by XYZ to its’ members will be covered.

Section analysed

Conclusion

Basis for conclusion

12 (4)

Since multiple services are provided to the members and
principal supply is that of conference services, this exception will have to
be ruled out

12 (6)

As already discussed above, admission to conference as a
service is not covered under this rule. Hence, this exception will also have
to be ruled out.

12 (7)

XYZ does not provide services in relation to organisation of
the event. The access to participation in a conference cannot be considered
as services in relation to organisation of event. Services of event managers
are in relation to organisation of the event.

Therefore, it can be argued that the
services rendered by XYZ do not fall under any of the exception rules mentioned
above and would be classifiable under the general rule.

Another issue that arises in the context of
Explanation provided in section 12 (7) is whether the explanation will have to
be read in the context of services provided to both, registered as well as
unregistered persons? This is because the explanation is silent with regards to
its’ applicability. However, one can apply the intention theory behind the said
explanation and say that this covers only services supplied to unregistered
persons, as in case of registered persons, the intention of the law is to provide
free flow of credit. Providing for multiple place of supplies would defeat the
said intention.

Therefore, in cases where the events are
held in multiple states, in cases where the agreement identifies consideration
for each event, the supplier will have to divide his invoicing state wise as
even practically, there is no provision to provide for multiple place of
supplies in the same invoice. However, the issue arises in the context of
services where the agreement is silent with regards to division of contract
state wise. Notwithstanding the same, even if the manner for determination of
POS is prescribed, even then it has to be noted that there is no provision
under the GST law for splitting of value / supply itself. The provisions exist
only for splitting of POS. Therefore, the question that needs consideration is
whether the levy will sustain in the absence of proper provision for
determination of value of supply, even if the notifications are issued in this
regard? In this context, reference can be made to the decision of the Supreme
Court in the case of CIT vs. B C Srinivasa Shetty wherein it was held
that the charging sections and the computation provisions together constitute
an integrated code and the transaction to which the computation provisions
cannot be applied must be regarded as never intended to be subjected to charge
of tax.

Services
relating to transportation of goods

This exception is contained u/s. 12 (8) of
the IGST Act. The relevant provisions are reproduced below for ready reference:

(8) The place of supply of services by
way of transportation of goods, including by mail or courier to,––

(a) a registered person, shall be the
location of such person;

(b) a person other than a registered
person, shall be the location at which suchgoods are handed over for their
transportation.

One important shift in policy is that while
under the service tax regime, in case of service of transportation of goods
outside India, as per Rule 10 of Place of Provision of Service Rules, 2012, the
destination of goods was the place of supply, the GST law provides for the
place of supply to be the origin of goods. In other words, export cargo was not
liable to service tax. The same applied even for services provided by shipping
companies / airlines. However, in view of the above provisions, the position
changed under GST and the tax was imposed on service of transportation of goods
outside India as well. It is however important to note that w.e.f 25.01.2018,
an exemption has been provided for services of transportation of goods by an
aircraft / vessel from customs station of clearance in India to a place outside
India. However, the said exemption is not applicable in case the services are
provided by a supplier located in India for transportation of goods or arranging
for transportation of goods where the origin and destination, both is outside
India.

Services relating to transportation of
passengers

This exception is contained u/s. 12 (9) of
the IGST Act. The relevant provisions are reproduced below for ready reference:

(9) The place of supply of passenger
transportation service to,—

(a) a registered person, shall be the
location of such person;

(b) a person other than a registered
person, shall be the place where the passenger embarks on the conveyance for a
continuous journey:

Provided that where the right to passage
is given for future use and the point of embarkation is not known at the time
of issue of right to passage, the place of supply of such service shall be
determined in accordance with the provisions of sub-section (2).

Explanation––For the purposes of this
sub-section, the return journey shall be treated as a separate journey, even if
the right to passage for onward and return journey is issued at the same time.

One critical
issue under this entry for determination of place of supply is in the context
of structuring of transactions as principal to principal basis vis-à-vis principal
to agent. Let us take the example of an air travel agent, who books tickets on
behalf of passengers with the airlines. The issue that arises here is whether
the airline will have to treat the agent as the recipient of service or the
passenger, considering the definition of supply of service? This will be
important because if the transaction is structured as P2P, the agent will have
issues in claiming credit since the condition u/s. 16 (2)(b) regarding receipt
of services may not be satisfied. However, the second option of treating the
transaction as P2A will also have its’ own set of operational difficulties,
especially in case of B2B transactions. This is because each airline operating
from multiple states would be issuing invoice in the name of recipient, in
which case each of the invoice would have to be accounted separately by the company
for each ticket as against single invoice for multiple tickets that were issued
under the service tax regime. This can also have issues on the credit matching
front as well as the agent might have mentioned wrong GST details of the
company in which case communication with the airline would be required to be
initiated which in itself would be a long drawn out process.

Telecommunication Services

This exception
is contained u/s. 12 (10) of the IGST Act and prescribes different place of
supply provisions depending on the transaction entered into, which is tabulated
below:

Nature of service supplied	Place of Supply
Services by way of fixed telecommunication line, leased circuits, internet leased circuit, cable or dish antenna	Place where the line / leased circuit / cable or dish is installed
Post-paid mobile connection for telecom services / internet / DTH services	Location of billing address of the recipient of services on record
Pre-paid mobile connection for telecom services / internet / DTH services through a voucher or any other means	u If service provided through a selling agent or a re-seller or a distributor of subscriber identity module card or re-charge voucher, the address of the selling agentor re-seller or distributor as per the record of the supplier at the time of supply u If service supplied to the final subscriber, location where such prepaymentis received or such vouchers are sold
In any other case	Address of recipient on record of supplier of service If not available, the location of supplier of service

Nature of service supplied

Place of Supply

Services by way of fixed telecommunication line, leased
circuits, internet leased circuit, cable or dish antenna

Place where the line / leased circuit / cable or dish is
installed

Post-paid mobile connection for telecom services / internet /
DTH services

Location of billing address of the recipient of services on
record

Pre-paid mobile connection for telecom services / internet /
DTH services through a voucher or any other means

u
If service provided through a selling agent or a re-seller or a distributor
of subscriber identity module card or re-charge voucher, the address of the
selling agentor re-seller or distributor as per the record of the supplier at
the time of supply

u
If service supplied to the final subscriber, location where such prepaymentis
received or such vouchers are sold

In any other case

Address of recipient on record of supplier of service

If not available, the location of supplier of service

Further, this sub-section has two provisos,
which read as under:

Provided that where the address of the
recipient as per the records of the supplier of services is not available, the
place of supply shall be location of the supplier of services:

Provided further that if such pre-paid
service is availed or the recharge is made through internet banking or other
electronic mode of payment, the location of the recipient of services on the
record of the supplier of services shall be the place of supply of such
services.

In addition, there is also an explanation
for cases where the place of supply is determined to be in multiple states
(similar to the explanation provided for immovable properties/event related
services and hence not reproduced for the sake of repetition).

Let us now try to understand some peculiar
issues faced in the above set of supplies for which provisions for determining
place of supply have been prescribed.

Example: ABC Limited is a e-education
service provider wherein it does live streaming of lectures provided by its
faculties from its head office located in Mumbai to various franchise
locations, spread across the country. The responsibility for arranging the
internet services to enable live streaming is on ABC. Accordingly, ABC has
entered into an arrangement subsequent to which, the vendor has agreed to
provide dedicated lines for enabling unhindered connection between the Head
Office and the franchise locations and a single invoice is issued for these
services. The issue that arises is that there are multiple Place of Supplies
and therefore, the supplier will have to divide his invoicing state wise as
even practically, there is no provision to provide for multiple place of
supplies in the same invoice. However, the issue arises in the context of services
where the agreement is silent with regards to division of contract state-wise.
Notwithstanding the same, even if the manner for determination of POS is
prescribed, even then the issues discussed in the context of events, where the
POS is spread across multiple states will continue to persist here as well.

In the context of online recharges, at the
time of selling the online vouchers to the portal, the supplier would charge
tax as per the location of the online portal. However, when the online portal
further sells the recharge to the end customer, the place of supply has to be
taken as per the address on record of the supplier. In other words, a telecommunication company/DTH company will have to open up its customer
database to each of the online portals to enable the sale of vouchers for
provision of service.

Similarly, even in the context of post-paid
services, there can be instances wherein between the billing cycle, there is a
change in the billing address of the service recipient after having provided
service for a specified number of days. In such a case, the question that
arises is whether the billing address has to be considered as applicable at the
start of billing cycle or end of the cycle or will there be a need to actually
do split billing, i.e., one invoice for the service provided before change in
the billing address and second invoice for service provided after change in
billing address.

Banking & Other Financial Services

This exception is covered u/s 12 (12) of the
IGST Act which provides that in general cases, the place of supply shall be the
location of recipient of service on record of the supplier of service, except
in cases where the location of recipient of service is not available on record
of the supplier.

The exception will generally apply in cases
of a walk-in customer who avails services for which KYC facilities may not be
mandatory, for instance availing demand draft facilities, money changing
services, etc. In all other cases, the place of supply will have to be taken as
per the address available on records.

The aspect of change in the location of
recipient of service cannot be ruled out in the context of banking & other
financial services as well as between two billing cycles and hence, proper
strategy will need to be developed to deal with such instances.

Insurance Services

This exception is covered u/s. 12 (13) of
the IGST Act, which is similar to the general rule for determination of place
of supply of services. The section provides as under:

– In case of services provided
to registered persons – the place of supply shall be the location of such
person.

– In case of services provided
to other than registered persons – location of recipient of services on the
records of the supplier.

Conclusion:

In the context of other services for which
exceptions for determination have been carved out, there are various important
aspects that needs to be considered, right from the stage of classification of
supply to the contractual treatment (P2P vs. P2A) to the contractual arrangement
(bifurcation of consideration in case of multiple place of supplies) and the
need to take care of minor issues (like change of address between the billing
cycle in case of telecom/banking services) and may also have credit impacts.
Therefore, businesses will have to be careful while determining the applicable
POS for their activities.

shailesh.kwebmaker

Construction Contract Vis-À-Vis Repair Contract

Introduction

Under Maharashtra Value Added Tax
Act, 2002 (MVAT Act), the Works Contracts were taxable by different methods.
There was one normal method by way of deduction u/r 58 of MVAT Rules and in
alternative there were certain composition schemes.

Under Composition Schemes there
were two alternatives, like 5% composition scheme for construction contracts
and 8% composition scheme for other contracts.

The 5% composition was applicable
to only notified contracts. The Government has issued notification dated 30.11.2006,
notifying the said ‘construction contracts’. The notification is reproduced
below for ready reference.

“FINANCE DEPARTMENT

Mantralaya, Mumbai 400 032, dated the 30^thNovember
2006

NOTIFICATION – The Maharashtra Value Added Tax Act, 2002.

No. VAT.1506/CR-134/Taxation-1– In
exercise of the powers conferred by clause (i) of the Explanation to
sub-section (3) of section 42 of the Maharashtra Value Added Tax Act, 2002
[Mah. IX of 2005], the Government of Maharashtra hereby notifies the following
works contracts to be the ‘Construction Contracts’ for the purposes of the said
sub-section, namely:-

(A) Contracts for construction of,–

(1) Buildings,

(2) Roads,

(3) Runways,

(4) Bridges, Railway over
bridges,

(5) Dams,

(6) Tunnels,

(7) Canals,

(8) Barrages,

(9) Diversions,

(10) Rail tracks,

(11) Causeways, Subways,
Spillways,

(12) Water supply schemes,

(13) Sewerage works,

(14) Drainage,

(15) Swimming pools,

(16) Water Purification
plants and

(17) Jettys

(B) Any works
contract incidental or ancillary to the contracts mentioned in paragraph (A)
above, if such work contracts are awarded and executed before the completion of
the said contracts.

By order and in the name of the Governor of
Maharashtra.”

Controversy

In relation to the above
notification, there was a controversy about the scope of the notified items.
Particularly, in relation to contracts for construction of building, there was
a dispute as to whether only new construction can be covered or repair of existing
building can also be covered. If the contract was for repair of the existing
building, then the view of the department was that it cannot be covered under
the above notification.

Bombay
High Court Ruling

One of the matters, having such
dispute, went to the Hon. Bombay High Court by way of appeal under MVAT Act.
The matter is in case of Painterior (India) (Maharashtra VAT Appeal No. 22
of 2017 dated 25.7.2017)(Bom).

The Hon. High Court has narrated
the facts as under:

“Background of the Appeal:

3. The Appellant is a
registered partnership firm registered under the MVAT Act. The Appellant is in
the business of repairs/reconstruction of buildings. Application dated 14^thJune 2010, was filed by the Appellant before the Commissioner of Sales
Tax, Maharashtra State (for short, “The Commissioner”) u/s. 56 of the
MVAT Act, for determination of the rate of tax applicable to a contract for
repairs of a building, as the repairs/reconstruction contracts are covered by
the expression “construction contracts”, which is used in section 42(3)
of the MVAT Act read with Notification No.VAT.1506/CR134/Taxation/1 dated 30^th
November 2006. The rate of tax applicable thereto, would be 5% as notified
under the Act. The Appellant had forwarded along with the Application to the
Commissioner such type of contract with the Sangam Bhavan Building.

4. The Appellant also prayed
for the direction that the determination of the Commissioner should not affect
the liability of the Appellant under the Act in respect of any sale affected
prior to the determination. The Commissioner by order dated 25^th
July 2014, rejected the contention of the Appellant and made a determination
that the contract is not a “Construction Contract”, thus attracting the
rate of tax at 8%. Being aggrieved by the order passed by the Commissioner, the
Appellant approached the Maharashtra Sales Tax Tribunal (for short, “the
Tribunal”) in Appeal. The Tribunal by Judgment and order dated 15^thDecember
2016, confirmed the order passed by the Commissioner. Hence, the Appeal.”

The Hon. High Court referred to the
provisions of the Act as well as earlier circulars under Works Contract Tax
Act. Under Works Contract Tax Act, for the amnesty scheme, the Commissioner of
Sales Tax has clarified that repair contracts are also Construction contracts.
Having this interpretation long back, the Hon. High Court held that there is no
reason to change the interpretation. The observations of the Hon. High Court
are as under:

“13. It is necessary to note that
under the WC Act, referring to section 6A(1) a similar notification dated 8
March 2000 was in existence, referring to the contract for construction of
“building”. Similar clause (B) of notification under MVAT Act dated 30^th
November 2006 was in existence under Section 42(3) Explanation. The Trade
circular was in existence about the repair, reconstruction and maintenance to
buildings, dams, bridges, canals and barrages would be covered under the
expression of “Construction Contract”, though it was for the purpose of amnesty
scheme. This undisputed position on record shows the consistent stand and
interpretation even of the Department that the “Construction Contract” includes
the repair and reconstruction and maintenance of building. There is no contra
circular and/or material available placed on record in this regard. The
circulars and the practice so adopted by the Department, since long, ought not
to have been overruled while rejecting the case/claim of the Appellant.

14. Therefore, considering the
scheme and purpose of section 42(3)(i) and notification dated 30^th
November 2006 under the MVAT Act, we are of the view that the ‘Works Contract’
in question, would be the ‘Construction Contract’. The contract for
construction of buildings includes the repairing, reconstruction and maintenance
of building etc. This is also for the reason that there is no
distinguishing feature and definitions and/or intention reflected in any
provisions about the nature of buildings, whether it is new building or old
building. The word “new” or “old” so observed in the impugned order as not
specifically defined or explained anywhere, cannot be added by giving such
restrictive interpretation to the provisions and the notification in question.
The term “Building” cannot be restricted only to the new building specifically
when, as per the practice and the explanation so given in similarly placed
provisions under the WC Act and the notification explaining the term so
referred above. In spite of the earlier provisions and the interpretation so
given, there is no reason to overlook the same specifically when, there is no
further clarification and/or provisions brought on record to supersede and/or
take away the clarification so issued by the Commissioner at the relevant time.
The repairing and/or reconstruction, if part of Construction Contract, which in
normal parlance and/or understanding cannot be read to mean that the
construction contract refers under these provisions only for the new building.
It is unacceptable and there is no rational and/or justification for want of
specific provisions of such interpretation.”

Conclusion

Thus,
the Hon. High Court has decided on this highly disputed issue which will bring
the controversy to end. Further, it also becomes clear that the circular
interpretation remains binding even if it is in a different situation.
Consistency in interpretation is getting impliedly confirmed by the Hon. High
Court. We hope that such a trend will always be kept in mind by the revenue
authorities for simplification of law.

shailesh.kwebmaker

Is Schedule Ii To The Central GST Act, 2017 & Other State GST Acts Unconstitutional As Regards Certain Services?

Introduction

The Goods and Services Tax legislations have become a reality
now and are in operation. The start was through a Constitutional (101^st)
Amendment Act, 2016 which came into effect from September 2016 itself. In that
Act, the Constitution was amended to insert, modify and delete several articles
to pave the way for introduction of GST. In doing so, however, Article 366(29a)
was left untouched. This article would analyse the effect of having this clause
remaining in the Constitution.

Goods and Services Tax

The term “goods” is defined in Article 366(12) to include all
materials, commodities and articles. As per Article 366(26A), “services” is
defined to mean anything other than goods. Article 366(12A) defines “goods and
services tax” to mean any tax on supply of goods or services or both except
taxes on the supply of the alcoholic liquor for human consumption.” Therefore,
it stands to reason that the goods and services tax is a tax on supply of goods
or services.

Tax on sale or purchase of goods

However, in Article 366(29a), which was inserted by
Constitution (46^th Amendment) Act, 1982, the definition of tax on
the sale or purchase of goods was introduced. The reason for its introduction
was several transactions which could not be taxed by the States because of
interpretation placed by the Courts was sought to be overcome. Now let us take
a look at the said definition which is set out hereunder (emphasis supplied):

“[(29A) “tax on the sale or purchase of goods” includes –

(a) a tax on the transfer, otherwise than
in pursuance of a contract, of property in any goods for cash, deferred payment
or other valuable consideration;

(b) a tax on the transfer of property in
goods (whether as goods or in some other form) involved in the execution of a
works contract;

(d) a tax on the transfer of the right to
use any goods for any purpose (whether or not for a specified period) for cash,
deferred payment or other valuable consideration;

(e) a tax on the supply of goods by any
unincorporated association or body of persons to a member thereof for cash,
deferred payment or other valuable consideration;

(f) a tax on the 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 (whether or not
intoxicating), where such supply or service, is for cash, deferred payment or
other valuable consideration,

and such transfer, delivery or supply of any goods
shall be deemed to be a sale of those goods by the person making the transfer,
delivery or supply and a purchase of those goods by the person to whom such
transfer, delivery or supply is made;”

In BSNL Ltd vs. UOI 2006 (2) STR 161, the Supreme
Court succinctly brought out reasons for its introduction which is set out
hereunder:

39. Clause (a) covers a situation where the
consensual element is lacking. This normally takes place in an involuntary
sale. Clause (b) covers cases relating to works contracts. This was the
particular fact situation which the Court was faced with in Gannon Dunkerley
and which the Court had held was not a sale. The effect in law of a transfer of
property in goods involved in the execution of the works contract was by this
amendment deemed to be a sale. To that extent the decision in Gannon Dunkerley
was directly overcome. Clause (c) deals with hire purchase where the title to
the goods is not transferred. Yet by fiction of law, it is treated as a sale.
Similarly the title to the goods under Clause (d) remains with the transferor
who only transfers the right to use the goods to the purchaser. In other words,
contrary to A.V. Meiyappan’s decision a lease of a negative print of a picture
would be a sale. Clause (e) covers cases which in law may not have amounted to
sale because the member of an incorporated association would have in a sense
begun both the supplier and the recipient of the supply of goods. Now such
transactions are deemed sales. Clause (f) pertains to contracts which had been
held not to amount to sale in State of Punjab vs. M/s. Associated Hotels of India
Ltd. (supra). That decision has by this clause been effectively legislatively
invalidated.

40. All the clauses of Article 366(29A)
serve to bring transactions where one or more of the essential ingredients of a
sale as defined in the Sale of Goods Act, 1930 are absent, within the ambit of
purchase and sales for the purposes of levy of sales tax. To this extent only
is the principle enunciated in Gannon Dunkerly limited. The amendment
especially allows specific composite contracts viz. works contracts [Clause
(b)], hire purchase contracts [Clause (c)], catering contracts [Clause (e)] by
legal fiction to be divisible contracts where the sale element could be
isolated and be subjected to sales tax.

It is clear from the above definition and analysis, that the
following goals get achieved through the amendment:

i. The definition talks of a tax on sale or
purchase of goods to include several things listed therein;

ii. There are three clauses dealing with tax on
transfer (clauses a, b and d), one clause dealing with tax on delivery (clause
d) and two clauses dealing with tax on supply;

iii. All the clauses deal with goods only;

iv. Further, the clause states that such transfer,
delivery and supply shall be deemed to be a sale or purchase of goods.

GST scenario

In the GST scenario, there are two principal legislations
dealing with tax on supply of goods or services – the Central GST Act, 2017 and
the State GST Act, 2017. It would be noted that the IGST Act, 2017 deals with
interstate supplies and imports. We take the CGST 2017 for analysis for the
sake of convenience and as this has been replicated by all states, it will hold
equally valid. Supply is defined in section 7 to include all forms of supply
of goods or services or both such as sale, transfer, barter, exchange, licence,
rental, lease or disposal made for a consideration in the course or furtherance
of business. Thus, the terminology supply includes sale of goods.

If we look further into section 7(1)(d), supply includes
activities to be treated as supply of goods or supply of services as referred
to in Schedule II. Schedule II attempts to classify what would be termed as
supply of goods and what is termed supply of services.

A close look at Schedule II would reveal the general theme
that transfer of title in goods will be classified as supply of goods and
transfer of other rights in goods would be classified as supply of services.
Further, transactions covered by clauses (b), (c), (d), and (f) of Article
366(29a) are classified as services while transactions covered by clause (e) is
covered as supply of goods. In effect therefore, works contract, hire
purchase transactions and transfer of right to use goods apart from goods
supplied in restaurant/hotels are classified now as supply of services and not
supply of goods.

Does this conflict with Article 366(29a)?

There are no two opinions about this that tax on works
contract, hire purchase and transfer of right to use goods apart from food
supplied in restaurants were and are treated as sale and purchase of goods by
virtue of the deeming fiction appearing in Article 366(29a) of the
Constitution. Therefore, to this extent the transactions being covered by
Schedule II are termed as services are seemingly in direct conflict with the
above constitutional provisions. Therefore, one has to find whether we can
harmonise Article 366(26A) which deals with tax on goods and services vis-a-vis
Article 366(29a) which deals with tax on sale or purchase of goods and deeming
certain transactions to be sale or purchase of goods.

Whether harmonising possible?

If we look at the constitutional provisions, there is no
definition of what is supply. But when we look at the statute, the term supply
is defined to have a wider meaning than the term sale as the latter is included
in the former. Therefore, sale is only a sub-sect of supply which includes
several other things. Can a statute be used to interpret the meaning of the
terms in the Constitution? Is such recourse possible? One argument is that the
term “sale” appearing in the Constitution was so interpreted by the Supreme
Court to be what was being used under a legislation. The summary of this
discussion is found in BSNL case supra which is reproduced hereunder:

To answer the questions formulated by us, it is necessary
to delve briefly into the legal history of Art. 366(29A). Prior to the 46th
Amendment, composite contracts such as works contracts, hire-purchase contacts
and catering contracts were not assessable as contracts for sale of goods. The
locus classicus holding the field was State of Madras vs. Gannon Dunkerley
& Co. – IX STC 353 (SC). There this Court held that the words “sale of
goods” in Entry 48 of List II, Schedule VII to the Government of India Act,
1935 did not cover the sale sought to be taxed by the State Government under
the Madras General Sales Tax Act, 1939. The classical concept of sale was held
to apply to the entry in the legislative list in that there had to be three
essential components to constitute a transaction of sale – namely, (i) an
agreement to transfer title, (ii) supported by consideration, and (iii) an
actual transfer of title in the goods. In the absence of any one of these
elements it was held that there was no sale. Therefore, a contract under which
a contractor agreed to set up a building would not be a contract for sale. It
was one contract, entire and indivisible and there was no separate agreement
for sale of goods justifying the levy of sales tax by the provincial
legislatures. “Under the law, therefore, there cannot be an agreement relating
to one kind of property and a sale as regards another”. Parties could have
provided for two independent agreements, one relating to the labour and work
involved in the execution of the work and erection of the building and the
second relating to the sale of the material used in the building in which case
the latter would be an agreement to sell and the supply of materials
thereunder, a sale. Where there was no such separation, the contract was a
composite one. It was not classifiable as a sale. The Court accepted the
submission of the assessee that the expression “sale of goods” was, at the time
when the Government of India Act, 1935 was enacted, a term of well recognized
legal import in the general law relating to sale of goods and must be
interpreted in Entry 48 in List II of Schedule VII of the 1935 Act as having
the same meaning as in the Sale of Goods Act, 1930. According to this decision
if the words “sale of goods” have to be interpreted in their legal sense, that
sense can only be what it has in the law relating to sale of goods. To use the
language of the Court :

“To sum up, the expression “sale of goods” in Entry 48 is
a nomen juris, its essential ingredients being an agreement to sell movables
for a price and property passing therein pursuant to that agreement. In a
building contract which is, as in the present case, one, entire and indivisible
– and that is its norm, there is no sale of goods, and it is not within the
competence of the Provincial Legislature under Entry 48 to impose a tax on the
supply of the materials used in such a contract treating it as a sale”.

34. Following the ratio in Gannon Dunkerley,
that “sale” in Entry 48 must be construed as having the same meaning which it
has in the Sale of Goods Act, 1930, this Court as well as the High Courts held
that several composite transactions in which there was an element of sale were
not liable to sales tax.

One could also view that actually the Gannon Dunkerly
decision to treat sale in the context of how the Government of India Act, 1935
had viewed it and as our Lists in VII Schedule were more or less reproductions,
it was to be interpreted keeping in mind what was the meaning in the earlier
legislation which was parallel to our constitutional provisions and therefore,
the Supreme Court has actually not subordinated the Constitution to the
statute. However, the BSNL’s case (supra) does not follow this argument
as also other Courts and have consistently interpreted the Gannon Dunkerly
judgement that the terms used in the constitution have been interpreted keeping
in mind the legislation present at that time.

If this argument be accepted, then clearly, the CGST Act 2017
can be used to refer to the meaning of the term supply which is conspicuous by
its absence in the Constitution. So read, sale is a sub-sect of supply as
supply will include other forms like transfer, barter, lease, rental, etc.
apart from sale. Therefore, Article 366(29a) is now a sub-sect of Article
366(26A) which seems to be plausible but flawed in one clear sense – the
sub-sect was introduced before the sect itself. But we assume here that the
makers wanted to so do as they were introducing a tax on a wider system of
supply than the narrow system of sale. If we do not treat the same as a sub
sect, then the two clauses are independent and the GST legislations will
clearly suffer from the vice of unconstitutionality in that respect.

Harmonising will still not save

Assuming for a moment that the clause is a sub-sect of
supply, still the challenge to the provisions contained in schedule II will
hold good because to the extent those clauses treat the transactions as supply
of services, they are still in conflict with the express provisions of Article 366(29a).

One other argument which can be thought of is that Article
366(29a) was retained in the Constitution for a specific reason that those
transactions which were entered into prior to 1.7.2017 when the GST
legislations were brought into force would still be protected for realisations
made after 1.7.2017. To put it simply, suppose you entered into a lease
transaction before 1.7.2017 which amounted to a transfer of right to use goods
and was treated as supply of goods earlier, the instalments that are realised
after 1.7.2017 could still be collected as the Constitutional mechanism is
still intact. However, this would lead us to a very paradoxical position. If
those transactions are covered still as tax on sale or purchase of goods, the
new levy of GST cannot be applied at all. In fact, that is clearly the
situation. For example, if I entered into a car lease on 1.4.2017, the
transaction would have been taxed as a sale of goods under the respective VAT
legislations and VAT has to be discharged every time the lease rentals are
invoiced. Similar would be cases of transfer of rights to use other goods like
machinery. Come 1.7.2017, the car lease rentals are described as services and
taxed at a rate of 43% or other transfers of right to use are now taxed under
GST as services. Can the recovery of instalments be taxed under GST where the
delivery or transfer of right to use is already complete prior to 1.7.2017 when
GST was introduced? The answer is a clear no and therefore, to charge GST on
such transactions may be beyond the statute itself, leave alone the
constitution. This is because, there is no supply under GST and the transfer of
right to use or delivery of goods has already occurred before the GST
legislation came into force. Even section 142(10) of the CGST Act, 2017 will
apply where in a continuing contract the supply is made after 1.7.2017.

That would mean that those collections have to be done under
the old VAT laws which now stand repealed. By virtue of section 174 of the CGST
Act, 2017 or section 173/174 of the Karnataka GST Act 2017 read with section 6
of the General Clauses Act, 1897 can it be said that the previous liability
will still continue under such Acts, in which case, till those transactions
conclude, the respective liability continues. However, it can be equally argued
that liability to pay tax occurs every month on lease rentals and unless the
legislation is in force, there is no liability to pay at all and my previous
liabilities are completely discharged.

Conclusion

Therefore, it appears that the provisions
relating to schedule II of the CGST Act, 2017 or the respective state
legislations trying to tax certain transactions as supply of services are in
direct conflict with the constitutional provisions. There seems to be a further
dilemma that certain completed transactions cannot be brought to tax under the
new GST regime. This is an area which is likely to be explored by the discerning
professionals.

shailesh.kwebmaker

Input Tax Credit – Some Emerging Issues

1. Fundamentals and basic rules

1.1. At the heart of an efficient indirect tax is a flawless Input Tax Credit (“ITC”) mechanism, that allows a business to claim offset of taxes paid on expenses at the time of discharging liability of taxes collected from customers. If the tax offset, also known as ITC is not allowed freely to the businesses, it results in tax inefficiencies in the form of tax on tax. In fact, one of the most important justifications for introduction of GST has been the seamless flow of credit.

1.2. The GST law in general allows registered businesses to avail ITC of taxes paid on inputs / input services / capital goods which are used or intended to be used in the course or furtherance of business, subject to certain restrictions and conditions.

1.3. This article primarily covers the aspect relating to ITC entitlement, conditions for claim of credit, conditions and restrictions imposed for claim of credit and some teething issues towards credit claim. Chapter V of the CGST Act, 2017 as well as Chapter V of the CGST Rules, 2017 deal with the provisions relating to ITC.

2. ITC Entitlement – General Conditions

2.1.    Section 16 (1) of the CGST Act, 2017 provides that every registered person shall be entitled to take credit of input tax charged on supply of goods or services or both, which are used / 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. Section 16(2) stipulates further conditions which need to be satisfied for the claim of credit and the same are listed below:
–    The registered person should be in possession of tax invoice / debit note issued by registered supplier or other tax paying documents
–    The registered person should have received goods / services
–    The tax charged on the invoice should have been actually paid to the Government
–    The recipient should have furnished his return
–    The recipient should have paid the supplier of goods / services the amount due towards the supply received (including taxes) within 180 days
–    The credit should not be blocked under Section 17(5).

2.2. As can be seen from above, there are various conditions prescribed under GST for claiming ITC, and they revolve around different pillars of compliances, from the view point of recipient (being a registered person, should have received the supply), compliances by both the parties (pre & post supply in the form of payment of taxes by the supplier, making correct disclosures relating to the supply by the supplier, filing the return by the recipient, intended use of the supply – business vs. non-business, etc.) and nature of supply (restricted credit vs. unrestricted credits).

2.3. Each of the above aspects are discussed in the subsequent paras.

3. Identifying Recipient of supply

3.1. As discussed above, one of the important conditions for claiming the ITC is that the registered person should have received the goods or services. In many cases, the payment for a supply may be made by one person but the economic benefit of the supply can be received by another person. Take the case of a Customs House Agent (CHA) paying for the warehousing charges at the Container Freight Station (CFS). Can it be said that the CHA has received the service and is therefore entitled for input tax credit?

3.2. In the above background, it becomes essential to define what is meant by the phrase “recipient of supply”. Section 2 (93) defines the term “recipient of supply” in the context of goods / services / both as:

    (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;

3.3. The CHA operates out of customs port and facilitates number of activities pertaining to import / export of goods, such as dealing with the shipping line, CFS, loading / unloading of goods in to the vessel, paying port charges, etc. The key to the entire analysis would be whether the CHA is liable to pay the consideration to the underlying vendor. The actual fact of paying the consideration may not be relevant. Therefore, it may be important to look at the contracts. In many cases, the contracts may be verbal or implied. In such a scenario, the invoice can be the best indicator of the contracting relationship.

3.4. Practically, the vendors may enter into contracts/issue the invoices in the following manner:

a. Contracts entered into with/ Invoices issued in the name of the Importer / Exporter. In such a scenario, the CHA merely acts as an agent. However, payment to the vendors is done by the CHA which is subsequently recovered from importer / exporter.

In this scenario, the vendors have recognised the importer / exporter as the recipient of supply and hence they will have to be treated as the recipient and the credit can be claimed only by the importer / exporter and not by the CHA.

b. Contracts entered into with / Invoices issued in the name of CHA. In this scenario, since the person liable to pay the consideration to the underlying vendor is the CHA, the +CHA can be considered as a recipient of supply. It may be important to note that the definition of recipient also includes an agent acting on behalf of the recipient. In this scenario, the vendors have treated the CHA as the person liable for payment of consideration, i.e., recipient of supply. The CHA can claim the credit of the taxes which have been posted into their Electronic Credit Ledger by the respective vendors. It is however, important to note that in such cases, the CHA will not be able to claim the amount as reimbursement of expenditure and he should treat the expenditure incurred by him as inward supplies for providing the outward supply to the importer / exporter.

c. Issued in the name of CHA who claims the reimbursement of expenses from client as pure agent

In the above scenario, if the CHA chooses to claim the benefit of reimbursement of expenses and consequent exclusion from valuation of taxable services, in view of the Mumbai High Court decision in the case of Ultratech Cement Limited 2010 (20) S.T.R. 577 (Bom.), the CHA will not be eligible for the claim of credit.

In fact this will result in an incremental cost for the importer / exporter with no actual benefit flowing in to either the CHA / importer / exporter by way of tax credits.

4. Denial of credit for non-possession of original tax invoices

– Section 16 (2) (a) provides that the person claiming the ITC should be in possession of tax invoice / debit note issued by the supplier for claiming the credit.

– The question that arises is whether the receiver should be in possession of the original tax invoice for claiming credit or photo-copy or scanned copy of the invoice shall also suffice.
– In this context, it would be important to refer to the provisions of section 145 of the Act, wherein it has been provided that a micro film of a document or the reproduction of the image or images embodied in such micro film (whether enlarged or not); or a facsimile copy of a document; or a statement contained in a document and included in a printed material produced by a computer, subject to such conditions as may be prescribed; or any information stored electronically in any device or media, including any hard copies made of such information, shall be deemed to be a document for the purposes of this Act and the rules made thereunder and shall be admissible in any proceedings thereunder, without further proof or production of the original, as evidence of any contents of the original or of any fact stated therein of which direct evidence would be admissible.

5. Failure to make payment to vendor for the supply received including taxes

– Second proviso to section 16 (2) provides that in case where a receiver of supply fails to make the payment to the supplier for the value of supply (incl. GST charged) within 180 days of the date of invoice, he shall be liable to reverse the ITC claimed initially along with the interest thereon.

– Similarly, the third proviso to section 16 (2) provides that when the receiver of supply makes payment to the vendor post reversal of credit in accordance with the provision of second proviso, he shall be entitled to re-claim the credit of the tax reversed in terms of second proviso.

– One important issue that arises is whether credit reversal would be required in case of part payments made to suppliers, and if yes, whether to the extent of entire supply or only to the extent payment is not made? It is imperative to note that the proviso to section 16 (2) referred above is silent in this regard. The proviso only requires for reversal of ITC, but is silent as to what extent the reversal shall be necessitated?

– While there is no clarification for these issue, either from the CBEC / State Authorities, under the erstwhile service tax regime, in the context of Rule 4 (7) of the CENVAT Credit Rules, 2004, (which is a similar provision as the proviso to section 16 (2)), the Board had clarified1 as under:
_____________________________________________________________
1 Circular No. 122/3/2010-S.T., dated 30-4-2010

(b) In the cases where the receiver of service reduces the amount mentioned in the invoice/bill/challan and makes discounted payment, then it should be taken as final payment towards the provision of service. The mere fact that finally settled amount is less than the amount shown in the invoice does not alter the fact that service charges have been paid and thus the service receiver is entitled to take credit provided he has also paid the amount of service tax, (whether proportionately reduced or the original amount) to the service provider. The invoice would in fact stand amended to that extent. The credit taken would be equivalent to the amount that is paid as service tax. However, in case of subsequent refund or extra payment of service tax, the credit would also be altered accordingly.

– Similar issue is also faced by the Infrastructure Sector, especially contractors / sub-contractors where there is a concept of retention money, i.e., amount reduced from invoices raised by the suppliers by terming them as “retention money” and subsequent payment as per contractual terms. It is obvious that the amount is contractually due after more than 180 days and hence the payment would actually be made after the period of more than 180 days. Will the requirement of reversal of credit trigger in such situations? It may be fruitful to reproduce the exact provision requiring the reversal of credit

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 added to his output tax liability, along with interest thereon, in such manner as may be prescribed

– It is important to note that the provision obligating the reversal of credit gets triggered when the recipient fails to pay. The phrase “fails to pay” is a specific incident and gets triggered only in situations when there is an obligation to pay. Since the recipient is not obligated to pay the retention money within a period of 180 days, it cannot be said that he has failed to pay the retention money and hence the proviso is not triggered.

6. Process for claiming Input Tax Credit

6.1. Section 16 (1) provides that every registered person shall be entitled to take ITC of inward supplies received for use / intended use in the course or furtherance of business, the same comes with the caveat “subject to conditions and restrictions as may be prescribed”.

6.2. Out of this pool of input tax credit, there are various restrictions imposed on the taxable persons from claiming the input tax credit. It may be important to note that even under the Service Tax / VAT regime, Rule 6 of the CENVAT Credit Rules (including Rule 2 (a), (k) & (l)) as well as Rule 53/ 54 of the Maharashtra Value Added Tax Rules provided for similar conditions / restrictions on the claim of input tax credit.

6.3. Similar conditions and restrictions are contained under CGST Act, 2017 in the provisions of Section 17 read with Rule 43 of the CGST Rules, 2017. The ITC attributable to total inward supplies received by a registered person, on which ITC has been charged by the supplier as well as transactions where the ITC is applicable under reverse charge mechanism has been classified as “T” for the purpose of determining eligibility.

6.4. The total ITC is subsequently segregated into multiple baskets, as is evident from the following chart and discussed in detail in subsequent paras:

6.5. Credit pertaining exclusively to non-business / exempt activities

6.5.1.The first two baskets of segregation of “T” deals with situation wherein inputs / input services are used partly for the purpose of business and partly for other purposes OR partly for affecting taxable supplies and partly for exempt supplies and the amount of credit shall be restricted to so much of input tax as is attributable to business purpose OR is attributable to taxable supplies. To the extent the ITC is attributable to non-business purpose, the same is classified as T1 and to the extent the ITC is attributable to exempt supplies, the same is classified as T2.

6.6. Restricted Credits

6.6.1. In addition to above, section 17 (5) provides that ITC shall not be allowed in respect of various expenditure incurred. The inward supplies which are covered u/s. 17 (5) are classified as “T3”. A quick summary of such inward supplies where ITC is restricted include ITC in respect of:

– Motor vehicles & other conveyances
– Specified inward supplies, such as:

a. 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;
b. membership of a club, health and fitness centre;

c. 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

d. travel benefits extended to employees on vacation such as leave or home travel concession;

–    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;
–    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.
–    Goods or services or both on which tax has been paid u/s. 10, i.e., composition scheme.
–    Goods or services or both received by a non-resident taxable person except on goods imported by him;
–    Goods or services or both used for personal consumption;
–    Goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples; and
–    Any tax paid in accordance with the provisions of sections 74, 129 and 130.

6.7. Identified Credits

6.7.1. The fourth basket of segregation is pertaining to inward supplies, which are exclusively used for making taxable supplies, including zero rated supplies. Such ITC is tagged as “T4”. A supplier shall be eligible for full input tax credit to the extent the inward supply is tagged under this basket

6.8. Common Credits

6.8.1. The balance ITC is the quantum of common inward supplies which are used for making both, taxable as well as exempted supplies on which a ratio needs to be applied on a monthly basis. Such ITC is tagged as “C2”. From C2, the amount of ITC attributable towards exempt supplies (“D1”) is identified using the following ratio,

           Aggregate value of exempt
           supplies during the tax period (E)
    ____________________________    *    C2
           Total turnover of the state of the
           registered person during the tax period (F)

6.8.2. The term “exempt supplies” has been defined to mean supply of any goods or services or both which attracts nil rate of tax or which may be wholly exempt from tax u/s. 11, or u/s. 6 of the Integrated Goods and Service Tax Act, and includes non-taxable supply (i.e., supply of goods or services or both which is not leviable to tax under this Act or under Integrated Goods and Service Tax Act).

6.8.3.    Value of Exempt Supply shall include the following:
–    Transaction Value of all the exempt supplies
–    Transaction Value of services on which tax is payable under RCM
–    Sale of Land/ Completed Buildings
–    Sale of Securities – 1% of sale value is presumed to be the value of exempted supply.

6.8.4. A banking company or a financial institution including a non-banking financial company has been given an option to either comply with the ratio requirement or avail only 50% of the eligible ITC on inputs, capital goods and input services in that month. However, such companies shall be required to exercise the option every year and once the option is exercised, the same cannot be withdrawn during the remaining part of the financial year. Further, the 50% credit claim option is not applicable for internal supplies within the company on which tax is payable.

6.8.5.While under the erstwhile Service Tax Regime, the ratio for reversal of credit was to be determined as per the financials of the previous year, to be applied throughout the year and subsequently, requiring a final ratio to be determined based on the financials of the concluded year by the 30th June, the method has been changed to some extent under the GST regime. Under GST, the ratio shall be required to be determined & applied on a monthly basis and subsequently, at the end of the year, a final ratio shall be determined and applied on or before 30th September of the next financial year.

6.9. Additional 5% adhoc reversal for common input tax credits

6.9.1. Further, an additional reversal of 5% is proposed from C2 in cases where common inputs / input services are used for business as well as non-business purposes, and the same is denoted as D2 for the purpose of ITC calculations. It is important to note that the additional 5% reversal is required only in cases where a registered taxable person uses some inputs / input services for both, business as well as non-business purposes and not in cases where it is used for purely business purposes.

6.9.2.Therefore, the question that arises is whether this clause is meant to be applicable for all categories of taxable persons or only for specified categories? Perhaps, this entry is meant to cover situations of sole-proprietary / partnership firms / HUF where there is always an element of personal expenditure incurred by the sole proprietor / partners / members being claimed as expenditure. While in the case of a company, while such instances cannot be ruled out, it is important to note that the Statutory Auditors are required to compulsorily disclose the personal expenditure of specified persons booked in the books of the company? So, the question that arises is what shall be the basis for determining the amount for D2 purpose. Has it to be the Income Tax Assessment Order making disallowance u/s. 37 for personal expenditure or has it to be the report of statutory auditor making such disclosures or is it something that has to be at the mercy of GST officer?

6.10. Credit in case of capital goods identified as being used for effecting taxable supplies is allowed immediately which is a departure from the earlier tax regime wherein credit of capital goods was to be claimed in two equal installments in the first two years. However, more complex provisions for reversal of ITC on capital goods have been prescribed. It has been provided that the claim of ITC on capital goods shall be distributed over a period of 60 months and credit should be availed every year basis the ratio determined on a monthly basis for a period of 60 months.

7. Credit Claim – Some controversies

7.1. Credit of ITC in respect of motor vehicles & conveyances

– As stated earlier, section 17(5), inter alia, does not permit the claim of credit in respect of motor vehicles. In this context, a question which arises is whether taxes paid on repairs and insurance of motor vehicles are eligible for input credit. Is the denial of credit only for procurement of motor vehicles as such or does the denial extend to all goods and services surrounding the effective consumption of the motor vehicle?

– In this context, it would be important to refer to the decision of the Hon’ble Supreme Court in the case of State of Madras vs. Swastik Tobacco Factory (1966) 3 SCR 79 (SC) wherein it was held that the expression “in respect of the goods” in r. 5(1)(i) means only on the goods, and cannot take in the raw material out of which the goods were made.

– Taking cue from the said decision, a view can be taken that the restriction for claim of credit is only restricted to receipt of motor vehicles and not other goods or services surrounding the motor vehicles. Therefore, a view can be taken that motor car insurance and repairs shall be eligible for credit under the GST Regime.
7.2. Distinction between rent-a-cab and leasing of vehicles and eligibility to claim credit thereof

– While the term rent-a-cab has not been defined under GST, the term cab has generally been perceived as a vehicle used for hiring purposes and is accordingly registered with the Transport Authorities as well. But the same cannot be said for leasing transactions, where the motor car given on lease is actually not registered with the Transport Authorities as a commercial vehicle and hence, the leasing of such vehicles, which in itself might be a commercial activity, cannot be classified as rent-a-cab.

– It may also be important to note that services of transportation of passengers attract GST at a rate of 5% / 18% while the leasing of goods attract the rate applicable on supply of such GST including the compensation cess thereof. The fact that there is a distinction of rate between the services of transportation of passengers in a cab, which is covered under rent-a-cab category and leasing of vehicles clearly reinforce the view that the credit of tax paid on leasing of vehicles can be claimed as the same is not equivalent to rent-a-cab.

7.3. Employee reimbursements – Credit Eligibility

7.3.1.An employee, as an agent of the company, who apart from working for the company and making various supplies on behalf of the company, also receives various supplies on behalf of the company in the course of his employment. Such supplies received might be in the nature of supplies meant for personal consumption of the employee or for the business purposes.

7.3.2.For example, an engineer visits a site and purchases various consumable items for use in provision of service to the client. The question that arises is whether the company shall be entitled to claim credit of such taxes, that would have been paid to the vendors?

7.3.3.It is more than evident that such consumable items are procured by the engineer for the company. The immediate consumption and use of such items is by the company and not by the engineer. Therefore the credit should be available to the company. However, it would be important that the invoice be issued in the name of the company and the credit is uploaded by the vendor in the company’s electronic credit ledger.

8. Conclusion:

8.1. The industry would have hoped that the ITC provisions under the GST regime would be less complicated as compared to the provisions under the erstwhile tax regime. However, the expectations have not materialised and the above complex provisions, if not complied in an organised manner, might result in future litigation as well as probable loss of credit for businesses. Therefore, businesses will have to be very careful while filing their monthly compliances relating to inward supplies register, tagging the inward supplies as either T1-T4 and C2 as well as calculating the ratios.

shailesh.kwebmaker

Sales Return – Scope

Introduction

Under VAT laws, tax can be
levied on sale of ‘goods’. Completed
sale is liable to tax. However, there may be a situation where the goods sold
are returned by the buyer. Since the transaction of sale is already complete,
even if subsequently there is sales return (which is also referred to as ‘goods
return’) the liability will still remain on the same. However, the legislature
gave some latitude by giving facility of deduction of sales return from taxable
turnover, if such return is within the stipulated time limit.

There are provisions under
Maharashtra Vat Act (MVAT Act) and Central Sales Tax Act (CST Act) explaining
that if the goods sold are returned back within six months from the date of
sale, then such return should be given deduction and no tax should be payable
on such goods return portion. If the return is beyond the prescribed period of
six months, then the deduction is not allowable and tax is payable on the full
sale value.

Sales
Return – Scope

The issue arises as to when
the goods returned are eligible for deduction as sales return? An important
judgement has come on the same from Hon. Bombay High Court. The judgement is in
case of Reliance Industries Ltd. vs. State of Maharashtra (50 GSTR 1)(Bom).
The facts in this case, as narrated by High Court are as under:

“3. In Writ Petition No. 2217
of 2015, the Petitioner is Reliance Industries Limited (for short
“RIL”) which is a public limited company inter alia engaged in
the manufacture of petrochemicals. Respondent No.1 is the State of Maharashtra,
through its Secretary, Ministry of Finance. Respondent No.2 is the MSTT
constituted under the BST Act. Respondent No.3 is Bharat Petroleum Corporation
Limited (for short “BPCL”) which is a public sector undertaking
engaged in the business of refining and selling petroleum products and who is
the supplier of Kerosene to RIL in the present dispute. Respondent No.4 is the
Commissioner of Sales Tax functioning and discharging his duties under the
provisions of the BST Act.

4. It is the case of RIL that
in or around 1992, RIL had established a petrochemical plant in Patalganga for
manufacturing Linear Alkyl Benzenes (“LAB”). RIL required N-Paraffin
as a raw material for the manufacture of LAB. According to RIL, Kerosene (also
known as Paraffin), is a mixture of Hydrocarbons in the range of C-8 to C-18.
Out of such mixture, the Hydrocarbons C-8 and C-9 are known as Light Paraffin.
Hydrocarbons from C-10 to C-13 are known as N-Paraffin (which is required by
RIL). The range of Hydrocarbons from C-14 to C-18 are known as Heavy Paraffin.
According to RIL, N-Paraffin itself is also Kerosene and is one of the many
constituents of Kerosene.

5. According to RIL,
N-Paraffin is easily obtained from kerosene by using a molecular sieve. This,
according to RIL, is only a physical activity not involving any chemical
reaction. The molecular sieve would absorb the N-Paraffin only and the rest of
the Kerosene would simply pass through the said Sieve. Subsequently, the
N-Paraffin is de-absorbed from the molecular Sieve.

6. According to RIL, BPCL is
having a refinery at Mahul for many years prior to 1992. One of the products
produced by BPCL in the said refinery is Kerosene. Kerosene is as such sold by
BPCL through the Public Distribution System (involving a dealer network) to its
final consumers.

7. Be that as it may, an exclusive
pipeline of approximately 56 kms was laid connecting the Mahul refinery and
Petitioner’s factory at Patalganga so as to ensure continuous and constant to
and fro movement of the requisite quantity of Kerosene from BPCL to RIL and
from RIL to BPCL, respectively. It is in these circumstances that RIL entered
into an agreement dated 24^th August, 1992 with BPCL for procurement
of Superior Kerosene Oil. As this Kerosene was required for manufacturing of
LAB as Feed Stock (FS), it was described as KO (LABFS). A copy of this
agreement can be found at Exhibit “C” to the Writ Petition.

8. According to RIL, it was
agreed between itself and BPCL that Kerosene would be delivered to RIL. In
turn, RIL would consume the suitable quantity of Kerosene by taking out N-
Paraffin required by it and send the balance quantity of Kerosene back to BPCL
as a “return stream”. According to RIL, this agreement mandatorily
required the Petitioner (by way of “return stream”) to return the
quantity of Kerosene after extracting the N-Paraffin. According to RIL, this
agreement thus provided for supply of Kerosene solely for the purposes of
consuming the requisite quantity of kerosene. Thereafter, the balance quantity
of Kerosene was to be returned back to BPCL.

9. According to RIL, the
“return stream” is a common phrase used in the petroleum and
petrochemical industry both within India as also internationally. A petroleum
product would be sent by the refinery to a petrochemical complex. The
petrochemical complex would use/consume the required quantity of item and
return the balance petroleum product to the refinery as a “return
stream”.”

In a nutshell, the issue was
that BPCL has to supply kerosene namely KO (LABFS) to RIL. RIL to extract
n-paraffin from the said kerosene and the balance kerosene will be returned
back to BPCL. The issue was whether such return of kerosene by RIL to BPCL will
be purchase by BPCL from RIL or it will simply be a case of sales return by RIL
to BPCL.

There were a number of issues
involved in the case. There were arguments from the both the sides.

Hon. High Court considered
arguments from both the sides and also referred to the relevant provisions
under MVAT Act like definition of manufacture, resale, turnover of sale etc.
After having such reference, Hon. High Court observed about the merits of the
case as under:

“53. What can be discerned
from the aforesaid definitions and as even correctly submitted by Mr.
Venkatraman as well as Mr. Dada is that for there to be a sales return, the
goods originally supplied and the delivery of the return stream should be one
and the same goods. If the goods that are sought to be returned are a product
which is different from the one that was originally supplied, the same can
never be termed as a sales return.

54. In the facts of the
present case, we are clearly of the view that the product that was supplied by
BPCL to RIL in the first leg of the transaction was different from the return
stream that was supplied/returned by RIL to BPCL. As mentioned earlier, the
Kerosene that was supplied by BPCL to RIL was rich in N-Paraffin. It comprises
of Hydrocarbons C9 to C14. The Kerosene that was sought to be returned by RIL
to BPCL was after the extraction of N-Paraffin. In other words, Hydrocarbons C9
to C14 were specifically denuded from the Kerosene that was returned by RIL to
BPCL. In fact, it is not in dispute that the returned Kerosene is denuded by
more than 50% of N-Paraffin. The Kerosene that was supplied by BPCL also known
as SKO (LABFS) which contains N- Paraffins was viable for commercial extraction
of N-Paraffin whereas the product given by the RIL to BPCL after extracting the
N-Paraffin is not viable for extraction of N-Paraffin due to the fact that the
return stream does not contain the extractable quantity. At least to our mind,
therefore, it is clear that the product supplied by the BPCL to RIL is very
different from the product that is returned by RIL to BPCL. To put it in other
words, the Kerosene supplied by the BPCL to RIL is pre-processed and the
Kerosene returned by RIL to BPCL is a processed product and hence are two
different commercial products. It is true that even the returned Kerosene meets
the BIS standards to be termed and used as Kerosene, but that alone cannot be
the test to come to the conclusion that the product returned by RIL is one and
the same as was supplied by BPCL to RIL in the first leg of the transaction. It
is an admitted fact before us, at least across the bar, that the Kerosene
supplied by BPCL to RIL can be used for extraction of N Paraffins whereas the
Kerosene returned by RIL to BPCL cannot be used for the same purpose. The
process of extraction carried out by RIL is thus a manufacture within the
meaning of the said expression as defined in the BST Act and the kerosene is
therefore not returned to BPCL in the same form. In other words, BPCL cannot
use the Kerosene returned by RIL to be supplied to another Petrochemical plant
for extraction of N-Paraffin. This, to our mind, would clearly go to establish
that the Kerosene supplied by BPCL to RIL in the first leg of the transaction
and the product returned by RIL to BPCL in the second leg of the transaction,
at least for the purposes of sales tax, are two different products. It cannot
be disputed that the two products are different in character and use. This
being the case, it is quite clear that the return stream of Kerosene and which
was sought to be returned by RIL to BPCL can never be termed as a sales return
but in fact a sale by RIL to BPCL.”

Thus, Hon. High Court decided
the yard stick about scope of sales return. If the goods sold and returned are
not the same goods but different goods, then there is no scope for claim of
sales return.

Prospective
effect to the liability

One more issue which is
decided in this matter is about prospective effect to the adverse determination
order. Since the dealer was guided earlier by favorable determination order.
Hon. High Court held that even if it is now reversed, still the protection is
required to be given for past liability. The relevant observations of Hon. High
Court are as under:

“70. What is ex-facie
clear from reading the provisions of Section 52 is that the Commissioner, in
the given facts and circumstances of the case, certainly has the power to
exercise his discretion and give prospective effect to the DDQ order passed by
him u/s. 52(1). As correctly submitted by Mr. Venkatraman as well as Mr. Dada,
in the facts of the present case, since the DDQ order dated 11^th
September, 2006 was passed in favour of the assessee, there was no occasion nor
any reason to request the Commissioner to grant prospective effect to his
order. The question of prospective effect would only arise when the order of
the Commissioner was reversed by the Tribunal vide the impugned order dated 20^th
January, 2015. Further, it is not in dispute before us that it is for the first
time in the history of the Bombay Sales Tax Act that the DDQ order passed by
the Commissioner u/s. 52 (1) was challenged by
the State of Maharashtra before the MSTT. From the facts narrated in this
judgement, it is also clear that bonafide litigation between the parties
has gone on right from the year 1992 till 2015. Further, right from the
assessment years 1988-1989 till 2004-2005, the assessments have been allowed in
favour of the assessee, namely RIL on the basis that the return stream of
Kerosene was a “goods return”. If prospective effect is not given to
the order of the Tribunal it would effectively lead to a situation that all
past assessments would have to be reopened and which would be highly unfair and
prejudicial not only to RIL but also to BPCL.”

Conclusion

The judgement has far reaching
effect in understanding the scope of sales return. It is also a guiding
judgement in respect of use of discretionary power of prospective effect in
determination proceedings. The dealers’ community may have good guidance from
the above judgement.

shailesh.kwebmaker

Interesting issues on Interest

Tax laws operate on three fundamental
impositions viz tax, interest and penalties. Each of these recoveries are
designed to meet specific objectives and interest has one striking peculiarity
i.e. it is not static and accumulates
over time.

In common parlance, interest is understood
as a compensation payable to the owner of funds for the usage of money borrowed
from such person. Black’s Law Dictionary defines interest, in the context of
usage of money, as a compensation allowed by law or fixed by parties for the use or forbearance of borrowed money. In
the context of tax laws, the Supreme Court in Associated Cement Co. Ltd. vs.
CTO (1981) 48 STC 466 has explained tax, interest and penalty as follows:

“Tax, interest and penalty are three
different concepts. Tax becomes payable by an assessee by virtue of the
charging provision in a taxing statute. Penalty ordinarily becomes payable when
it is found that an assessee has wilfully violated any of the provisions of the
taxing statute. Interest is ordinarily claimed from an assessee who has
withheld payment of any tax payable by him and it is always calculated at the prescribed
rate on the basis of the actual amount of tax withheld and the extent of delay
in paying it. It may not be wrong to say that such interest is compensatory in
character and not penal.”

The Supreme Court in Prathibha
Processors vs. Union of India (1996) 88 ELT 12 (SC) has held that interest
is compensatory and its levy is mapped to the actual amount of tax withheld
and the extent of delay in payment of tax from the due date.

Settled
principles on interest under fiscal legislations

The well-settled principles of interest
under fiscal legislations have been summarised for guidance while interpreting
the GST scheme:

i. Interest
provisions are part of the substantive law of the fiscal statute and cannot be
imposed by implication. The statute should specifically provide for the
circumstances leading to the imposition of interest.

ii. Imposition
of interest is mandatory in nature and with no scope for any discretion.

iii. Reason
for delay (intentional/ unintentional etc.) in payment of tax is irrelevant
while deciding the imposition.

iv. Interest
should be calculated as per the law prevailing for the period under
consideration.

v. Interest
need not be quantified in the assessment order.

vi. Interest
can be waived only by specific statutory provisions (say VCES scheme, etc).

vii. Interest
would be applicable even if there is an interim stay of recovery by any Court.

viii. Interest
cannot be demanded where the tax recovery itself has become time barred.

Overview
of provisions of interest under GST Law

The provisions of interest under the GST
laws can be categorised as follows – (a) interest on demands; and (b) interest
on refunds. Any interest computation is based on three variables and the GST
law is no different:

(a) Principal
– Tax unpaid

(b) Time
period – Period commencing from due date of tax payment to date of actual
payment

A) Interest
on tax demands

Interest provisions are contained in
Chapter-X : Payment of tax. The circumstances under which interest is
applicable under GST law are:

i. General
Provision – Interest on delayed/ short payment of tax

Section 50(1) applies when a person fails
to pay the tax or any part thereof within the prescribed period. Interest would
be calculated on the principal (being the tax involved) at the rate notified by
the Government, not exceeding 18% per annum (N-13/2017 –Central Tax dt.
28.06.2017 prescribes a rate of 18% p.a). The delta of the following dates is
used for the determination of the time period for which interest applies:

(a) Due date for payment of tax (section 39):
Section 39 provides that tax shall be paid as per the monthly return within the
due date for the said return. Rule 61 requires that every registered person is
required to furnish the monthly return in form GSTR-3 by 20^th of the
succeeding calendar month. The said rule inserted an additional return in Form
GSTR-3B w.e.f. 27.07.2017 in cases where the due date of filing GSTR-3 has been
extended. Notifications have been issued from time to time prescribing the due
date of GSTR-3B as the 20^th day following the relevant tax period.
The said notification also contains a clause that requires the assessee to
discharge its liability of tax, interest and penalty within the due date for
GSTR-3B.

(b) Date of payment of tax (section 49): Tax
liabilities (either self-assessed or otherwise) of a taxable person are
recorded in the electronic liabilities ledger (ELL) of the taxable person on
filing the return. Section 49 provides
for depositing amounts in Government accounts under various heads (major and
minor heads) which would be reported in the electronic cash ledger (ECL). The
amounts available in the electronic cash ledger or electronic credit ledger
(ECrL) would be debited and adjusted towards the outstanding liabilities in the
ELL. Section 49(7) & (8) states that the taxes of a tax period would be discharged
in a particular manner.

Therefore, the due date for payment of
taxes is sought to be fixed by the notification as 20^th of the
succeeding calendar month. Prima-facie, any delay in payment of taxes
after this date would involve payment of interest @ 18% p.a. The assessee would
have to follow the system of reporting the taxes on the GSTN portal and then
discharge its liabilities in the ledger by filing the due return. This position
is subject to further discussion of the interplay between GSTR-3 and GSTR-3B
explained later.

ii. Interest
on undue or excess claim of input tax credit or reduction of output tax

Similarly, section 50(1) also provides for
interest in cases of an undue or excess claim of input tax credit u/s. 42(8) or
an undue or excess reduction in output tax u/s. 43(8).

– Section 42 applies where GSTR-2
(statement of inward supplies) generates a mismatch report on account of
duplication, incorrect data, etc. amounting to excess claim of input tax
credit. Section 42(8) levies interest on the amount so added from the month of
availment of credit till the corresponding addition is made in the return.

– On similar lines, section 43 applies
where the GSTR – 1 (statement of outward supplies) generates
a mismatch report on account of duplication, incorrect data, etc. in
credit notes claimed towards reduction of turnover. Section 43(8) levies
interest from the date of claim of reduction till the corresponding addition is
made in the return.

Time frame for matching – Rule 69 of the
CGST rules provides for matching of the input tax credit claims by the
Government. The said rules do not provide for an outer limit within which input
tax credit matching should be performed by the Government, though it empowers
the Commissioner to extend the date of matching in cases where the filing of
GSTR-1 and 2 are extended. Rule 71 states that the mismatch report would be
communicated to the tax payers on or before the last date of the month in which
the matching is carried out.

The said provisions were originally
intended at matching of input tax credit claims/ output tax reductions by the
end of the calendar month in which returns were filed which effectively
resulted in interest on the mismatch for a period of 1 month, in case of
duplicate claims, and 2 months in the case of erroneous claims. GSTN is yet to
conduct the matching of GSTR-2 and 2A. To the knowledge of the author, none of
the Commissioners have exercised this power of extension on the presumption
that matching is the prerogative of GST Council. In view of the decision of the
GST council to defer matching, this reporting of mismatch has not taken place yet.

While discussions over the mechanism of
matching of input tax credit claims are underway in the GST council meetings,
it is evident that this would be undertaken sooner or later[1]. In the
recently concluded GST Council Meeting, it has been decided that a single
return would be formed for GST compliance with the matching being performed at
the backend. The said return is announced to be operationalised on the GST
portal within 6 months.

Until then, it unfortunately implies that
a mismatch would be recoverable from the recipient and interest provisions
would be invoked for a period more than what was originally envisaged. To add
to this, the supplier may not be in a position to even rectify the mismatch
identified by the GSTN since the same may be beyond the month of September of
the following financial year. The tax
payer may have to bear the brunt of interest for delays attributable to the
Government/ GSTN which may extend to more than one year (one should consider
filing a counter claim from GSTN for such delay!).

iii. Interest
on provisional assessment

Section 60 provides for provisional
assessment in cases where tax is not determinable by the tax payer/ assessing
authority. Section 60(4) imposes interest in respect of any additional tax
payable on closure of such assessment from its original due date to the actual
date of payment of tax, irrespective of the date of conclusion of the
provisional assessment. This issue has experienced intensive litigation under
the Excise law right upto the Supreme Court. With specific provisions under the
GST law, it seems clear that interest liability has to be determined from the
original due date and not from closure of provisional assessment.

iv. Waiver
of interest in case of incorrect classification of supply

Section 77(2) r/w 73/74 of the CGST law
implicitly provides for fresh payment of the appropriate tax in cases where a
taxable person has incorrectly classified an ‘intra-state supply’ as an ‘inter
state supply’. Conversely, IGST law would also be read in a similar manner in
view of section 20 of the said law. However, the section waives the interest
liability on account of the delay in payment of the appropriate tax. This is on
the premise that the tax payer has made the tax payment, albeit under an
incorrect tax type and should not be saddled with an interest liability. This
is the only provision under the statute which waives interest liability on
account of delayed payment of taxes.

v. Other
cases of interest recovery

Other provisions of interest are as follows:

– Reversal of input tax credit where the payment
of the inward supplies has not been made within 180 days from the date of issue
of invoice: interest is applicable from the date of availment of input tax
credit to the payment by way of reversal/ addition to output liability.

– Recovery of irregular input tax credit
distributed by the Input Service Distributor to its recipients : recovery of
tax and interest would be from the recipient of the ISD credit in terms of
sections 73 and 74 of the GST law.

– ITC reversals in respect of any exempted/
non-taxable activity is provisionally arrived at on a monthly basis and finally
adjusted at the year-end at an aggregate level : interest is applicable from 1^st
April following the end of the financial year till the date of payment/
reversal of such excess credit.

– Inputs or capital goods which are supplied to a
job worker without payment of tax and either not returned or supplied therefrom
within 1 year/ 3 years respectively – interest is applicable from the month in
which such goods were original removed to the date of actual payment.

– Rectification of any under-reporting of tax in
view of an omission/ error in any subsequent return (section 39(9)) is liable
for interest.

– Failure/ delay on the part of the deductor to
deposit the taxes deducted to the Government within the prescribed date is
liable for interest in the hands of the deductor.

– Rectification of any under-reporting and taxes
collected at source by an e-commerce operator is subject to interest.

– Interest is applicable in cases where payment
of tax is permitted to be made on instalment basis in terms of section 80.

– Amount demanded by an anti-profiteering body in
cases where the benefit of taxes have not been duly passed on would also be
subject to interest provisions.

– As an exception to the general rule of tax
liability, section 13(6) and 14(6) defers the time of supply in cases where the
value/consideration of a service is enhanced due to inclusion of interest, late
fee or penalty as part of the value of supply in terms of section 15(2)(d).
Consequently, the start point of calculation of interest stands deferred to the
date of its receipt.

– Interest on taxes short paid or not paid are
liable for recovery whether or not the same is stated or quantified in the show
cause notice or assessment order

– Interest computed under the GST law should be
rounded off to the nearest rupee

B) Interest
on delayed refunds due to an applicant

Section 56 grants interest on refunds due
to the applicant if the same has not been paid within sixty days from the date
of refund application. Interest is applicable from the expiry of sixty days to
the date of actual refund at the rate presently notified at 6% p.a.

In cases where the refund is ordered by an
adjudicating authority, appellate authority, court, etc. the assessee is
entitled to an interest of 9% p.a. for the aforesaid period. It also applies to cases where the refund
sanctioning authority orders refund in its order but fails to issue the refund
cheque to the applicant along with the refund order. For the purpose of
computation of interest of 9% p.a., the period has to be reckoned from the date
of application filed consequent to the said order. In cases of appellate
relief, interest would be applicable from the date of payment of the taxes
against the aggrieved order and not from the date of the appellate order
(section 115).

In context of availing refund for
zero-rated supplies u/s. 54, an applicant is not entitled to claim interest in
case the authority fails to grant the provisional refund of 90% (Rule 91 of the CGST
Rules) of the claim of refund of input tax credit.

In the context of section 77 (incorrect
classification of supply), though there is a waiver for interest on delay in
payment of the correct tax type, there is no bar on claiming the interest on
refund of the incorrect taxes paid in cases of any delay in granting such
refund.

Issues
in determination of interest

i. What
is the actual due date of payment of tax? In other words, by deferring the due
date of GSTR-3, has the Government also inadvertently deferred the due date of
payment of tax?

Section 39(7) states that self-assessed
taxes are required to be paid within the due date of filing the return. The GST
scheme originally envisaged the filing of the return in GSTR-3 on a monthly
basis by 20^th of the succeeding month. The Government has however
made multiple changes in the return filing procedures in order to address the
technical challenges in the GSTN portal. GSTR-3B was introduced as an
additional return until the portal was sufficiently equipped for filing GSTR-3[2]. A question arises on whether the due date of
return/ payment of tax should be understood as per the due date prescribed for GSTR-3B or GSTR-3? We may look at the said provisions in detail.

Section 39(1) requires a return to be
filed on a calendar month basis by 20^th of the succeeding month –
the return referred to in section 39(1) is a return of outward/ inward
supplies, input tax credit availed/reversed, tax payable/ paid and other
prescribed particulars. Strictly speaking, GSTR-3B is only an additional return
(recording summary figures) to that originally envisaged u/s. 39(1). As the law stands today, tax payers would
eventually have to file the monthly return in Form GSTR-3.

Can one take a stand that the due date
prescribed for tax payment is vis-à-vis the due date of GSTR-3 and not
GSTR-3B? The thrust of this stand hinges on whether GSTR-3 or 3B is the
‘return’ referred to in section
39(1)/ (7). The arguments in favour of GSTR-3 may be as follows:

– GSTR-1, 2 are statements which are
auto-populated in the monthly return in form GSTR 3 and should be considered as
part of GSTR-3 itself (Instruction 2 & 4 of form GSTR-3). Section 39(1)
refers to a return of inward and outward supplies with other details such as
input tax credit availed, reversed etc. The said section thus envisages
a return detailing the inward and outward supplies and not merely a form
reporting aggregate amounts i.e. GSTR-3.

[1] State officers in
some states have started issuing scrutiny notices for verification of input tax
credit claims by exercising powers u/s. 61.

– Strictly speaking, GSTR-3B is not a return
of inward or outward supplies – attention should be placed on the
preposition ‘of’ which means that the return should be that which records
outward and inward supplies and not merely the turnover at an aggregate level.

– The instructions in GSTR-3 and GSTR-3B conveys
that ECL, ECrl and ELL are updated only on filing the GSTR-3 and not GSTR-3B
(contrary to the functionalities of the GSTN portal) – legally speaking,
GSTR-3B is not a valid document to update the ELL/ ECrL and should not be
considered as the return u/s. 39(1) & (7).

– Section 39 refers to ‘a’ return to be filed for
every calendar month i.e. a singular return. The rules seem to extend beyond
the requirement of a singular return for every calendar month since the filing
of GSTR-3B does not dispense with the requirement of filing GSTR 3. Therefore, GSTR-3B is a document which is
clearly not envisaged in section 39.

– GSTR-3B does not displace GSTR-3 as a return
for inward or outward supplies. The returns seem to parallelly exist and this
requirement exceeds the mandate of section 39(1) of filing a singular
return.

– GSTR-3B can at most be considered as a
provisional document subject to the final return in form GSTR-3. The entries in
the electronic ledgers are merely provisional entries to tide over the
difficulties posed by the common portal until GSTR-3 is fully functional.

– CBEC circular (No. 7/7/2017-GST dt. 01.09.2017)
clarified that any error in GSTR-3B could be rectified while filing GSTR-1/2
and 3. GSTR-3 certainly enjoys a superior status compared to GSTR-3B, and being
so, the due date should be understood with reference to the said document and
not from an inferior document.

– Form GSTR-3, 4, etc. are titled ‘Return’
whereas GSTR-3B does not hone such a title.

– As it is well settled, where there are two
interpretations of law, the one which is beneficial to the tax payer should be
adopted.

Based on the above arguments, one may take
a view that the extension of GSTR-3 has also lead to the extension of the due
date of payment of tax.

However, the said contention may fail if
one applies the purposive interpretation as against a literal interpretation of
law. The intention behind introduction of GSTR-3B was to facilitate the
Government to collect taxes on a monthly basis and overcome the technical
glitches in the common portal. Rule 61(5) term GSTR-3B as a ‘return’ to be
filed in cases where GSTR 3 is extended in special circumstances (also refer Circular
7/7/2017-GST dt. 01.09.2017 & Circular 26/26/2017-GST dt. 29.12.2017). The Circular mentions that any rectification
subsequent to filing the GSTR-3B should be accompanied by interest on delayed
payment, if any. The notification
prescribing due dates of GSTR-3B also requires the tax payer to discharge its
taxes, interest and penalty within the said due dates. Further, Government(s) would be deprived of
its revenue, if taxes are not paid in a timely manner. The taxes which are collected by suppliers
are in the capacity of an agent of the Government and the Government never
intended the tax payer to collect taxes from the consumers and retain this sum
without any outer time limit.

If the amounts are substantial, this would
certainly be a heated issue between the tax payer and the department and
warrant a resolution by the Courts.

ii. Whether
balance available in respective ECL / ECrL can be reduced for ascertaining
taxes unpaid? As a corollary, whether interest is applicable if utilisation
through the return filing mechanism is not undertaken on the common portal?

The overall scheme of reporting and
payment may give pointers on this question.
Section 40 provides for a mechanism of reporting liabilities and payment
of tax through electronic ledgers. Three ledgers have been designed for this
purpose: ECL, ECrl & ELL. The said ledgers have been created separately for
each enactment and cross movement of cash/ funds is not permitted except
through the cross credit utilisation mechanism in section 49(5) of CGST/ SGST
law and 18 of IGST law:

– ECL: Credited with bank remittances and used
for payment of tax, interest, penalties, fees.

– ECrL : Credited with self-assessed input tax
credits and used for payment of tax.

– ELL : Credited with return related and
non-related liabilities and is debited with payments from ECL / ECrL. This ledger is updated only after filing the
statutory return (currently GSTR-3B).

Discharge of tax dues under the GST law
involves a two-step mechanism – (a) a bank payment (involving flow of funds)
into the cash ledgers and (b) an accounting adjustment (an appropriation of
such funds). There have been many
instances where assesse has sufficient ECL/ ECrL balance to set-off the ELL but
has failed to file the GSTR-3B for one reason or another, due to which the
utilisation or discharge of liabilities reported/ due to be reported in the ELL
has not taken place.

In such cases, an issue arises whether
interest is applicable on failure to discharge the ELL / non-filing of return
even-though the tax payer has paid the amounts into Government coffers? Has the law made a distinction between
payment of taxes and discharge of tax liability? Are they co-terminus or independent actions
to be performed by the tax payer?
Whether the double entry accounting adjustment on filing the return
would have any revenue impact for Government?
These questions would certainly come up to address the question of
interest applicability.

While logically, there seems to be no doubt
that the benefit of funds available in ECL/ ECrL should be given to the tax
payer and non-filing of returns should not entail any interest liability, one
should also give cognisance to the literal interpretation of the Statute.

Literal interpretation

Section 60(1) terms the credit into the
ECL as a deposit towards tax, interest, penalty, fee or any other sum
dues. Section 60(3) states that ECL may
be used for payment of tax under the Act. Section 60(7) & 60(8) provide
that all liabilities would be recorded in the ELL and discharged in a
prescribed manner. Rule 85(3) states that all liabilities would be paid by
debiting the ECL/ ECrL as permissible.

ECL in form PMT-05 maintains separate
account heads – minor head (such as Tax, interest, penalty, etc.) under
each tax type – major head (CGST/ SGST/ IGST) for deposits made into such
account. The law does not permit cross transfer of amounts reported in one
account major/ minor head into other account heads.

If one examines the GSTN portal, filing of
GSTR-3B creates a credit entry in the ELL and a simultaneous debit in the ECL/
ECrL as the case may be, as discharge of taxes. The tax dues are said to be
discharged on filing the returns and corresponding utilisation of ECL / ECrL. Therefore, interest seems to be prima-facie
applicable from the due date to the actual date of filing the return.

In the view of the author, even if the
returns are not filed, deposits into the Government accounts should be
considered as payment of tax dues and benefit of such credits be granted for
ascertainment of the taxes unpaid u/s. 50(1). Following arguments can be taken
in support of this stand:

– Section 50 (1) states that interest is
applicable on failure to pay the tax dues.
The failure is with reference to the tax payment and not with reference
to utilisation of the ECL with the ELL (referred to as discharge of tax
liability).

– Section 39(7) requires the assessee to pay the
taxes due as per such return before the due date of filing the return, i.e. the
act of payment should be one which can be performed ‘before’ filing the
return. As stated above, the book
adjustment (credit in ECL and debit in ECrL) takes place only after filing the
return (refer instructions of form GSTR-3). Therefore, payment of taxes is distinct
from discharge of taxes.

– Moreover, the IT framework does not allow one
to file a return unless sufficient balance is available in the appropriate
ledgers. This implies that payment of taxes precedes the adjustment in
ELL. Hence, bank payment in ECL should
be considered as a ‘payment’ u/s. 39(7).

– Principally, interest is collected to
compensate the Government of its rightful revenue. Amounts credited to ECL are
funds received into respective Government accounts and it is free to utilise
this revenue for its functioning.

– The amounts lying in the ECL are not under the
control of the assessee. One has to necessarily follow the procedures
prescribed in GSTR-3B/3 to claim the refund of any excess balance, implying
that the funds are available with the Government.

– Provisions of refund provide for interest @ 6%
if the Government delays in refund of the excess ECL balance also implying that
these funds are being used by the Government and under its control.

– Amounts lying in ECL are akin to amounts lying
in PLA under Excise laws. Where a
manufacturer delays in filing its excise return or carries excess balance in
its PLA, it was considered as amounts paid under the Excise law.

– Similarly, amounts lying in ECrL represents
credit eligible to the assessee – Courts have held that input tax credit
permissible under law is as good as taxes paid.
Though an assessee may not have filed the returns, the liability of such
assessee for a tax period would have to be computed after deduction of amounts
lying in ECrL.

In view of this, one can take a stand that
the Government has not incurred any loss of revenue and hence interest should
not apply where sufficient amounts are lying in the ECL/ ECrL. The CBEC Circular No. 7/7/2017 (supra)
on the contrary states in para 11 & 12 that interest is applicable till the
date of debit in the ECL/ ECrL; i.e. until the return is filed and the
corresponding utilisation in the respective ledgers takes place.

Inter-Government Account Settlement

The flow of funds
between Government accounts are an important factor to ascertain whether the
rightful Government is enjoying funds.
The settlement of accounts of Governments takes place at the back-end
based on the returns filed by the tax payers.
‘Place of supply’ reported in the tax invoices identifies the Government
which is entitled to the revenue in an outward supply. However, these details can be ascertained by
the Government only when accurate and complete returns are filed in GSTR-1, 2
& 3.

Transfer of funds on cross utilisation of
input tax credit and settlement of accounts by the Governments are covered u/s.
53 of the respective CGST/ SGST Acts and Chapter VIII of the IGST Act
(comprising of section 17 and 18). The
settlement of accounts between Governments can be categorised in two broad
types:

a) Input
tax credit Settlement

– Section 53 of the respective CGST/SGST Acts
provide that on utilisation of the credit of CGST/ SGST for payment of IGST,
corresponding amounts would be transferred from the Central Government/ State
Government account to the IGST account.

– Section 18 of the IGST Act provides that on
utilisation of the credit of IGST for payment of CGST/ SGST, corresponding
amounts would be transferred by the Central Government to the Central
Government / State Government account.

– Section 53 and 18 above, convey that cross
utilisation of credits lead to a transfer of funds between Government accounts
in the back end and the Government granting the set-off towards input tax
credit receive its share of revenue. The
section also states that this cross utilisation takes place only at the time of
filing the return and to the extent of the amounts are reported in the
return. Where a return is not filed or
the return filed is erroneous, the cross utilisation to the extent of the error
would not take place and the rightful Government would not receive this
revenue.

b) Cash
Settlement

– Cash payments in the ECL takes place through
electronically generated challan in PMT 06.
Major heads represents each statute under which the collection is being
made and funds cannot be cross-transferred to other major heads; Minor heads
represents the folios under which collection is being made (such as tax,
penalty, interest, etc.) and merely an accounting head of the respective
Government.

– CGST/ SGST-ECL ledgers represents funds
received by the respective Government and hence no further adjustment or
transfers are required. The funds in the ECL can be used for any payment including
tax, interest and penalties.

– IGST-ECL ledger represents the amounts
collected by the Central Government and due to both Central Government and
State Governments as per prescribed formula. Section 17 of the IGST Act
provides for a mechanism of apportionment of IGST collected and settlement of
accounts.

Legally speaking, revenues would accrue to
the State only once the return is filed and the appropriate utilisations are
made in the ECL/ ECrL and ELL. In case
this is not done, revenues would remain un-appropriated and fall into an
apportionment formula. To this extent,
there is every possibility that the Government has not received its rightful
share of revenue. Governments may then
claim that on account of an incorrect return or an omission of filing a correct
return, it has been deprived of the rightful revenue. In that sense, the issue
is not really of the amount being paid and only offset entry not done.

During the last one year, there have been
multiple cases where amount were lying in the ECL/ ECrL, but the assessee was
unable to file the return or failed to file the return within the due date, due
to which the appropriate utilisations could not be made at the back-end by the
Government(s). A matrix of various possibilities has been tabulated and the
compensatory nature of interest can be put to test based on the interpretation
that unless the Government is deprived of funds, interest should not apply.

Sl
No.

Scenarios

ECL

ECrL

ELL

Funds
held by

Funds
due
to

Interest

Major
heads : I/C/S

Sufficient Input Balance
(without considering cross utilisation)

I –
NIL

C –
NIL

S –
NIL

I –
100

C –
100

S –
100

I –
100

C –
100

S –
100

Respective Govts.

NIL

Sufficient Input Balance
(considering cross utilisation)

I –
NIL

C –
NIL

S –
NIL

I –
300

C –
NIL

S –
NIL

I –
100

C –
100

S –
100

Central Govt.

State Govt.

May apply to the extent of
SGST component (sec. 53) since no ITC settlement in favour of State Govt.

-do-

I –
NIL

C –
NIL

S –
NIL

I –
NIL

C –
200

S –
100

I –
100

C –
100

S –
100

Central Govt.

Should not apply since no
loss of revenue to Govt.

-do-

I –
NIL

C –
NIL

S –
NIL

I –
NIL

C –
100

S –
200

I –
100

C –
100

S –
100

State Govt.

Central Govt.

May apply to the extent of
IGST component since no ITC settlement in favour Central Govt.

Sufficient Cash Balance

I –
50

C –
50

S –
50

I –
50

C –
50

S –
50

I –
100

C –
100

S –
100

Respective Govts.

NIL

Sufficient Cash Balance (but
different major head of same Government)

I –
100

C –
NIL

S –
50

I –
50

C –
50

S –
50

I –
100

C –
100

S –
100

Central Govt.

Should not apply since no
loss of revenue to Central Govt.

Sufficient Cash Balance (but
different Government)

I –
NIL

C –
50

S –
100

I –
50

C –
50

S –
50

I –
100

C –
100

S –
100

State Govt.

Central Govt.

May apply to extent of IGST
component since no ITC settlement in favour of Central Govt.

Cash Balance (but different
major head of same Government)

I –
150

C – NIL

S –
50

I –
50

C –
NIL

S –
50

I –
100

C –
100

S –
100

Central Govt.

Should not apply since same
Govt.

Sufficient Cash Balance (but
different Government)

I –
150

C –
50

S –
NIL

I –
50

C –
50

S –
NIL

I –
100

C –
100

S –
100

Central Govt.

State Govt.

Will apply on 50 SGST being
unpaid balance. May apply to the
extent of 50 SGST component since no ITC settlement in favour of State Govt.

In certain cases, interest becomes
applicable and in certain cases, interest should not apply on the fundamental
principle of being compensatory in nature. The above table depicts the
conundrum which one would face if they have to convince a Court that interest
is not applicable per compensatory principles. Though an argument can certainly
be taken that the assesse should not be saddled with an interest merely because
Governments have not settled their accounts internally.

iii. Whether
blocked/ ineligible credit claimed in ECrL and remaining unutilised is subject
to interest at the time of its recovery?

Sections 16, 17 and 18 provide for the
mechanism for granting the benefit of input tax credit to an assessee. Input tax credit eligible under these
sections can be availed by reporting the same in GSTR-2 (currently in GSTR-3B)
and these amounts are credited in the ECrL for further utilisation u/s. 49(4)/
49(5). Under the input tax credit
scheme, eligibility, availment and utilisation have distinct meanings:
Eligibility addresses the qualification of an amount to be termed as input tax
credit; availment involves recording these eligible amounts in ECrL as input
tax credit and utilisation involves making tax payments by way of adjustment
with the output tax liability. Eligibility precedes availment and availment
precedes utilisation.

Section 73 and 74 provide for recovery of
input tax credit erroneously availed or utilised by the assessee. The said section empowers tax officers to
recover the input tax credit at the stage of availment itself and the assessing
officer need not wait for the assessee to utilise the said input tax
credit. Financially speaking, there is
no outflow of revenue from the Government when the assessee avails input tax
credit in its returns. The flow of funds only takes place when the said amounts
are utilised from the said ledger for discharge of liabilities recorded in the
ELL (refer discussion above). The question thus arises on whether interest is
applicable on incorrect availment of input tax credit?

Similar instances came up under the Cenvat
Credit regime. Rule 14 of the Cenvat
Credit Rules (as existed during the period up to 2012) contained a provision
for recovery of Cenvat availed ‘or’ utilised. The Supreme Court in Union of
India vs. Ind-Swift Laboratories ltd 2011 (265) ELT (3) SC held that
revenue is permitted to recover the unutilised Cenvat at the stage of availment
itself. It also held that revenue can impose interest in case of incorrect
availment of Cenvat even though such amounts have not been utilised by the
assessee. However, the High Court of Karnataka and Andhra Pradesh have held to
the contrary in spite of the decision of the Supreme Court. Subsequently, the
law was amended in 2012 to recover Cenvat and interest only after utilisation
of such Cenvat Credit.

In the context of GST, section 73 and 74
direct recovery of Input tax credit at the stage of availment but interest is
applicable in terms of section 50(1). A
question arises on whether availment of input tax credit in ECrL results in
failure of payment of tax to the Government?

Input tax credit is a claim by the
assessee from the Government for taxes in respect of taxes paid to the
supplier. From a recipient’s perspective, it represents amounts due ‘from’ the
Government rather than due ‘to’ the Government.
If this claim is rejected prior to its utilisation, there is no revenue
loss and hence it cannot be said that taxes are ‘unpaid’ to the
Government.

Section 49(4) also states that amounts
lying in the ECrL may be used for payment of taxes. The utilisation of input
tax credit is an option to the tax payer and if the tax payer does not utilise
this amount, it continues as a balance but does not result in ‘taxes unpaid’.
Though recovery provisions may be initiated for incorrectly availed input tax
credit, interest on such incorrect availment cannot be imposed.

From the point of view of settlement and
flow of funds, sections 53 of the CGST/ SGST law and 18 of IGST law require
payment of funds from Centre to State or vice-versa only when the cross
utilisation takes place from the ECrL to the ELL. Until such time the
Government in whose name the Credit stands retains the funds. On these grounds, one can take a stand that
interest is not imposable on incorrect availment if the same is not
utilised.

iv. Whether
interest applicable on payment made through ECrL but later credit held to be
wrongly availed (say blocked credit)?

Section 50 uses the phrase ‘tax unpaid’. This is different from input tax credit
wrongly availed and/or utilised. Though
mathematically speaking, a wrong input tax credit claim results in short
payment of taxes, recovery of short payment of taxes is different from recovery
of erroneous availment and utilisation of input tax credit. To cite an example : short payment of taxes
are cases of under-valuation or lower rate, etc where the error is on the
calculation of output taxes while recovery of input tax credit takes place in
case of an error on the inward supplies to an assessee. This distinction is
highlighted in view of separate phraseology for recovery of input tax credit
wrongly availed and utilised and for short payment of taxes in section 73 and
74. Explanation to section 132 specifically
clarifies that taxes unpaid also includes input tax credit wrongly
availed or utilised. However, the said explanation has been made applicable
only section 132 and not section 50.

Under the Cenvat Credit regime, Rule 14 of
the Rules, made specific provisions for recovery of input tax credit wrongly
availed or refunded. Rule 14(ii) specifically enabled the tax authorities to
recover interest under the Excise/ Service tax law. Section 50 of the GST does
not seem to capture this situation and the recovery of interest in such
scenarios can certainly be challenged by the assessee.

v. Whether
interest is applicable on early claim of input tax credit?

The above analogy would apply in such
cases and interest is not recoverable from the assessee. It may also be
interesting to note that in terms of second proviso to section 16(2), where an
assessee fails to make a payment on inward supplies within 180 days of the date
of invoice, the assessee is specifically required to repay the input tax credit
along with interest. The specific
mention of recovery of interest in such cases makes it clear that section 50
does not capture cases of erroneous input tax credit claims.

vi. How
is interest to be computed in cases of mismatch?

Section 50(1) and (3) provides for imposition of interest in cases where
mismatch reports are generated. Mismatch could arise under various
circumstances:

– Non-reporting of invoice by supplier itself
resulting in short payment of taxes.

– Erroneous reporting of invoice (incorrect
details) by supplier but taxes have been paid (wholly or partly in cases where
value is short reported).

– Duplicate reporting of invoice by recipient.

There seems to emerge some confusion while
reading the provisions of section 42/43 (mismatch reports) and section 50(1)
and 50(3). Section 42/43 provide a tax
payer a minimum of two attempts to claim input tax credit in its return – in
case of an error in the first attempt, the tax payer would be liable for
interest @ 18% for the period of 2 months.
However, if there is an error in the second or any subsequent attempt,
the tax payer would be liable for interest @ 24%.

In such cases, interest is imposed for the
period during which the mismatch continued. It is interesting to note that
interest is imposed on the recipient right from the date of availment even
though taxes are paid along with interest at supplier’s end (wherever
applicable). There may be instances where the liability of interest is thrust
upon the recipient even for delays or errors on the part of the supplier. While
it is just to claim interest in case of duplicate reporting of an invoice, in
other cases, the Government seems to be receiving the interest from both sides
of the transaction.

vii. Whether
transition credit claimed but later reversed through GSTR3B/GSTR-3 liable for
interest?

In the view of the author, though
transition credit is directly credited to the ECrL from the Transition returns,
the answer to this question would remain the same. Interest would not apply till the time the same
has been utilised from the ECrL based on the principles of compensatory
levy. Even in cases where the said
amount has been utilised, interest would not apply in the absence of a specific
provision of recovery of interest u/s. 50 on irregular input tax credit.

An issue also arises whether incorrect
carry forward of transition credit also entails interest under the erstwhile
laws. The savings clause u/s. 174 places the liability of interest on such sums
until the recovery of such incorrect credit. However, the said provisions are
subject to any specific provision under the GST law. GST law does not contain
any specific provision for recovery of interest for incorrect credits in the
ECrL directly.

Therefore, interest may be liable to be
paid under the erstwhile laws on account of the saving provisions, no further
interest should be recovered under the GST law.
One may take a stand that where the recovery provisions are invoked
under the earlier law and sums due to the Government have been paid with interest
till date, the credit brought forward in the GST law should not be disturbed,
else it would result in double jeopardy to the tax payer.

In summary, it
seems evident that the front end portal, back-end settlement mechanism and the
GST laws are at divergence in many instances.
A simple concept of interest will surely throw up unexpected challenges
and we are entering an era where calculation of interest is turning into an
subject by itself. This primarily arises due to the hybrid GST mechanism of bringing
all the States on a common platform.

It is important for the GST Council to
identify all possible permutations to ensure that interest is paid to the right
Government and should be equipped to answer questions on accountability &
propriety of Government funds. At 18%, the stakes are certainly going to be
high for the tax payer as well as the Government!!!

shailesh.kwebmaker

GST @ 1: TAXPAYER REACTIONS

GST was launched with much
fanfare at the midnight of 30^thJune 2017. Touted as the most
important tax reform since independence, the same immediately met with extreme
reactions on both sides. Some course corrections were also carried out in terms
of reduction in tax rates, extension of due dates, filings, suspension of many
of the complex provisions in the law and the like.

Nearly a year since its’
implementation, GST continues to be the talk of the town. Last week, I met a
friend and in casual discussions, I could sense an element of frustration. When
I asked for the reasons, he explained that the deluge of due dates, to a large
extent sponsored by GST, just keep him super-busy and the compliance costs had
increased drastically. During the discussions, another friend joined in and he
had a diametrically opposite version to offer. He was very happy with the
introduction of GST and saw it as an opportunity to streamline his business
processes.

These diametrically opposite
versions, coinciding with the anniversary of GST prompted BCAS to conduct a
survey on the taxpayers’ reactions towards the implementation of GST. The
BCAS survey on GST included a cross section of industry verticals with
constituents of differing scale and complexity of operations. This article
summarises the key takeaways from the said survey. To ensure
confidentiality, as requested by many of the participants, the names are
avoided in this article and reference to the position and industry is provided.

Whether introduction of GST was a step in the right
direction?

The rollback of GST in Malaysia
was the backdrop of the above question in the survey. Surprisingly, not a
single participant responded in the negative. The jury was unanimous. The
country was fed up with a plethora of indirect taxes like sales tax, VAT,
excise duty, service tax, CST, octroi, etc. Therefore, the dual levy of GST,
implemented in a unified manner was hailed by all the participants. To quote
the response of the Global Tax Manager at a large software exports company,
“This kind of reform under Indirect Taxes was the need of the hour I
congratulate the policy makers for that.”

Has GST resulted in ease of doing business?

To the next question on
analysing the impact of GST on the ease of doing business, the mood amongst the
participants was that of cautious optimism. While most of the participants felt
that there was an improvement in the ease of doing business, they felt that the
extent of improvement could have been better. Perhaps the initial teething
troubles resulted in this hesitation in response. The response of the AVP-GST
at a large diversified listed company summarises this mood well, “Over a period
of time once streamlined then it (the ease of doing business) will improve.”

Has GST resulted in reduction of product costs and
prices?

On the question of the impact
of GST on product costs and pricing, again the jury’s view generally was that the costs have reduced due
to lower cascading of taxes and free flow of input tax credit. However, certain
sectors did see an increase in costs due to working capital blockages and
related issues. To quote the response of the Finance Controller at a midsized
pharmaceutical manufacturer, “Working capital requirements have increased and
funds are blocked due to procedure and timelines of refunds for exporters.”

Is the GST tax rate optimal?

Again, most of the
participants were comfortable with the rate of tax and to that extent the
response was not surprising. An astutely managed fitment of rates coupled with
a course correction of rate on many items kept most of the people happy.
However, some pockets were affected. The tax manager at a large public sector
bank responded “W.r.t. Banking sector, GST has really not resulted in cost
efficiencies. In fact tax outgo has
increased. Further, w.r.t. banking services, the GST rate could have been lower”.
Similarly, the Finance Controller at the pharmaceutical manufacturer felt that
instances of inverted rate structure could have been avoided.

Has GST resulted in increase in compliance costs?

On the question of increase in
compliance costs, the general response was that GST did result in increase in
compliance costs. The transaction level uploading and multiple return
obligations perhaps resulted in such increase in costs. The increase in
compliance costs was more felt by small and mid sized organisations. To quote
from the response of the AGM of a small diamond assortment company, “Yes, the
number of returns and details to be provided in return is considerably
increased resulting in additional costs.”

Does the structure of dual GST present an inherent
risk of divergence?

The multiplicity of enactments
and the autonomy provided by the Constitution to both the Centre as well as the
State prompted this question. As of now, all seems well. However, what would
happen once the period of assured compensation for revenue loss is over? Will
some States digress from the uniform GST Structure? In response to this
question, most of the participants felt that a reasonable political consensus
has been achieved on the front of GST and there should really be no reasons to
worry. However, the response of the AVP at a large diversified listed company
was different, “I fear risks in consensus between Centre and States going
forward once there is a coalition based Central Govt.”

Is the allocation of administrative jurisdiction
between Centre and States fair?

The dual GST structure with
allocation of tax administration between the Centre and the State Authorities
has been a unique experiment in the Indian context. In response to a question
in this regard, most participants could not respond since they did not have
first hand experience of interaction with the respective jurisdictions.
However, the response from the public sector bank suggested some discontent on
this front, “Assessees seem to be allocated between Centre and State
Authorities in a random manner. Proper communication has also not been sent
which has led to confusion among assessees.”

Are there challenges in the legal provisions
pertaining to GST?

In various technical sessions,
it is highlighted that the legal provisions of GST present inherent conflict
and could result in litigations. The spate of litigations in the High Courts
and the advance rulings revalidate this aspect. Interestingly, the responses of
the industry on this front appeared to be much more forgiving.

The industry seems to have
reconciled to the expanded definition of supply and taxation of branch
transfers. The General Manager at a large cement manufacturing company
summarises the response, “Earlier also Excise Duty was paid but it was a cost.”
In fact, the Global Tax Manager at a large software exports company sees this
provision as a positive provision. In response to a pointed question on whether
there are difficulties on account of this extended definition of supply, he
responded, “In fact its otherwise the tax on branch transfer allows the credit
chain to remain intact.” GST is an interesting tax, people want to pay the tax!

One common resentment on the
legal provisions pertained to taxation of advances. It was unanimously
criticised by most of the participants. Luckily as a part of course correction,
tax on advances pertaining to supply of goods was kept in abeyance. This
presents another set of challenges. To quote the AVP-GST at a large diversified
listed company, “Its (The obligation is) onerous as at the time of advance the
purpose is not known.”

The place of supply rules not
only determine the nature of the tax but also the Government which effectively
enjoys the tax. In that sense, these rules go to the core of the GST
Implementation. Most of the constituents were reasonably happy with the
drafting of the rules and did not foresee any major risk of interpretation on
this account. With the aggregate tax remaining the same, the approach of the
industry seemed to be to take as conservative a stand as possible. As one of
the respondents stated, “We are taking safe route.”

On the requirement of matching
of input tax credit, the opinion was fairly divided. While some felt that this
requirement was fine, others felts that this resulted in an onerous obligation.
Some suggested a middle route to substitute the invoice level matching to
vendor level matching. There was also a feeling that the restrictions in the
claim of credit should be done away with. To quote tax manager at a large
public sector bank, “Restrictions can be further rationalised. In Banking as it
is 50% ITC is reversed so the list of ineligible items should be further
reduced or done away with.” Similar responses were received to do away with
restriction on claim of credits for employee related costs.

Were you able to use the portal effectively during
non-peak days?

Even the uninitiated would
know by now that the IT System for implementing GST was not totally ready at
the time of implementation and is still a work in progress. In fact, most of
the backlash against the Government was around this aspect of the portal not
supporting a smooth transition into GST[1]. In this
context, the response to the above question was a bit surprising with many
participants suggesting that the portal was fine to use during non-peak days.
However, in case of errors like digital signatures not matching, browser
compatibility issues, etc., it appeared that the industry was left to find its’
own solutions. Most of the responses expressed dissatisfaction about the
response time from the helpdesk. In fact, the response from the public sector
bank was, “(Our issues are) Not yet resolved in spite of repeated follow up and
reminders with GST helpdesk.”

Did the nationwide rollout of eWay Bill System bring about
uniformity, ease of doing business and
transportation?

The first phase of
implementation of eWay Bills resulted in the system crashing on the first day
itself, resulting in postponement of the implementation. Thereafter, the system
has been implemented across the nation. In this context, the above question was
posed and most of the respondents felt that the system did bring about a
uniformity and ease of doing business and transportation. Those from the
service sectors like banking were less impacted. However, an interesting point
of view was presented by the global tax manager at the software company, “when
invoice wise details are reported to GSTN there is no case for eway bills, it
needs to be scrapped.”

Did the outreach programs of the Government help in
transitioning to GST?

Last year, around this time
saw an unprecedented flurry of outreach programmes from the Government. To its’
credit, the Government did try quite a few things to educate the trade and
industry about this gigantic reform. “FAQs, sessions with business/ Chambers
helped” was the crisp response from one of the participants.

Learnings from the Survey

Any legal expert would agree
that the Dual GST Structure along with a half baked law representing an amalgam
of multiple earlier laws does not augur well and can present fundamental
challenges. Things got complicated with confusion on administrative aspects
like portal, eWay Bills and the like. Despite these issues, the responses from
the industry have been positive. While there are issues, which did come out in
the survey as well, on a holistic basis, the industry understands the saying
that one cannot miss the woods for the trees. To summarise in a single line,
“There is a big thumbs up for the GST reform implemented by the Government.”

shailesh.kwebmaker

Reduction in Sale Price Due To Discount Given By Issue of Credit Notes Subsequent To the Invoice

INTRODUCTION
Under Sales Tax Laws, tax is payable on the ‘sale price’ of goods. Sale price is normally defined in respective State Acts. For example, under MVAT Act, term “sale price” is defined in section 2(25) as under.

“2(25) “sale price” means the amount of valuable consideration paid or payable to a dealer for any sale made including any sum charged for anything done by the seller in respect of the goods at the time of or before delivery thereof, other than the cost of insurance for transit or of installation, when such cost is separately charged….”

There is a separate mention about discount given from the original sale price.

Discounts are generally given in the invoice itself. There may not be much difficulty in claiming reduction for such discount amount from the sale price.

However, discount can also be given after the invoices are issued. There may be discount schemes like turnover discount, early payment discount, where discount will be eligible on happening of a given event. In such cases, invoices would be at original price. The subsequent discount will be required to be given by issue of credit note.

In some of the States, there are provisions providing that discount mentioned in the invoices will be eligible
for reduction.

The issue that arises is whether such type of provisions requires strict interpretation or can be interpreted liberally so as also to include discounts given by credit note/s issued separately after the issue of invoice/s.

Recent judgment of Hon. Supreme Court in case of Southern Motors vs. State of Karnataka (Civil Appeal Nos.10955-10971 of 2016 dt.18.1.2017)

In this case, the issue before the Hon. Supreme Court was from Karnataka VAT Act, 2003. The facts leading to the litigation, as mentioned in the judgment, can be noted as under:

“3. The foundational facts, albeit not in dispute present the required preface. The appellant is a dealer in the motor vehicles and registered under the Act. Its version is that during the years in question i.e. 2007-2008 and
2008-2009, it raised tax invoices on the purchasers as per the policy of manufacturers of vehicles to maintain uniformity in the price thereof. After the sales were completed, credit notes were issued to the customers granting discounts, in order to meet the competition in the market and for allied reasons.

Consequentially, it received/retained only the net amount that is the amount shown in the invoice less the sum of discount disclosed in the credit note. Accordingly, the net amount, so received was reflected in his books of account and returns were filed …..”

The assessing authority took a view that as per the Karnataka VAT Rules, 2003, only such discount which is mentioned in the invoices is allowable. Since the discount was given post issue of invoices, it was held that it is not deductible from the sale price. Karnataka High Court upheld the claim of State Government. Before Hon. Supreme Court the main argument of the dealer was as under:

“7. The emphatic insistence on behalf of the appellant is that the combined reading of section 30 and Rule 31 demonstrates in clear terms that the assesses are entitled to claim deduction of the discount allowed to their customers by credit notes, from the total turnover to quantify their taxable turnover. The learned counsel have urged that as some discounts, especially those linked to targets to be achieved in a particular period are not comprehend able at the time of sale, these logically cannot be reflected in the tax invoices.

They have maintained that such discounts actualise through credit notes at the end of the prescribed period for which the target is fixed and are thus governed by section 30 of the Act and Rule 31 of the Rules. They have asserted that in no view of the matter, Rule 3(2)(c)can be conceded a primacy to curtail or abrogate Section 30 or Rule 31 of the Rules, lest the latter provisions are rendered otiose. Such an explication would also be extinctive of the concept of the well ingrained concept of turnover/trade discount which is indefensible.”

The department stuck to the stand that rule is to be applied strictly. The arguments of the sales tax department are noted as under:

“9. In refutation, the learned counsel for the respondents, has argued that a discount to qualify for deduction to compute the total and eventual taxable turnover, as contemplated in Rule 3(2)(c) of the Rules has to be essentially reflected in the tax invoice or the bill of sale issued in respect of the sales.

According to them, section 30 and Rule 31 deal with a situation where after a tax invoice is issued, it transpires that the tax charged has either exceeded or has fallen short of the tax payable for which a credit/debit note, as the case may be, would be issued. As these two provisions do not regulate the computation of a taxable turnover, there is no correlation thereof with Rule 3(2)(c) of the Rules which has been assigned an independent role to determine the tax liability. In absence of any specific provision in the parent statute granting tax exemption based on deduction founded on post sale trade discount, section 30 and Rule 31 are of no avail to the assesses, he urged. It is maintained that in any view of the matter, a taxing statute has to be construed strictly and any exemption is permissible only if the legislation permits the same. Reliance in buttress of the above has been placed on the decisions of this Court in A.V. Fernandez vs. The State of Kerala 1957 SCR 837, IFB Industries Ltd. vs. State of Kerala (2012) 4 SCC 618 and Jayam & Co. vs. Assistant Commissioner and Another (2016) 8 SCALE 70.”

The Supreme Court referred to a number of precedents on the issue. Ultimately, the Supreme Court came to conclusion that the sale price means what is actually received by the vendor. Therefore, the Supreme Court observed that rules cannot be interpreted to disallow reduction where actual discount is passed on and the amount is not receivable to the dealer. The pertinent observations of the Supreme Court are as under:

“37. On an overall review of the scheme of the Act and the Rules and the underlying objectives in particular of Sections 29 and 30 of the Act and Rule 3 of the Rules, we are of the considered opinion that the requirement of reference of the discount in the tax invoice or bill of sale to qualify it for deduction has to be construed in relation to the transaction resulting in the final sale/purchase price and not limited to the original sale sans the trade discount. However, the transactions allowing discount have to be proved on the basis of contemporaneous records and the final sale price after deducting the trade discount must mandatorily be reflected in the accounts as stipulated under Rule 3(2)(c) of the Rules. The sale/purchase price has to be adjudged on a combined consideration of the tax invoice or bill of sale as the case may be along with the accounts reflecting the trade discount and the actual price paid.

The first proviso has thus to be so read down, as above, to be in consonance with the true intendment of the legislature and to achieve as well the avowed objective of correct determination of the taxable turnover. The contrary interpretation accorded by the High Court being in defiance of logic and the established axioms of interpretation of statutes is thus unacceptable and is negated.”

CONCLUSION
Thus, the Hon’ble Supreme Court has decided a very important issue. The discounts are part and parcel of business activity. It will not be just to levy tax on an amount, which is neither received nor receivable as per the understanding of the parties. Therefore, the above judgment of the Hon. Supreme Court will be guiding judgment including in the forthcoming GST era.

shailesh.kwebmaker

Pre-Deposit At First Stage Appeal – Whether Adjustable At The Second Stage?

BACKGROUND:
As announced by Hon. Finance Minister, Goods and Services Tax is likely to be effective from July 01, 2017. Indirect tax litigation is yet to become a story of the past considering pendency of the matters before various Benches of CESTAT and first appellate authorities, which is further topped up by enthusiasm demonstrated by officers of the department of service tax in particular of initiating proceedings for all and sundry, decided or undecided issues. Since service tax law underwent an ‘overhaul’ on account of introduction of “negative list” based taxation from 01/07/2012, various issues closed under the earlier regime are routinely initiated for the legal testing under the “negative list” based period as well, even though those issues do not remain open on account of the new law having taken care of the shortcomings in interpretation of the earlier provisions of service tax law.

ISSUE OF PRE-DEPOSIT OF DUTY OR TAX IN TWO-STAGE APPEAL
In the scenario, pre-deposit of duty or tax payable while filing appeals is quite a concern of many assessees under service tax considering huge demands initiated and routinely confirmed by adjudicating authorities at all levels and especially in vexatious cases. In a recent decision, Ahmedabad Tribunal in ASR Multimetals Pvt. Ltd. 2017 (345) ELT 294 (Tri.-Ahmd) had an occasion to examine whether pre-deposit made while filing the first appeal can be adjusted against the quantum of deposit required to be made while filing the appeal before the Tribunal.

Section 35F of the Central Excise Act, 1944 laying down provisions in this regard (as amended with effect from August 06, 2014) also applicable to service tax vide section 83 of the Finance Act, 1994 is reproduced below:

“35F. Deposit of certain percentage of duty demanded or penalty imposed before filing appeal.- The Tribunal or the Commissioner (Appeals), as the case may be shall not entertain any appeal,-
(i) under sub-section (1) of section 35, unless the appellant has deposited seven and a half per cent of the duty, in case where duty or duty and penalty are in dispute, or penalty where such penalty is in dispute, in pursuance of a decision or an order passed by an officer of Central Excise lower in rank than the Commissioner of Central Excise

(ii) against the decision or order referred to in clause (a) of sub-section (1) of section 35B, unless the appellant has deposited seven and a half per cent of the duty, in case where duty or duty and penalty are in dispute, or penalty, where such penalty is in dispute, in pursuance of the decision or order appealed against;

(iii) against the decision or order referred to in clause (b) of sub-section (1) of section 35B, unless the appellant has deposited ten per cent of the duty, in case where duty or duty and penalty are in dispute, or penalty, where such penalty is in dispute, in pursuance of the decision or order appealed against.

Provided that the amount required to be deposited under this section shall not exceed rupees ten crores.

Provided further that the provisions of this section shall not apply to the stay applications and appeals pending before any appellate authority prior to the commencement of the Finance (No.2) Act, 2014.

Explanation.- For the purposes of this section “duty demanded” shall include.-

(i)    amount determined under section 11D
(ii)   amount of erroneous CENVAT credit taken;
(iii)   amount payable under Rule 6 of the CENVAT Credit Rules, 2001 or the CENVAT Credit Rules, 2002 or the CENVAT Credit Rules, 2004.”
[emphasis supplied]

In three cases under appeal before the Tribunal, the Appellants paid 7.5% duty at first appellate stage before Commissioner (Appeals). Against the orders passed by Commissioner (Appeals), when the appeals were filed before the Tribunal, they deposited 2.5% in terms of clause (iii) of the above section 35F / section 129A of the Customs Act, 1962*).

(*Since the provisions of the Customs Act in this regard are identical, they are not reproduced here for the sake of brevity).

They adjusted thus the amount paid at the first appellate stage and considered that the requirement of 10% payment towards pre-deposit thus stood fulfilled. The Revenue objected to this as according to them, such interpretation was incorrect and thus additional 10% was required to be paid in place of 2.5% to comply with the provisions laid down in applicable clause (iii) of the above section 35F for the appeal to be entertained by
the Tribunal.

The Tribunal found that the provisions were in no way ambiguous to interpret that the amount paid under clause (ii) at the time of filing appeal before Commissioner (Appeals) was adjustable/considered paid for the purpose of clause (iii) as well.

The Tribunal in this context relied on the ratio of decision in the case of Greatship (India) Pvt. Ltd. vs. Commissioner of Service Tax, Mumbai-I 2015 (39) STR 754 (Bom) wherein principles of interpretation of taxing statutes were discussed at significant length, at the end of which, the following conclusion was drawn at para 34 relied upon by the Tribunal in the present case.

“34. It would thus appear that it is settled position of law that in taxing statute, the Courts have to adhere to literal interpretation. At first instance, the Court is required to examine the language of the statute and make an attempt to derive its natural meaning. The Court interpreting the statute should not proceed to add the words which are not found in the statute. It is equally settled that if the person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if the Crown seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of law the case might otherwise appear to be. It is further settled that an equitable construction, is not admissible in a taxing statute, where the Courts can simply adhere to the words of the statute. It is equally settled that a taxing statute is required to be strictly construed. Common sense approach, equity, logic, ethics and morality have no role to play while interpreting the taxing statute. It is equally settled that nothing is to be read in, nothing is to be implied and one is required to look fairly at the language used and nothing more and nothing less. No doubt, there are certain judgments of the Apex Court which also holds that resort to purposive construction would be permissible in certain situation. However, it has been held that the same can be done in the limited type of cases where the Court finds that the language used is so obscure which would give two different meanings, one leading to the workability of the Act and another to absurdity.”
[emphasis supplied].

In view of the above, the Tribunal upheld the Revenue’s contention that the interpretation by the appellants would not be possible without inserting the words not present therein and therefore it was incorrect to interpret that the amount paid at the first stage-appeal could be adjusted. In effect, the pre-deposit amount required for two-stage appeals would be 7.5% in the first instance and 10% of the confirmed duty/tax at the time of filing the Tribunal appeal.

Having had unambiguous decision/interpretation as above, the fact that monetary limits for adjudication of Show Cause Notice have been revised vide Circular No.1049/37/2016-CX dated 29/09/2016, all cases adjudicated after this date where the amount of duty/service tax/penalty confirmed is below two crore rupees involve two-stage appeals and aggregate amount of 17.5% has to be provided towards mandatory pre-deposit. Indeed this was also clear otherwise on reading of the provisions. Further, TRU letter 10th July, 2014 in Annexure-IV also provided clarification on identical lines both in respect of section 129E of the Customs Act and section 35F of the Central Excise Act. Nevertheless, it must be noted here that vide its Circular No.984/08/2014-CX dated 16/09/2014, CBEC has clarified that payment made during investigation or audit, prior to filing the appeal can be considered to the extent of 7.5% or 10% subject to the limit of Rs.10 crore as deposit towards fulfillment of requirement u/s. 35F of Central Excise Act or section 129E of the Customs Act, 1962.

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Welcome GST – Input Tax Credit Provisions under the Model GST Act (Revised Nov 2016)

1. Introduction

“Goods and Services Tax” popularly known as ‘GST’ will soon be a new face of indirect tax legislation in India. It is a concept which will subsume various indirect taxes that are currently being imposed on goods and services under various Central and State laws and will lead to imposition of a single levy namely “goods and service tax” on all goods and services purchased or consumed anywhere in India. The idea is to convert the whole of India into one single uniform market, by eliminating differential tax treatments under different laws and different States. The concept of Value Added Tax is an inherent feature of GST. Whenever a commodity changes hand, there is a value addition. GST will be imposed in respect of every value addition made to goods and services from its origination till its final consumption.Needless to say, being an indirect tax, the ultimate burden of taxes on the entire value of the commodity/service will be transferred onto the final consumer of such commodity/service. To illustrate, if ‘A’ sells goods worth Rs.100 to ‘B’, A will pay tax of say 10% i.e. Rs.10 to Government and recover the same from ‘B’ by loading the same onto value of that commodity. ‘B’ will therefore pay Rs.110 to ‘A’. When ‘B’ further sells the commodity to ‘C’ by adding his profit margin of Rs.40, then he will pay tax @10% on the said value addition of Rs.40 say Rs.4 to Government and recover the entire amount from ‘C’ i.e. 110 paid by him to ‘A’ and Rs.44 being his value addition and taxes paid by him to Government on his value addition. In short he will recover Rs.154 from ‘C’ which comprises of Rs.140 as total value and Rs.14 as taxes. The bill issued by ‘B’ to ‘C’ will also clearly show Rs.140 as the value of commodity and Rs.14 as the taxes. Therefore, in a transparent value added system, the customer knows how much amount he has paid for a commodity as its economic value and how much by way of taxes.

The example looks very simple, when Rs.10 paid by ‘A’ and Rs.4 paid by ‘B’ are taxes under the same statute and are paid to same Government. However, the economics of commodity pricing will change, if these taxes are paid under different statutes and to different governments. To illustrate, let’s assume that in the above example Rs.100 is value addition by ‘A’ for sale of goods and Rs.40 is value addition by ‘B’ in the nature of service. In other words supply made by ‘A’ to ‘B’ is in the nature of ‘sale of goods’ and supply made by ‘B’ to ‘C’ is in the nature of provision of service. In this case, A will pay Rs.10 to State Government as VAT. Although value addition made by ‘B’ is only Rs.40, since the Authority recovering the taxes from ‘B’ is a Central Government, it will recover service tax on entire Rs.140 by taxing the entire value once again under different statute (‘double taxation’). Not only that, but it will also levy tax on Rs.10 which is in fact a tax paid to State Government (‘tax on tax’). The final outcome would be that, an economic supply having aggregate value addition of Rs.140 will be loaded with VAT of Rs.10 (Rs.100 x 10%), Service Tax of Rs.14 (Rs.140 x 10%) and a tax on tax (recovered as service tax) Rs.1 (VAT of Rs.10 x 10%), thereby making total price of the commodity Rs.165. (Rs.140 as Value addition and Rs.25 as taxes) as against Rs.154 computed earlier. Another most disturbing factor in this scenario would be that, ‘B’ will raise a bill on ‘C’ showing Rs.150 as the value addition and Rs.15 as service tax. The customer will therefore be under the impression that, he has paid only Rs.15 as taxes whereas in reality he pays Rs.25 towards taxes.

GST thus endeavours to reduce cascading effect of taxes i.e. eliminating double taxation (saving of Rs.10) and tax on tax (i.e. Rs.1). It also encourages transparency by separating economic value of a commodity from taxes. The concept of “value addition based taxation” is enshrined in provisions governing Input Tax Credit(‘ITC’). This article deals with the said provisions contained in Revised Model GST law (November 2016). The provisions dealing with eligibility of CENVAT credits or tax credits under the earlier laws in GST regime (i.e. transitory provisions) are not explained in this article.

2. Definitions:

As per section 2(52), ‘inputs’ means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business.

As per section 2(19) “capital goods” means goods, the value of which is capitalised in the books of accounts of the person claiming the credit and which are used or intended to be used in the course or furtherance of business.

As per section 2(53) “Input service” means any service used or intended to be used by a supplier in the course or furtherance of business.

As per section 2(55) “input tax” in relation to a taxable person, means the Integrated Goods and Service Tax (IGST), including that on import of goods, Central Goods and Service Tax (CGST) and State Goods and Service Tax (SGST) charged on any supply of goods or services to him and includes the tax payable under sub-section (3) of section 8 [i.e. tax payable under reverse charge], but does not include the tax paid under section 9 [i.e. tax payable under composition scheme].

As per section 2(71) “output tax” in relation to a taxable person, means the CGST/SGST chargeable under this Act on taxable supply of goods and/or services made by him or by his agent and excludes tax payable by him on reverse charge basis

As per section 2(54) “Input Service Distributor” means an office of the supplier of goods and / or services which receives tax invoices issued u/s. 28 towards receipt of input services and issues a prescribed document for the purposes of distributing the credit of CGST (SGST in State Acts) and / or IGST paid on the said services to a supplier of taxable goods and / or services having same PAN as that of the office referred to above.

3. Principal Eligibility Test:

The concept of ITC, presupposes that the preceding supply (i.e. inwards supply) as well as the subsequent supply (i.e. outward supply’) both are charged with GST. If inward supply is not charged with GST, the question of ITC does not arise. Similarly, if outward supply is not charged with GST (Nil rated or fully exempted supply, non-taxable supplies), the ITC gets accumulated and eventually becomes a part of the cost. However in certain cases, due to policy reasons, refund of ITC is permissible. Under GST, there are only two cases where refund of ITC is permissible viz. exports including zero rated supplies and cases involving inverted duty structure i.e. where the credit is accumulated on account of rate of tax on inward supplies being higher than the rate of tax on outward supplies (other than Nil/ fully exempted supplies). Except for the said two cases, if the outward supply does not attract levy of GST, then ITC of corresponding inward supply cannot be allowed and therefore necessarily forms the part of cost. This may be taken as principal eligibility test under GST.

For instance, the outward supply of goods and services which is not made by a supplier in the course of his business or commerce, is not treated as ‘supply’ for the purpose of levy of GST. There is thus no GST on such ‘non-business outward supplies’. A supplier may have been charged GST on goods and services procured and used by him for the purpose of making a ‘non-business outward supply’. However, ITC in respect of such goods/services is not allowed. What is ‘non-business outward supply’ is therefore important for the purpose of determining eligibility of ITC of corresponding goods/ services. Definition of ‘business’ is contained in section 2(17) of the GST Act. A ‘non-business’ outward supply is therefore to be interpreted accordingly.

Section 16(1) provides that, entitlement of ITC is subject to certain conditions relating to restrictions, time and manner. These conditions, restrictions and the manner, to the extent they are contained in section 16 and section 44 of the GST Act are mentioned below. In addition thereto certain additional conditions may be contained in rules which are yet to be prescribed.

4. ITC Eligibility Conditions:

As per section 16(1) of the Model GST Act, the ITC can be taken only by a registered taxable person. In other words, registration under GST is a pre-condition for availing ITC.

As per section 16(2) of the Model GST Act, the ITC shall not be allowed if the fulfillment of following conditions is in question.

– possession by claimant dealer of a tax invoice or debit note or such other prescribed taxpaying document(s) issued by a supplier registered
under this Act, against inward supply made by claimant dealer.

–    The supplier issuing such documents has actually paid to the account of appropriate government, tax charged in respect of such supply, either in cash or through utilisation of ITC availed by such supplier.
–    receipt of goods and/or services by claimant dealer. [The purpose of this clause is to prevent misuse of ITC provision by indulging into practices like issuing ‘accommodation bills’].
–    the claimant dealer has furnished the returns u/s. 34.

Considering the provisions of ‘time of supply’ a question may arise that whether a claimant dealer would be eligible for ITC on advance payments made by him for inward supply. In this respect, it may be noted that the conditions mentioned in section 16(2) are anti-avoidance provisions. Hence as long as a supply (past or future) underlying any tax paid document (tax invoice, debit note etc.) is not doubted, ITC cannot be denied. Besides, as per Explanation 1 to Section 12 (2) the supply shall be deemed to have been made to the extent it is covered by the invoice or, as the case may be, the payment. It’s also worthwhile to note that, provisions of section 16(2) are subject to provisions of section 36 of the GST Act. As per section 36(1) credit shall be allowed to the registered taxable person on provisional basis as self-assessed in his return. It may further be noted that, Table 11 of the GSTR-1 (statement of outward supply) requires supplier to disclose the cases where tax is paid on advance basis and identifying such tax payment qua a person from whom the advance is received. However, the identification of such advance qua invoices given in Table 12 of GSTR-1 may happen in the subsequent tax period. Till the time such invoice identification takes place, it is doubtful whether ITC will be available in GSTR-2 of the receiver.

Another issue which may arise as regards receipt of goods/services will be, whether ‘actual receipt’ of goods is essential or ‘constructive delivery’ can be said to be enough as a fulfillment of aforesaid condition. For example, ‘A’ located in Maharashtra directs ‘B’ located in Gujarat to supply goods to ‘C’ located in Delhi. In such case, although there is a single movement of goods from ‘B’ to ‘C’ and goods are never actually received by ‘A’,explanation to section 16(2) provides that, ‘A’ shall be deemed to have received goods.
Similarly, in case of job work transactions, section 20 provides that, the “principal” shall be entitled to take credit of input tax on inputs and capital goods even if the inputs/capital goods are directly sent to a job worker for job-work without their being first brought to his place of business.

In case of input service distributor (ISD) also, section 16(2)(b) may not be applicable, for such ISD is not a receiver of service, but only a distributor of credit. Conditions of section 16(2) are therefore required to be fulfilled by the respective units under the same PAN at which such credit is distributed.

5. Reduction in ITC Set off
In following cases, ITC is not allowed fully, but is reduced to certain extent.

– Where the goods and/or services are used by the registered taxable person partly for the purpose of any business and partly for other purposes. [As discussed above, the amount of credit shall be restricted to so much of the input tax as is attributable to the purposes of his business only] – section 17(1). The manner of computation is yet to be prescribed.
– Where the goods and / or services are used by the registered taxable person partly for effecting taxable supplies and partly for effecting exempt supplies. In such case, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies- section 17(2). In this case, ‘zero rated’ supplies are treated as taxable supplies and supply on which recipient is liable to pay tax on reverse charge are regarded as exempt supply. For Example: ‘A’ supplies commodity X which is taxable at 5% (Turnover = Rs.50 Lakh), commodity ‘Y’ which is exempt from tax (Turnover = Rs.20 Lakh), Commodity ‘X’ and ‘Y’ are supplied to SEZ unit (Turnover = Rs.15 Lakh) and supply of commodity ‘Z’ on which the receiver is liable to pay tax under RCM (Turnover = Rs.10 Lakh). In this case, for the purpose of section 17(2) Taxable supply and Exempt supply shall be computed as under:

Taxable Supply = Rs.50 Lakh + Rs.15 Lakh = Rs.65 Lakh
Exempt Supply = Rs.20 Lakh + Rs.10 Lakh = Rs.30 Lakh.

If there is any inward supply in the hands of ‘A’ on which he is liable to pay tax under reverse charge, then such inward supply shall not be considered for the purpose of aforesaid calculation. The manner of computation u/s. 17(2) is yet to be prescribed.

– 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 section 17(2), or avail of, every month, an amount equal to 50% of the eligible ITC on inputs, capital goods and input services in that month.

6. Ineligible / Negative List Items
In respect of inward supply of following goods/ services specified in section 17(4), the ITC shall not be allowed.

Negative List Goods/Services

Exceptions,
if any

motor vehicles and other conveyances

Motor vehicles
and conveyances used for making following taxable supplies

– Further supply of vehicles and conveyances.

– Transportation of passengers

– imparting training on driving, flying,
navigating such vehicles or conveyances

– Transportation of goods.

supply of food and
beverages, outdoor catering, beauty treatment, health services, cosmetic and
plastic surgery

Where such inward
supply of goods or services of a particular category is used by a registered
taxable person for making an outward taxable supply of the same category of
goods or services

membership of a
club, health and fitness centre

rent-a-cab, life
insurance, health insurance

Where it’s
obligatory for an employer to provide these services to its employees as
Government notified services under any law for the time being in force

travel benefits
extended to employees on vacation such as leave or home travel concession

works contract
services when supplied for construction of immovable property,

However, works
contract services availed for construction of plant and machinery is allowed.

For these
purposes, the word “construction” includes re construction, renovation,
additions or alterations or repairs, to
the extent of capitalization, to the said immovable property.

‘Plant and
Machinery’ means apparatus, equipment, machinery, pipelines,
telecommunication tower fixed to earth by foundation or structural
support that are used for making
outward supply and includes such foundation and structural supports but
excludes land, building or any other civil structures

Negative List
Goods/Services

Exceptions, if
any

goods or services
received by a taxable person for construction of an immovable property on his
own account, even when used in course or furtherance of business

The goods or
services received by a taxable person for construction of plant and machinery
as defined above, is allowed.

goods and/or
services on which tax has been paid under composition scheme

goods and/or
services used for personal consumption

goods lost,
stolen, destroyed, written off or disposed of by way of gift or free samples

As regards the aforesaid goods and services, following observations may be noted:-

–    There is a need to expand the relaxation given against services mentioned in Sr. No.4 above, to all government notified services. Presently, supply of food and beverages, outdoor catering and health services (Sr. No.2) would not be eligible for ITC, even if it’s obligatory for an employer to provide these services to its employees as Government notified services under any law for the time being in force.
–    Presently, ITC of membership of a club, health and fitness centre, will also be denied to film and media industry, actors, sportsman, agencies providing personal security services etc., for whom inward supply of such services is a business necessity.
–    The term ‘construction’ includes capitalised expenditure, even though expenditure is incurred on renovation, additions or alterations or repairs. A business man may have to face a situation, where after the year end, at the time of audit the auditor may require him to capitalise certain expenses, which have been earlier debited to revenue accounts. In such case, he may be required to reverse the ITC availed earlier.

In addition to aforesaid cases, the ITC is also not available in following cases:

– Where the registered taxable person has claimed depreciation on the tax component of the cost of capital goods under the provisions of the Income- tax Act, 1961(43 of 1961), the ITC shall not be allowed on the said tax component.

– Where any tax is paid in terms of section 67, 89 or 90, such tax shall not be regarded as eligible ITC. Section 67 of the Act deals with payment of taxes as a result of determination by the tax authorities, in cases involving non-payment/ short payment by reason of fraud or any wilful misstatement or suppression of facts to evade tax. Section 89 deals with payment of taxes by any person who transports any goods or stores any goods while they are in transit in contravention of the provisions of this Act. Section 90 deals with payment of taxes in circumstances leading to confiscation of goods/ conveyance.

7. Timing for the purpose of Taking ITC

– As mentioned above, as per section 36, the ITC can be claimed by the assessee (‘Tax Payer’) in his tax returns on provisional basis and can be used for payment of self-assessed output tax liability. Section 37 deals with provisions relating to Matching, reversal and reclaim of ITC. The matching takes place, by comparing the details of inward supplies and tax credit furnished by assessee (as a receiver of supply) with the details furnished by his supplier in his return. The claim of ITC that match with the details of corresponding supplier’s returns are finally accepted and communicated to the assessee. Where the ITC claimed by a recipient in respect of an inward supply is in excess of the tax declared by the supplier for the same supply or the outward supply is not declared by the supplier in his valid returns, the discrepancy is communicated to both such persons. Similarly, duplicate claims of ITC are also communicated to receiver. The amount in respect of which any discrepancy is not rectified by the supplier in his valid return for the month in which discrepancy is communicated shall be added to the output tax liability of the recipient, in his return for the month succeeding the month in which the discrepancy is communicated. However, as regards duplicate claims, the excess ITC claimed shall be added to the output tax liability of the recipient in his return for the month in which the duplication is communicated.

For Example: A return for the month of July 2017 is filed on 20th August 2017. The discrepancies are communicated in August 2017. Such discrepancy will be required to be rectified in return pertaining to month of August 2017, which will be filed on 20th September 2017. If discrepancy is not rectified, then demand pertaining to excess ITC claimed will be added in the tax liability for the month of September 2017. However, if this was a case of duplicate claim, then such demand will be added in the tax liability for the month of August 2017 itself.

It is important to note that, recipient shall be entitled to reclaim the credit only if the discrepancies communicated to suppliers are subsequently rectified by him in his valid returns within the time limit specified in section 34(9) i.e. earlier of due date for furnishing of return for the month of September following the end of the financial year or the actual date of furnishing of relevant annual return.

–    As per section 16(4), A taxable person shall not be entitled to take ITC in respect of any invoice or debit note for supply of goods or services after furnishing of the return u/s. 34 for the month of September following the end of financial year to which such invoice or invoice relating to such debit notepertains or furnishing of the relevant annual return, whichever is earlier. In other words, if debit note pertaining to invoice is issued by the supplier after the aforesaid period, the benefit of ITC pertaining to such debit note may not be available to the receiver.
–    Where the goods against an invoice are received in lots or instalments, the entire credit becomes eligible only upon receipt of the last lot or installment.
–    Where a recipient fails to pay to the supplier of services, the amount towards the value of supply of services along with tax payable thereon within a period of three months from the date of issue of invoice by the supplier, an amount equal to the ITC availed by the recipient shall be added to his output tax liability, along with interest thereon. This condition is applicable only in respect of inward supply of services and not in respect of goods.
–    The credit of input tax in respect of pipelines and telecommunication tower fixed to earth by foundation or structural support including foundation and structural support thereto is allowed in staggered manner over a period of not less than 3 years. The claim in the first year not to exceed 1/3rd of the total credit and claim in second year not to exceed 2/3rd of the total credit.

8. Availability of ITC in special circumstances – Section 18.

In following cases, a registered taxable person shall be allowed to take credit subject to certain prescribed conditions and provided that the ITC is claimed within the expiry of one year from the date of issue of tax invoice relating to such supply.

–    If a person applies for registration under the Act within 30 days from the date on which he becomes liable to registration, after registration, he shall be entitled to take credit of ITC in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the day immediately preceding the date from which he becomes liable to pay tax under the provisions of this Act. For Example: if threshold turnover exceeds Rs.20 Lakh on 2nd October 2017. The person applies for registration on 17th October 2017 and is granted registration on 24th October 2017, then he shall be entitled to take ITC in respect of inputs held as on 1st October 2017. The provision does not cover the ITC in respect of capital goods held in stock.
–    If a person applies for voluntary registration, he shall be entitled to take credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the day immediately preceding the date of grant of registration. For Example: if a person applies for voluntary registration on 17th October 2017 and is granted registration on 24th October 2017, then he shall be entitled to take ITC in respect of inputs held as on 23rd October 2017. The provision also does not cover the ITC in respect of capital goods held in stock.
–    Where any registered taxable person ceases to pay tax under composition scheme, he shall be entitled to take credit of input tax in respect of inputs held in stock, inputs contained in semi-finished or finished goods held in stock and on capital goods on the day immediately preceding the date from which he becomes liable to pay tax under normal levy. This provision covers the credit ITC in respect of capital goods held in stock reduced by such percentage as may be prescribed.
–    Where an exempt supply of goods or services by a registered taxable person becomes a taxable supply, such person shall be entitled to take ITC in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock relatable to such exempt supply and on capital goods exclusively used for such exempt supply on the day immediately preceding the date from which such supply becomes taxable. The credit of such capital goods is allowed on percentage reduction method.

9. Transfer of ITC in certain situations.

Section 18(6) provides for transfer of ITC, where there is a change in the constitution of a registered taxable person on account of sale, merger, demerger, amalgamation, lease or transfer of the business with the specific provision for transfer of liabilities. In such case, the said registered taxable person shall be allowed to transfer the ITC that remains unutilised in its books of accounts to such sold, merged, demerged, amalgamated, leased or transferred business in the manner prescribed. It is however surprising to note that, there are no similar provisions for transfer of credit, when business is succeeded as a going concern by legal heir or representative of a deceased taxable person.

10. Payment of amount of ITC in respect of goods held in stock, or payment of higher amounts in certain cases:

–    Cancellation of Registration: As per section 26(7), every registered taxable person whose registration is cancelled shall pay an amount, equivalent to the ITC in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the day immediately preceding the date of such cancellation or the output tax payable on such goods, whichever is higher. In case of capital goods, an amount equal to the ITC taken on the said capital goods reduced by the percentage points as may be prescribed in this behalf or the tax on the transaction value of such capital goods, whichever is higher shall be paid.
–    Supply of capital goods: As per section 18(10), in case of supply of capital goods or plant and machinery, (other than refractory bricks, moulds and dies, jigs and fixtures are supplied as scrap) on which ITC has been taken, the registered taxable person shall pay an amount equal to the ITC taken on the said capital goods or plant and machinery reduced by the percentage points as may be specified in this behalf or the tax on the transaction value of such capital goods or plant and machinery, whichever is higher.
–    From Normal Levy to Composition Scheme or From Taxable to Exempt Supply: As per section 18(7), where any registered taxable person, who has availed ITC, switches over as a taxable person for paying tax under composition scheme or, where the goods and / or services supplied by him become exempt absolutely u/s.11, he shall pay an amount, by way of debit in the electronic credit or 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 such switch over or, as the case may be, the date of such exemption.

11. Lapse of ITC in certain situations

If after making such payment u/s. 18(7) above, any amount remains in the electronic credit ledger, then such balance amount shall lapse.

12. Input Service Distributor (ISD)

The concept of ISD is applicable only in case of inward supply of services and not in case of goods. The ISD is not an actual supplier, but he is merely a distributor of credit. For instance, A has administrative office in Maharashtra and factories at Maharashtra, Gujarat and Tamil Nadu. In such case, it may happen that all the input services are paid from administrative offices at Maharashtra and bill for such services will be raised by the supplier of services in the name of Administrative office, although the actual services are performed at Gujarat, or that the benefit of service is received at factories located at Maharashtra, Gujarat as well as Tamil Nadu. In such case, administrative office will work as ISD, and distribute all the ITC to all the beneficiary units in a prescribed manner. The manner in which ISD can distribute the credit is given in section 21 of the Act. Where the ISD and units to which the ITC is to be distributed are located in the same State, then credit of CGST shall be distributed as CGST and Credit of SGST shall be distributed as SGST. The credit of IGST shall be distributed as CGST as well as SGST, in a manner prescribed. If the ISD and units to which the ITC is to be distributed are located in the different States, then the credit of CGST shall be distributed as IGST or CGST and the credit of SGST shall be distributed as IGST or SGST. (However, it is not clear as to how the credit of CGST/SGST of one State shall be distributed to unit located at other State as CGST/SGST of that State).

As per Explanation 2 to section 21, recipient of credit means the supplier of goods and / or services having the same PAN as that of Input Service Distributor. Therefore, unless the job worker’s premises is registered as additional place of business of the Principal, the distribution of ISD to a job-worker seems difficult.

13. Payment of Tax using ITC

–    As per section 44 of the Act, the ITC as self-assessed in the return of a taxable person shall be credited to his electronic credit ledger on provisional basis. The amount available in the electronic credit ledger may be used for making any payment towards output tax payable in such manner and subject to such conditions and within such time as may be prescribed. It, therefore, appears that, there may be rules for utilisation of ITC within a specific time period. Under the current tax regime, there is no limit of utilsation of Cenvat Credit under Central Excise/Service Tax laws. However, in State laws, there is time limit for carry/forward of tax credits subject to provisions for refund of unutilised credits.
–    The amount of IGST-ITC shall first be utilised towards payment of IGST and the amount remaining, if any, may be utilised towards the payment of CGST and SGST, in that order. The amount of CGST-ITC shall first be utilised towards payment of CGST and the amount remaining, if any, may be utilised towards the payment of IGST. Similarly, the amount of SGST-ITC shall first be utilised towards payment of SGST and the amount remaining, if any, may be utilised towards the payment of IGST. The ITC on account of CGST shall not be utilised towards payment of SGSTand vice versa.
–    The amount in electronic credit ledger shall not be used for the purposes of making payment of interest, penalty, fees, or any other amount. Similarly, such amount shall not be used for making payment of liability under reverse charge or composition tax.
–    It may be noted that, in case of excess claim due to mismatch of ITC, taxable person shall be liable to pay interest on such excess claim at the prescribed rate for the prescribed period. In cases mentioned in section 37(8), interest shall be payable, from the date of availing of credit till the corresponding additions are made. If however, any excess claim of ITC added earlier is later on found to be correct due to acceptance of additional liability by the supplier of such goods/services, then such interest paid by the assessee shall be refunded to him to the extent it does not exceed the amount of interest paid by the said supplier.

14.    Conclusion:

ITC and its eligibility are the key constituents of Value Addition Based Taxation Regime on which the concept of GST is designed. It is desirable that there should not be any undue restrictions on its eligibility and admissibility. The seamless flow of ITC credit will result in lower commodity price and the prices so arrived at will be better indicators of economic value of a particular commodity. The ‘matching concept’ demands highly sophisticated and very responsive Information Technology software tools and facilities. With a tax base of around 70-80 Lakh tax payers, there will be hundreds of crores of invoices which will be required to be processed every month by the GST network. Although ‘failure of matching concept’, faulty place of supply rules, composition taxes, restricted or negative list goods and services, reverse charge etc are some of the hindering factors, the Revised Model GST law has made an attempt to facilitate better credit flow as compared to the existing tax laws. But, finally, it is the implementation which will determine whether the effect of cascading of taxes on price will be minimised and reduction in prices will be achieved or not. Let us hope for the best.

shailesh.kwebmaker

Sale In The Course Of Import Vis-À-Vis Works Contract

Introduction

Under Sales Tax Laws, sales effected in the course of import
are exempt. The protection is given by Article 286 of the Constitution of
India. The nature of sale in the course of import is defined in section 5(2) of
the CST Act, 1956 which is as under;

“(2) A sale or purchase of goods
shall be deemed to take place in the course of the import of the goods into the
territory of India only if the sale or purchase either occasions such import or
is effected by a transfer of documents of title to the goods before the goods
have crossed the customs frontiers of India.”

It can be seen that there are two limbs in above
section. The first limb covers the sale
which occasions the import. The second
limb covers sales which are effected by transfer of documents of title to goods
before the goods cross Customs Frontiers of India.

In relation to first limb, there are a number of precedents.
There are cases, where importer has committed sale of goods to be imported, to
its buyer and the actual import is made after such commitment. The first sale
by foreign seller to importer is occasioning the import and hence covered by
first limb. However, it is also possible that the sale made by importer to the
local buyer after import can be covered by the said first limb. However, the
issue is debatable and depends upon facts of each case.

After the 46^th amendment to the Constitution, the
works contract sales are also brought in taxable net under sales tax laws.
Issue arises as to whether the theory of sale in the course of import, more
particularly sale to local buyer, after import, can be covered within first
limb of section 5(2) of the CST Act.

Inextricable link

For claiming sale to local buyer after import, as covered by
first limb as sale in the course of import, it is necessary that there is
inextricable link between import and local sale. In other words, it is required
to be seen whether the import and local sale after import are interlinked.
There are number of criteria to decide inextricable link.

Judgment of Supreme Court

Recently, the Hon’ble Supreme Court had an occasion to decide
such an issue. The judgment is in case of Commissioner, Delhi Value Added
Tax vs. ABB Ltd. (91 VST 188). The short facts of the case noted by the
Hon’ble Supreme Court are as under;

“3. Before adverting to the main issue as to whether the High
Court judgment is correct in law as well as in facts or not, it would be
appropriate to notice some of the relevant facts. The respondent is a Public
Limited Company engaged, inter alia, in manufacture and sale of
engineering goods including power distribution system and SCADA system. It
appears to be a market leader in power and automation technologies. It is a
subsidiary of ABB Ltd., Zurich Switzerland which has operational presence in
over 100 countries and employs around 1,30,000 personnel. On 15.05.2003 DMRC
invited tenders for supply, installation, testing and commissioning of traction
electrification, power supply, power distribution and SCADA system for Line 3
Barakhamba Road-Connaught Place-Dwarka Section of the DMRC. Respondent
responded.

4. DMRC short listed the respondent and then executed
the contract under which the respondent had to provide transformers,
switch-gears, High Voltage Cables, SCADA system and also complete electrical solution,
including control room for operation of metro trains on the concerned Section.
The Bid Document contained detailed bill of goods, quantities and
specifications for the goods, sources (i.e, name of the manufacturer/brand),
detailed terms and conditions requiring approval of sub-contractors/ suppliers
and testing. The goods as also the components of works required certification
as well as acceptance. The NIT required both, Technical Bid and Financial Bid.
Besides the quotation of lumpsum price for the entire scope of work the Bid
Document required individual breakup of price of goods and other details. Bid
submitted by the respondent finally culminated into a contract on 04.08.2004.
The contract document comprised of Special Conditions of Contract, General
Conditions of Contract etc.”

The Delhi sales tax authorities held that there was no link
between the import and contract between DMRC (contractee) and supplier of goods
i.e. ABB Ltd (importer). In other words the claim of sale, in the course
import, by ABB Ltd to DMRC under works contract was disallowed.

Hon’ble Delhi High Court, after going through the contract
allowed the transaction as sale in the course of import and accordingly held it
exempt. Before the Supreme Court, similar arguments were repeated. In
particular, sales tax department relied upon judgment in case of M/s Binani
Brothers Pvt Ltd (1974)1 SC 459. The Hon’ble High Court has allowed the
claim based on judgment in case of K. G. Khosla & Co AIR 1966 SC 1216.
The Hon’ble Supreme Court dealt with this argument elaborately with
reference to above judgments. The observation of the Hon’ble Supreme Court are
as under :-

“12. For analysing the main contention advanced on
behalf of the appellant that the present case is identical to that of the
assessee in the case of Binani Bros. (supra), we have examined
the facts of Binani Bros. (supra) with meticulous care. In para
13 of that judgment the most peculiar and conspicuous aspect of K.G. Khosla
case (supra) was noticed and highlighted that “under the contract of
sale the goods were liable to be rejected after a further inspection by the
buyer in India.” In the same paragraph it was further highlighted with the help
of a quotation from K.G. Khosla case (supra) that movement of
goods imported to India was in pursuance of the conditions of the contract
between the assessee and the Director General of Supplies. There was no
possibility of such goods being used by the assessee for any other purpose. In
the next paragraph of the Report the peculiar facts of Binani Bros. (supra)
were highlighted in the following words, “….. the sale by the petitioner to the
DGS&D did not occasion the import. It was purchase made by the petitioner
from the foreign sellers which occasioned the import of the goods”. In paragraph
16 it was further pointed out that there was no obligation on the DGS&D to
procure import licences for the petitioner.

13. There is no difficulty in holding that Binani
Bros. (supra) did not differ with the earlier judgment of a
Constitution Bench in the case of K.G. Khosla (supra). A careful
analysis of the facts in Binani Bros. (supra) leads to a
conclusion that the case of West Bengal Sales Tax authorities in that matter
that there were two sales involved in the transactions in question, one by the
foreign seller to the assessee and the second by the assessee to the DGS&D,
because there was no privity of contract between the DGS&D and the foreign
sellers, was accepted mainly because the assessee was found entitled to supply
the goods to any person, even other than DGS&D because there was no
specification of the goods in such a way as to render it useable only by the
DGS&D. This was coupled with the fact that the latter had imposed no
obligation on the assessee to supply the goods only to itself. Further, there
were no obligations of testing and approving the goods during the course of
manufacture or for that matter, even at a later stage with a right of
rejection. Such a right of rejecting the specific goods in the present case is
identical to the similar right in respect of goods in K.G. Khosla case (supra).
Hence we are unable to accept the main contention of the appellant that this
case is similar to that of Binani Bros (supra). To the contrary, we
agree with the reasonings of the High Court for coming to the view that the
present case is fit to be governed by the ratio laid down in K.G. Khosla’s
case (supra).

14. The legal principles enunciated in K.G. Khosla (supra)
have been reiterated in State of Maharashtra vs. Embee Corporation, Bombay
and stand supported by the judgment in the case of Deputy Commissioner of
Agricultural Income Tax and Sales Tax, Ernakulam vs. Indian Explosives Ltd.,
as well as in Indure Ltd. and Anr. vs. CTO & Ors. In these cases,
sale in course of imports was accepted without requiring privity of contract
between the foreign supplier and the ultimate consumer in India.”

Conclusion

Thus, the Hon’ble Supreme Court allowed the
claim. From the above judgment it becomes clear that the transactions falling
under ‘works contract’ are also eligible for exempted sale as Sale in the
course of import. The judgment will be useful for future guidance on the issue.

shailesh.kwebmaker

Transfer of Cenvat Credit in Merger & Amalgamation – Recent Amendment

Transfer of CENVAT Credit – Existing Provisions under Rule 10
of CENVAT Credit Rules, 2004 (‘CCR’)

If a manufacturer of the final products shifts his factory to
another site or the factory is transferred on account of change in ownership or
on account of sale, merger, amalgamation, lease or transfer of the factory to a
joint venture with the specific provision for transfer of liabilities of such
factory then, the manufacturer shall be allowed to transfer the CENVAT credit
lying unutilised in his account to such transferred, sold, merged, leased or
amalgamated factory.

If a provider of output service shifts or transfers his
business on account of change in ownership or on account of sale, merger,
amalgamation, lease or transfer of the business to a joint venture with the
specific provision for transfer of liabilities of such business then, the
provider of output service shall be allowed to transfer the CENVAT credit lying
unutilised in his account to such transferred, sold, merged, leased or
amalgamated business.

The transfer of the CENVAT credit under sub–rules (1) and (2)
shall be allowed only if the stock of inputs as such or in process, or the
capital goods is also transferred along with the factory or business premises
to the new site or ownership and the inputs, or capital goods, on which credit
has been availed of are duly accounted for to the satisfaction of the Deputy
Commissioner of Central Excise or as the case may be, the Assistant
Commissioner of Central Excise

Amendment in Rule 10 of CCR vide Notification No. 4/2017 –
CE(NT) dated 02/02/2017

In Rule 10 of the said rules, after sub-rule (3), the
following sub-rule shall be inserted, namely :-

(4) “Subject to the provisions contained in sub-rule
(3), the transfer of the CENVAT credit shall be allowed within a period of
three months from the date of receipt of application by the Deputy Commissioner
of Central Excise or Assistant Commissioner of Central Excise, as the case may
be:

Provided that the period specified in this sub-rule may, on
sufficient cause being shown and reasons to be recorded in writing, be extended
by the Principal Commissioner of Central Excise or Commissioner of Central
Excise, as the case may be, for a further period not exceeding six months.”

Brief Analysis of the amendment

Rule 10 of CCR contains specific provisions for transfer of
unutilised CENVAT credit, in cases where, a manufacturer or a service provider
shifts his factory/premises to another site or transfers his business, on
account of sale, merger, amalgamation, lease etc. The transfer of credit
in such cases is allowed on the condition that the stocks of inputs and capital
goods are transferred as well. Further, the said inputs or capital goods, on
which credit has been availed, need to be duly accounted for to the
satisfaction of the concerned authorities.

Based on practical experience of central excise and service
tax administration, it is noticed that invariably attempts are made by Central
Excise department to raise frivolous objections and deny transfer of unutilized
CENVAT credit in case of business restructuring generally resulting in hardship
and avoidable litigation.

In particular, provisions under Rule 10 of CCR have led to
several disputes. The departmental authorities insist that prior permission is
required for transfer of unutilised CENVAT credit, while the tax payers take a
position that mere intimation was sufficient to transfer the unutilised credit.

Some relevant judicial considerations are given hereafter for
reference:

In Hewlett Packard (I) Sales vs. CC (2008) 6 STR 155; 211
ELT 263 (CESTAT), it has been held that prior permission of AC / DC is not
required for transfer of credit relying on Solaris Biochemicals vs. CCE
(2005) 179 ELT 216 (CESTAT) – followed in Kiran Pondy Chems vs. CCE
(2009) 239 ELT 192 (CESTAT SMB); Flex Art Foil P Ltd. vs. CCE (2010) 260 ELT
261 (CESTAT) [view upheld in CC vs. Hewlett Packard India Sales Ltd.
(2012) 279 ELT 203 (Karn HC DB).]

In CCE vs. Amar Traders (2008) 222 ELT 400 (CESTAT SMB),
assessee had taken CENVAT credit after intimating about merger and stock
(without seeking any permission). It was held that assessee is eligible for
CENVAT credit of duty paid on stock.

Rulings which have held that permission is not required to
transfer the balance credit – [CCE vs. Tata Auto Components Systems (2011)
33 STT 294; 277 ELT 318 (Karn HC DB); Om Glass Works vs. CCE (2012) 279 ELT 313
(CESTAT SMB).]

In CCE vs. Nagarjuna Agrichem (2008) 222 ELT 232 (CESTAT
SMB), it was observed that Rule 10 does not lay down any condition for
seeking permission from authorities.

In most of the judicial cases, relating to transfer of
unutilized CENVAT credit in case of business structuring, the matter has been
decided in favour of tax payers.

Under this backdrop, a new sub-rule 4 has been inserted with
effect from 02/02/2017 in Rule 10 of CCR, to provide that transfer of
unutilised CENVAT credit shall be allowed by the jurisdictional authorities
within 3 months (to be further extended by 6 months on sufficient cause being
shown) from the date of receipt of application by the manufacturer or service
provider.

The wordings of this newly introduced clause, indicates that
the unutilised CENVAT credit cannot be utilised by the new entity/unit unless
express written approval is received from the concerned authorities.

Some Practical Issues from the amendment

a) It is likely to increase the compliance
procedures for tax payers who have multiple premises/factories and consequently
multiple registrations under central excise and service tax. This could also
lead to an overall delay in the entire process, with the various jurisdictional
authorities disposing off applications at different times.

b) Pending
approval from the concerned authorities or in a case where the application is
rejected by the authorities, there could be situations where the new
entity/unit has to discharge the output tax liability of both the current
operations as well as new operations which may have to be paid in cash without
being able to utilise CENVAT credit of the transferor entity/ factory. This
could pose severe working capital constraints.

c) There could be a scenario where the authorities
do not issue the formal approval within the prescribed time. In such a case,
the amendment is silent as to whether or not, transfer of unutilised CENVAT
credit would automatically stand permitted after the expiry of the prescribed
time period.

Conclusion

Mergers and amalgamations are a very common phenomenon in the
fast changing business environment globally as well as in India. Hence, it is
essential that in order to promote the cause of “ease of doing business”, the
relevant tax laws are business friendly so as to encourage smooth & easy
business restructuring. The amendment made in Rule 10 of CCR with effect from
02/02/2017, could result in long drawn litigations and create uncertainty as
regards entitlement to the benefit of unutilised CENVAT credit at the end of
transferor company or entity, by the transferee company or entity.

In light of the foregoing, the following is recommended:

Appropriate clarifications need to be issued by
CBEC to address practical issues arising from the amendment so as to avoid
hardships to tax payers, in case of business restructuring. In order to encourage
mergers and amalgamations and business restructuring generally and also to
promote the cause of “ease of doing business”, transfer of unutilised CENVAT
credit may be permitted provisionally, pending disposal of application for
transfer of credit based on an undertaking that can be given by the transferor
company or entity to safeguard interest of revenue. While finalising GST
legislation, it should be ensured that these concerns are appropriately addressed.

shailesh.kwebmaker

Welcome GST Indian GST: Goods and Services Tax – Overview & Framework

1. Introduction

1.1. Goods and Services Tax (“GST”) is a
landmark indirect tax reform knocking at our doors. The framework for the
proposed GST Law is provided through the Constitution (101st) Amendment Act,
2016. Section 12 of the said Act dealing with the constitution of the GST
Council was notified on 12.09.2016 and the balance sections of the said Act
have been notified with effect from 16.09.2016 vide Notification No. F. No.
31011/07/2014-SO (ST). In view of sections 17 and 19 of the said Amendment Act,
many of the existing indirect taxes can continue only up to a period of one
year from the above notified date i.e. Existing levies like central excise
duty, value added tax, central sales tax, etc. cannot continue after
16.09.2017. The Union Finance Minister has therefore reiterated the commitment
to introduce GST w.e.f. 01.07.2017.

1.2. In June 2016, the Empowered Committee of
the State Finance Ministers released a draft of the proposed GST Law for public
comments. Based on the public comments received, the GST Council Secretariat
released a revised draft of the proposed GST Law for education of the trade.
The revised draft of the proposed GST Law is the basis of this article.

2. Dual Model of GST

2.1. GST is proposed to be a comprehensive
indirect tax levy on manufacture, sale and consumption of goods as well as on
the services at a national level. In an utopian situation, the tax has to be a
singular tax on all supplies with a uniform rate and seamless credits for taxes
paid at the earlier stage. The current distinction between goods and services
and between concepts of manufacture, sale, deemed sales, etc. should be
subsumed in such a utopian GST.

2.2. However, considering the federal structure
of India, the Empowered Committee of State Finance Ministers have worked out a
dual GST model for India. In this model, both the Central and the State
Governments would levy Central GST (“CGST”) and State GST (“SGST”) respectively
on the same comprehensive base of all supplies, thus eliminating the
distinction between goods and services for the purpose of levy of tax.

3. Destination Based Consumption Tax

3.1. Since the State Governments would also
have jurisdiction to levy tax on supplies, the need for addressing issues
related to interstate supplies arises. GST is designed to be a destination
based consumption tax and therefore in case of interstate supplies, the tax on
the interstate supply must accrue to the destination State. This would also
enable seamless flow of credit in case of interstate supplies for business
purposes.

3.2. Extending the principle of destination
based consumption tax, supplies imported into the country would attract GST
whereas supplies exported from the country need to be zero rated (i.e. not
liable for payment of GST with unfettered input credit).

3.3. To enable a smooth implementation of the
above propositions, the interstate supplies, imports and exports are governed
by an Integrated GST(“IGST”). The IGST rate is proposed to be determined by
considering the CGST and SGST Rates. Effectively, in IGST, there would be two
components i.e. CGST and SGST, out of which, the portion of CGST will be held
by the Central Government and the portion of SGST will be transferred to the
destination State Government. Thus, for IGST, the Central Government will work
as a clearing house for the states where consumption takes place. IGST will
also enable smooth flow of credits between the origin and the destination
States.

3.4. In order to ensure smooth flow of credit
and reduce the documentation requirements, IGST is proposed not only on
interstate sales but also on interstate supplies including branch transfers.

4. Salient Features of Constitution
Amendment Act

4.1. The term ‘GST’ is defined in Article
366(12A) of the Constitution of India to mean “any tax on supply of goods or
services or both except taxes on supply of the alcoholic liquor for human
consumption”.

4.2. Article 366(26A) of the Constitution of
India provides that “services means anything other than goods”.

4.3. Various Central and State taxes will be
subsumed in GST. All goods and services, except alcoholic liquor for human
consumption, will be brought under the purview of GST. Petroleum and petroleum
products (Crude Petroleum, Petrol, Diesel, and ATF) have also been brought
under GST. However, it has also been specifically provided that petroleum and
petroleum products shall not be subject to the levy of GST till a date to be
notified. Till such time Petroleum products will continue to attract excise
duty.

4.4. Article 246A of the Constitution is
inserted in the main body of the Indian Constitution after Article 246 to
empower both the Centre and State to legislate on a common matter i.e. Goods
and Service Tax. The power to make laws on Inter-state transactions has been
kept exclusively with the Central Government.

4.5. Article 279A of the Constitution has been
introduced for creation of Goods and Service Tax Council, a constitutional body
which will be a joint forum of the Central and the State Governments. This
Council will make recommendations to both the Central and State Government on
important issues like tax rates, exemptions, threshold limits, disputes
resolution for GST. The GST Council is envisaged as a recommendatory body with
the Union Finance Minister as Chairperson, Minister in charge of Finance or
Taxation or any other Minister nominated by the each State Government as
members and Union Minister of the State in charge of Revenue as Member of the
GST Council.

5. Legislation – Draft GST Laws

5.1. The dual GST model would be implemented
through multiple statutes:

– An enactment by the Centre to govern the
collection and administration of CGST

– An enactment by each of the States to govern
the collection and administration of SGST

– An enactment by the Centre to govern the
collection and administration of IGST

– An enactment by the Centre to govern the
collection and administration of Cess earmarked for grant of compensation to the
States for revenue loss on account of implementation of GST.

5.2. While there would be multiple statutes for
collection and administration of different variations/components of the GST, it
is expected that the basic features of law such as chargeability, definition of
taxable event and taxable person, measure of levy including valuation
provisions, basis of classification etc. would be uniform across these
statutes. For the said purpose, the GST Council will recommend a draft
legislation for adoption by the State Governments. The GST Council is likely to
finalise the said draft GST Law very soon. However, full autonomy would be
available to the respective State Governments to deviate from the suggested
draft legislations, if there is a need for the same.

6. Provisions relating to Levy and
Collection

6.1. The
levy of tax on intrastate supply of goods and/or services is governed by the
CGST/ SGST Act whereas the levy of tax on inter-state supply of goods and/or
services is governed by the IGST Act.

6.2. Therefore,
the classification of a supply as intrastate supply or interstate supply
becomes paramount to determine the applicable taxes. This classification is
based on the combination of “location of supplier” and the “place of supply”
and is provided under the IGST Act. The provisions are tabulated below for
ready reference:

Nature of supply

Interstate

Intra state

Goods

Location of the supplier and
the place of supply are in different state

Location of the supplier and
the place of supply are in the same state

Services

Location of supplier and
place of supply in different state

Location of supplier and
place of supply in same state

6.3. It may be noted that the above
classification is subject to certain exceptions provided under the IGST Act.

7. Supply

7.1. The term “supply” is defined u/s. 3 of the
CGST/SGST Act. The said definition also applies to the IGST Law. The said
supply can be either taxable supply or an exempted supply.

7.2. All forms of supply like sale, transfer,
barter, exchange, license, rental, lease or disposal and importation of
services are made liable for GST. However, it is important that such supplies
should be for a consideration and that the supplies should be in the course of
or furtherance of business or commerce.

7.3. In addition to supplies for consideration,
Section 3(1) also includes supplies mentioned in Schedule-I without a
consideration. Notable inclusions in Schedule-I are as under:

– Permanent transfer/disposal of business
assets, in cases where input tax credit has been availed

– Supply of goods and/or services between
branches or between related persons

– Supply of goods by principal to agent and vice-versa

– Importation of services from overseas
branches

8. Valuation & Rate/s of Tax

8.1. In general, GST would be payable on the
value of supply. While the general provision u/s. 15 states that the value of
supply shall be the transaction value, the same is subject to the following
conditions:

– Supplier and recipient of supply not
related

– Price is the sole consideration.

8.2. The proposed GST Rate would be determined
based on the principle of Revenue Neutral Rates (RNR). ‘Revenue Neutral Rates’
(RNR) in layman terms, is the rate that allows the Central and States to
sustain the current revenue from tax collections.

8.3. Based on the announcements made by the GST
Council, the following broad classifications of rates are proposed in upcoming
regime of GST:

– Nil Rate for essential goods and services

– Merit Rate for essential goods – 5%

– Lower Standard Rate for goods and services –
12%

– Standard Rate (RNR) for goods and services in
general – 18%

– Demerit Rate for goods – 28%

– Special rate for precious metals – yet to be
decided.

8.4. In addition to the above, certain goods
classified under the 28% rate may also bear a cess which will enable the
compensation to be paid by the Centre to the Revenue loosing States.

9. Exemptions & Composition Scheme

9.1. Most of the exemptions currently available
will be phased out. However, section 11 of the Act permits the Government to
grant exemptions through the issuance of notifications. Further, certain goods
and supplies may be covered under the NIL rate under the Schedule

9.2. A
basic threshold exemption limit of Rs. 20 lakh has been provided.
Further, in order to facilitate small tax payers, an optional composition
scheme has been prescribed for persons having aggregate turnover of up to Rs.
50 lakh. The composition option is not available to the following persons:

– Service Providers

– Persons making inter-state supplies

9.3. The Composition scheme is subject to
various conditions. The supplier is not eligible to claim the credit nor is he
entitled to collect the tax from the customer. Further, the customer is not
eligible for any credits of the composition amount.

9.4. The following table explains the minimum
amount of tax payable under composition scheme:

Type of
suppliers

Minimum CGST

Minimum SGST

Total

Manufacturers

2.5%

Traders

Service Providers

Not eligible

10. Time of Supply

10.1. The liability to pay tax arises at the time
of supply. The following provisions are relevant in this regard.

Section

Provisions

Time of supply of goods

Time of supply of services

Change in rate of tax for
goods and services

10.2. In general, the liability to pay GST arises
on the raising of invoice or receipt of payment whichever is earlier. However,
it is also provided that in case where the invoice is not issued within the
prescribed time, the date on which the invoice is required to be issued will
trigger the GST Liability.

11. Place of Supply for Goods

11.1. Section 7 of the IGST Act defines the place
of supply of goods other than imported and exported goods. The said provisions
are fundamentally different from the current provisions since they are based on
the destination principle rather than the origin principle.

11.2. The following table summarises the place of
supply of goods as defined under the GST Act and under the IGST Act:

Situation

Place of Supply as per
Section 7 of IGST Act

Supply involving movement of
goods

Location of termination of
movement for delivery

Supply by way of transfer of
documents of title

Principal place of business
of the buyer

Supply not involving movement of goods

Location of goods

Goods assembled or installed
at site

Place of installation or
assembly

Goods supplied on board of
conveyance

Location at which goods are
taken on board

11.3. Similarly, the place of supply for imported
/ exported goods is provided u/s. 8 of the IGST Act. The provisions are simple
and are therefore tabulated below for ready reference :

Nature of Goods

Place of Supply

Imported Goods

Location of Importer

Exported Goods

Location outside India

12. Place of Supply for Services

12.1. The concept of IGST serves multiple
objectives. Since the services are essentially intangible in nature, the place
of supply rules for services are drafted considering these objectives in
mind. Further to the above objectives,
the place of supply rules under IGST also need to deal with situations of
supplies amongst two or more States, where also the guiding principle is
ensuring a seamless flow of credits amongst businesses and transfer of tax to
the correct State of Consumption.

12.2. The following table summarises the
provisions in regard to the place of supply of services. It may be noted that
if the location of service recipient is not available on records, the location
of supplier will be considered in cases where the place of supply is the
location of recipient of service.

Nature of Supply of Service	Supplier- recipient in India (R2R)	Either of supplier or recipient is outside India
General Rule	Location of Service recipient	Location of Service Recipient	Location of Service Recipient
Immovable property	Location of Immoveable Property	Location of Immoveable Property	Location of Immoveable Property
Performance based service	Location of Service Recipient	Location of Service Recipient	Place of Performance of Service
Training and performance	Location of Service Recipient	Place of Performance	Place of Performance
Admission to an event or park	Location of the Event	Location of the Event	Location of the Event
Organization of events etc.	Location of service recipient	Place where event is actually held	Place where the event is held
Transportation of goods	Location of service recipient	Place where goods are handed over their transportation	Destination of Goods
Transportation of passengers	Location of service recipient	Place where passenger embarks on the conveyance for a continuous journey	Place where passenger embarks on the conveyance for a continuous journey
Services on board a conveyance	First Scheduled Point of Departure	First Scheduled Point of Departure	First Scheduled Point of Departure
Telecommunication services	Various situations to determine the location of subscriber	Various situations to determine the location of subscriber	Location of Recipient
Banking & Financial Services including stock broking	Location of service recipient on the records of service provider	Location of service recipient on the records of service provider	Location of Supplier for account related services. Location of Recipient in other cases
Insurance	Location of service recipient	Location of service recipient	Location of service recipient
Advertisement services to Government etc.	Not Applicable	• Meant for identifiable state- POS would be that state • Multiple States- POS all such states and value to be attributed to each of them	Not Applicable
Intermediary	Location of Recipient	Location of Recipient	Location of Supplier
Hiring of means of transport	Location of Recipient	Location of Recipient	Location of Supplier
Online information and database access or retrieval service	Location of Recipient	Location of Recipient	Location of Recipient

Nature of Supply of Service

Supplier- recipient in
India (R2R)

Either of
supplier or recipient is outside India

Business to Business
Cases (B2B)

Business to Customer Cases
(B2C)

General Rule

Location of Service
recipient

Location of Service
Recipient

Immovable property

Location of Immoveable
Property

Performance based service

Location of

Service Recipient

Location of

Service

Recipient

Place of Performance of
Service

Training and performance

Location of

Service Recipient

Place of Performance

Place of

Performance

Admission to an event or
park

Location of the Event

Organization of events etc.

Location of service
recipient

Place where event is
actually held

Place where the event is
held

Transportation of goods

Location of service
recipient

Place where goods are handed
over their

transportation

Destination of Goods

Transportation of passengers

Location of service
recipient

Place where passenger
embarks on the conveyance for a continuous journey

Services on board a
conveyance

First Scheduled Point of
Departure

First

Scheduled Point of Departure

First Scheduled Point of
Departure

Telecommunication services

Various situations to
determine the location of subscriber

Various

situations to determine the
location of subscriber

Location of Recipient

Banking & Financial
Services including stock broking

Location of service
recipient on the records of service provider

Location of Supplier for
account related services.

Location of Recipient in
other cases

Insurance

Location of service
recipient

Location of

service recipient

Location of service
recipient

Advertisement services to
Government etc.

Not Applicable

• Meant for identifiable state- POS would be that state

• Multiple States- POS all such states and value to be attributed
to each of them

Not Applicable

Intermediary

Location of Recipient

Location of Supplier

Hiring of means of transport

Location of Recipient

Location of Supplier

Online information and
database access or retrieval service

Location of Recipient

13. Input Tax Credit

13.1. Input Tax Credit mechanism is the core of
the GST Regime. The provisions of input tax credit are contained in section 16
of the Act. The salient features thereof are as under:

– Input Tax credit will be allowed only to
registered persons

– On registration, credit would also be
available for inputs and finished goods lying in stock on the date of
registration.

– Credit to be calculated based on generally
accepted accounting principles as may be prescribed.

– Proportionate credit in case certain goods
are used for business as well as non-business purposes

– Certain cases of ineligible input tax credit
are also prescribed.

13.2. Some examples of ineligible credits are
provided below for ready reference

– Motor vehicles unless used for transportation
of goods

– Food and Beverages unless the same is used
for the purposes of further business in F&B

– Employee related goods/ services

– Goods/ services resulting in construction of
immovable property for self-consumption

– GST paid under the composition scheme

– Goods for personal consumption

– Goods lost, destroyed, stolen, written off or
disposed off by way of gifts or free samples

13.3. Fungibility of credit: The rules relating to
fungibility of credits and priority of adjustment are as under

13.3.1. The input tax credit on account of IGST during
a tax period shall first be utilised towards payment of IGST; the amount
remaining, if any, shall be utilised towards the payment of CGST and SGST, in
that order.

13.3.2. The input tax credit on account of CGST during
a tax period shall first be utilised towards payment of CGST; the amount
remaining, if any, shall be utilised towards the payment of IGST.

13.3.3. The input tax credit on account of SGST during
a tax period shall first be utilised towards payment of SGST; the amount
remaining, if any, shall be utilised towards the payment of IGST.

13.3.4. No input tax credit on account of CGST shall be
utilised towards payment of SGST.

13.3.5. No input tax credit on account of SGST shall be
utilised towards payment of CGST.

13.4. Section 16(2) of the Act also prescribes for
certain documentation before the credit can be claimed, such as possession of
tax invoice, goods/ service should have been received, tax has been actually
paid by the supplier and return has been furnished under the applicable
section. Similarly, it is also stated that the payment of tax by cash or credit
by the supplier is necessary to claim credit. Similarly, it is important that
the payment is made to the service provider within a period of 3 months.

14. Procedural Aspects

14.1. Under the GST Law, credits will be available
on the basis of online matching of credits. Towards that goal in mind, a
detailed procedure has been prescribed for periodic filing of statements,
online matching and submission of returns. The following chart explains the
process as a bird’s eye view.

14.2. Elaborate rules are also prescribed for
payment of taxes, grant of refunds, assessment, audits, demands and
enforcement. Further, penal provisions are also prescribed for various offences
listed under the proposed Act.

15. Transitional Provisions

15.1. The model GST Law contains various
provisions dealing with transition related issues. The said provisions deal
with migration of registrations of existing taxpayers into the GST Regime and
thereafter deal with issues relating to credits, payment of taxes and certain
procedures.

16. Anti Profiteering Measure

16.1. Sensing the risk of GST resulting in
widespread inflation, the Government has introduced an anti profiteering
provision under the Model GST Law. Accordingly, it is proposed that an
authority shall be set up to investigate such cases and impose penalties as
deemed fit.

17. Conclusion

17.1. The
proposed GST Law presents a unique opportunity to professionals to provide
quality services to clients. The BCAJ proposes to carry detailed articles analysing
each of the sections of the proposed GST Law. This article is a precursor to
such a detailed in depth analysis which will be carried in subsequent issues.

shailesh.kwebmaker

Works Contract Vis-À-Vis Consumables

Introduction

Under VAT era (period prior to 30.6.2017) one of the burning
issues is whether the transaction is a ‘works contract’ or ‘service contract’.
If it is works contract then it can be liable to VAT/CST, otherwise not.

There are boundary line cases where nature of transaction is
known on final decision of higher courts like the High Court.

One such transaction is a contract requiring use of
consumables. There are conflicting judgments on this issue. A brief reference
to such judgments can be tracked as under.

Pest Control India Ltd. (75 STC 188)(Pat)

“There can be no transfer of property in goods unless the
goods themselves exist. In the execution of a contract for eradication of
pests, rodents, termites, although chemicals are used, the chemicals are
sprayed through machines so that when the process ends, the chemicals are
consumed and nothing tangible remains in which property is transferred. Such a
transaction does not involve transfer of any goods as understood in sub-clause
(b) of clause (29-A) of article 366 of the Constitution, or under the
provisions of the Bihar Finance Act, 1981. Such a contract is a pure service
contract, and no sales tax is leviable in relation thereto under the provisions
of the Bihar Finance Act, 1981.”

Enviro Chemicals vs. State of Kerala (39 VST 434)(Ker)

“The petitioner had developed a chemical product by name
“envirofloc” used as a chemical for effluent treatment. The
petitioner carried out pollution control treatment for M, a company engaged in
manufacture of yarn. In the course of effluent treatment entrusted to the
petitioner, the petitioner applied the chemical “envirofloc” and it treated
effluent water probably by neutralising colour, odour, etc.. The
petitioner claimed that no transfer or sale took place in the execution of
works contract. The Department took the view that the material was consumed in
the process of effluent treatment and it got transferred in the course of such
treatment and there was sale of goods involved in the execution of works
contract. The petitioner was therefore assessed to tax under the Kerala General
Sales Tax Act, 1963 on the sale of materials involved in the execution of works
contract of effluent treatment at the premises of M, a manufacturer of yarn:

Held, per majority, that admittedly the chemical in question
was goods and the petitioner was the owner of the goods in question, namely,
the chemical. The intention of the parties was that the petitioner must use the
chemical in the effluent treatment process and the petitioner actually used it.
By using the chemical, the petitioner rendered the effluent compliant with the
standards. The moment the petitioner poured the chemicals into the effluent, it
ceased to be the owner and at that point of time M must be deemed to have taken
delivery thereof. The fact that upon its being poured into the effluent, it
lost its identity and that it was consumed would not detract from the fact that
there was delivery thereof to M. The effluent and the treated effluent both
belonged to M. It was, therefore, into the property of M, namely the effluent,
that the petitioner supplied the chemical. The property in the chemicals passed
to M the moment they were put into the effluent by the petitioner and their
subsequent consumption was consumption after sale and did not detract from the
factum of sale and consequently exigibility to tax. There was a sale of
chemical involved in the execution of the works contract as there was delivery
of it to the awarder by virtue of the chemical being poured into the effluent.”

It can be seen that there is apparent conflict between views
of the authorities.

In case of Enviro Chemicals vs. State of Kerala (39 VST 434)(Ker),
the Larger Bench of Kerala High Court has taken an extreme view that once goods
are used for customer there is transfer of property, though customer may not be
getting any tangible property.

Recent judgment in case of VPSSR Facilities vs.
Commissioner of Value Added Tax and ans (99 VST 1)(Del).

This judgment is latest in series. The brief facts as stated
by the Hon. Delhi High Court are as under:

“The petitioner is engaged in the business of providing
services of maintenance, cleaning, washing, housekeeping, waste management, etc.

The petitioner was awarded a contract by the Northern
Railways (hereinafter referred to as the contractee) in relation to the
management, cleaning, washing, housekeeping, waste management, etc., at
Diesel Shed Shakurbasti and at Training School Shakurbasti.

It is contended by the
petitioner that the contract was for cleaning of sites of Northern Railways
(contractee) and was a pure service contract and no transfer of property from
the petitioner (contractor) to Northern Railways (contractee) was involved. It
is contended that the activities undertaken by the petitioner did not
constitute a sale within the meaning of Delhi Value Added Tax Act, 2004
(hereinafter referred to as “the DVAT Act”).

It is contended that being a service contract, the petitioner
is paying service tax at 12.36 % on the entire consideration received by it
from the contractee. There is no separate payment made for the use of
consumables. It is contended that as the payment made by the contractee to the
petitioner was not because of transfer of property in goods, no tax was
required to be deducted at source u/s. 36A of the DVAT Act. It is contended
that the contractee (railways) to be on safe side insisted on deduction of tax
at source.

It is contended that for the purposes of providing the
service of cleaning, the petitioner was required to use soap/detergent/chemical
of a very minimal quantity and a very nominal value. The
soap/detergent/chemical was used for removing the muck/grime and the same got
completely “consumed” in the process and were not transferred to the
railways. It is contended that the contract involved pure labour and service
and was a mere works contract.”

There were arguments on both sides. Judgment of the Hon.
Kerala High Court in Enviro Chemicals is also considered.

To further consider facts, the High Court referred to para in
agreement, which reads as under:

“For the execution of the above work of maintenance, cleaning
washing of locomotives, etc., the petitioner is required to use
chemicals/solvents.

Clause 38 of the special conditions of contract reads as
under:

“38. Chemical/solvents and machines chemical/solvents
used should be eco-friendly, bio degradable pH value 7-8. Chemical/solvent can
be tested by railway from the independent lab at the contractor’s cost.
Chemical/solvents used should be of reputed brand. Contractor after having gone
through the scope of work will calculate the requirement of chemical/solvent
required per month/year. Chemical will be supplied by the contractor and shall
be kept in the custody of railway. These chemicals will be issued to the
contractor on daily basis as per requirement submitted by the contractor and
empty bottles/cans are required to submit back to issuing authority after
completion of daily work. Railway will not pay any amount separately to
contractor for purchase of chemical or machine. Cost of chemicals and machines
should be inclusive in activities mentioned in the schedule of unit
rates.”

Referring to the above clause 38, the respondent/Revenue has
held that the property in the chemicals/solvents used by the petitioner in the
execution of the work has transferred to the contractee.”

Distinguishing judgments including Enviro Chemicals, the
Delhi High Court observed as under:

“In both Enviro Chemicals [2011] 39 VST 434 (Ker) [FB]
and Xerox Modicorp Ltd. [2005] 142 STC 209 (SC); [2005] 7 SCC 380, the
courts were not dealing with the goods which were integral to the service
contract and which were completely consumed during the execution of the service
contract. The goods were consumed for the purposes of the final output, i.e.,
chemical treatment of effluent water (Enviro Chemicals) and spare parts and
Toners and Developers (Xerox Modicorp Ltd.). The courts were not concerned with
goods (soaps/detergent/chemical/solvent) as in the present case, which are
consumed in the process of cleaning. In the present case the contract, inter
alia, requires the petitioner to perform the task of mechanised scrubbing
of shed floor to keep it free from muck/grime arising due to dropping of
oil/grease/effluents and industrial.

Here italicized waste by using biodegradable floor
chemicals/solvent. Mechanised scrubbing by floor scrubbing/scarifying machine,
removal of industrial waste along with muck, unwanted/useless and dumping the
same at the nominated place within the shed complex. Cleaning of floor of main
shed, SMM store, lab and administrative block to keep it free from dropping of
oil/ grease/grime/effluent including removal of cobwebs from covered area.
Cleaning of DEMU Care Centre, DEMU Block and Diesel Training Centre SSB to keep
it free from dropping of oil/grease/grime/effluent including removal of cobwebs
from covered area. Cleaning of rooms, veranda, etc., of lab,
administrative block and offices of Sr. Subordinate Supervisors with wiping by
wet and dry moppers. Cleaning of rooms, veranda, etc., of DEMU Block and
Diesel Training Centre SSB with wiping by wet and dry moppers. To keep floor,
side walls of inspection pits free from muck/grime/ arises due to dropping of
oil/grease/effluents and industrial waste by using high-pressure cold/hot jet
cleaner. Removal of unwanted industrial waste and dumping the same at the
nominated place within the shed complex. To keep floor, side walls of DEMU Care
Centre pits free from muck/grime/ arises due to dropping of
oil/grease/effluents and industrial waste by using high-pressure cold/hot jet
cleaner. Cleaning of toilets by high-pressure water jet cleaner, removal of silt
and muck from urinals. Loco washing/ cleaning of pit wheel lathe machine
complex to keep it free from dropping of oil/grease/grime/effluent/waste metal
chips including removal of cob-webs from covered area.

The soaps, detergent, chemicals and solvent used purely for
the purposes of cleaning and which are completely consumed, in the process of
the execution of the above referred tasks, cannot by any stretch of imagination
be said to be goods in which property could pass to the contractee. Similarly,
water is also used in the above referred process of cleaning and execution of
the contract. Can it be said, that even property in water, that is used and
consumed in the said process of cleaning and execution of the contract, is also
transferred to the contractee and the value of the water consumed should be
exigible to tax?

The mere fact that soaps, detergent, chemicals and solvents
are deposited in the store of the contractee would not make any difference to
the exigibility, as is sought to be contended by the Revenue/respondents,
because, admittedly, by mere deposit in the store, the property in them is not
stated to pass. It is contended by the Revenue/respondent, that the property
passes when they are actually used. The petitioners and the railways have contended
that the said soaps/detergent/chemical/solvent are deposited with the railways
and issued from their store to ensure that adequate quantity is used by the
petitioner for the execution of the awarded work.

In view of the above, we hold that, the property in the
consumable chemicals used in the process of cleaning does not transfer to the
contractee/railways and accordingly the said goods are not exigible to tax.
Since the said goods are not exigible to tax, the contractee/railways is not
liable to deduct tax at source and the Commissioner, VAT is liable to grant a
certificate for Nil deduction of tax deducted at source.”

Thus the transaction is held as not a works contract on
ground that there is no transfer of property.

Conclusion

The margin in works contract and service transaction is very
thin. It is again the perspective of the authorities which will decide the
nature of transaction.

It is expected that similar issue will not arise
under GST.

shailesh.kwebmaker

Decoding GST – GST – First Principles on Reverse Charge Mechanism

Introduction

Goods and Services Tax (“GST”), being an indirect tax levy, places the
incidence of the tax on the supplier (i.e. seller/ service provider). The supplier being the taxable person under
the law is required to discharge the tax liability on the transaction of
supply. Although GST is said to be a
consumption tax, legislatures the world over choose to collect the tax from the
suppliers rather than the consumers, with an authority to the supplier to
collect the tax in turn from the consumer.
In the entire scheme, the supplier/ taxable person acts as a tax
collecting agency and deposits the taxes into the Government exchequer after
charging it from recipient/consumer under a contractual arrangement.

This practice has been
largely imbibed into the Indian GST system.
However, the legislature has in special cases shifted the burden of
discharging the tax from the supplier to the recipient, commonly known as a
‘reverse charge mechanism’ (RCM). Under
this mechanism, the legislature places the incidence directly on the recipient
of the supply and in some sense, by-passes the tax collecting agency principle
by opting to collect its taxes directly from the recipient. These are cases
where the scale of administrative convenience tilts towards the recipient
rather than the supplier (such as
transporters of unorganised sector, small traders/service providers below the
turnover threshold, suppliers located outside India in cross border
transactions, etc.). This system existed even under the erstwhile VAT
regime in the form of purchase tax/URD tax and also in the service tax regime
in the form of full/partial reverse charge tax.

RCM Mechanism

The RCM mechanism under GST law
can be placed in two broad baskets:

A)Notified transactions [section 9(3)]:

The
respective Governments under the CGST/SGST law have notified certain
goods/service transactions and the corresponding suppliers/recipients that are
covered under RCM.

Notification
4/2017-CT (Rate) dated 28.06.2017 provides for reverse charge mechanism in case
of procurement of certain goods. The notification covers specified procurement
of goods like cashew nuts, bidi/tobacco leaves from agriculturists, silk yarn
from manufacturer and lottery tickets from the Government/local authority.

On a perusal of the above notification, it
can be observed that the reverse charge mechanism is triggered only on the
first point of the supply chain. For example, cashew nuts supplied by an
agriculturist will attract reverse charge. However, subsequent transactions will
not be governed by reverse charge but by normal provisions of the law.

Similarly,
Notification 13/2017-CT (Rate) provides for reverse charge mechanism in case of
procurement of certain intrastate supply of services whereas Notification
10/2017-IT (Rate) provides for reverse charge mechanism in case of certain
inter-state supply of services. The following table summarises the provisions
in this regard:

Sr. No.

Category of Service

100% to be paid by

Rate

SAC Code

Import of Service

Any person located in the taxable territory other than
non-assessee online recipient (Business Recipient)

Rate applicable to the service

As per category of services

Goods Transport Agency Service

Any Registered Person, Factory, Society, Body Corporate,
Partnership Firm, Casual Taxable Person

99679

Legal Service

Any business entity

18%

99821

Arbitral Tribunal Service

Any business entity

18%

99821

Sponsorship Service

Anybody corporate or partnership firm

18%

99839

Services provided by Government
(Excluding exempt categories)

Any business entity

18%

99911

Service provided by Director

A company or a body corporate

18%

99839

Service provided by Insurance Agent

Any person carrying on insurance business

18%

99716

Service provided by Recovery Agent

A banking company or a financial institution or a
non-banking financial company

18%

99859

Transportation of Goods by Vessel where
freight is pre-paid

(a) Where freight is identified

Importer as defined under clause (26) of section 2 of the
Customs Act,

5% GST on the Freight value

99652

(b) Where freight is not identified (On
CIF Value)

Importer as defined under clause (26) of section 2 of the
Customs Act,

5% GST on 10% of CIF Value

Transfer of copyright relating to
original literary, dramatic, musical or artistic works

Publisher, Music company, Producer

12%

99733

Rent-A-Cab Service (e-commerce operator
only)

(a) Where fuel cost is borne by
recipient

Electronic commerce operator

18%

99660

(b) Others

Electronic commerce operator

B) URD transactions [section 9(4)]:

The legislature has mandated RCM mechanism
also on transactions where the supplier is an unregistered person (URD). On a plain reading of the provisions of
section 9(4), it is evident that the cumulative conditions for trigger of this
provision are as follows: (i) supplier is unregistered; (ii) recipient is
registered; (iii) supply is taxable.
Accordingly, the applicability of RCM on URD activities can be tabulated
as follows:

Registration Status of Recipient

Registration Status of the Supplier

Nature of Taxable Supply

Applicability of RCM u/s. 9(4)

General Applicability
of GST

Registered

Taxable

Not Applicable

Supplier will pay GST either under normal or composition
option.

Registered

Non Taxable

Not Applicable

Supply itself is not taxable or exempted.

Registered

Unregistered

Taxable

Applicable

Recipient will discharge the GST under RCM.

Registered

Unregistered

Non Taxable

Not Applicable

Supply itself is not taxable or exempted.

Unregistered

Registered

Taxable

Not Applicable

Supplier will pay GST either under normal or composition
option and will treat this as B2C transaction.

Unregistered

Registered

Non Taxable

Not Applicable

Supply itself is not taxable or exempted

Unregistered

Taxable

Not Applicable

The provisions of section 9(4) do not trigger a
registration requirement. This is analysed later.

Unregistered

Non Taxable

Not Applicable

Supply itself is not taxable or exempted.

Applicability of registration
under rcm transactions

The primary question that
arises is whether RCM provisions by itself trigger a registration requirement
under the GST law. This has to be answered by examining RCM baskets
individually. As regards the notified transactions, the provisions apply to the
‘recipient’ in contradistinction to ‘registered person’. It implies that any
recipient whether registered or not is obligated to comply with the RCM
provisions. Therefore, in case an
unregistered recipient avails any of the specified services attracting RCM (like
legal services from an advocate), the said recipient would have to necessarily
seek registered (if not already registered) and comply with the RCM
provisions. The provisions of section 24
of the GST law give effect to the registration requirement on the recipient in
this case. Respite has been provided
under the corresponding notification where the specified recipients for this
RCM category are either body corporates/ business entity, etc. The notification therefore consciously
excludes individual consumers or unregistered persons (not engaged in any
business activity) from the rigours of RCM. For example, a citizen seeking the
services of a lawyer would not be subject to RCM and the registration
requirements.

As regards URD transactions, the provisions specify that the recipient
should be a registered person under the GST law, implying that persons who are
not registered may not be subject to RCM provisions. A contradictory view can come up in view of
the non-obstante provisions of section 24(iii) which makes persons
liable for registration if they are covered by reverse charge provisions. This can be countered by contending that said
section 24 is non-obstante only with reference to the threshold limit
(of Rs. 20 lakh) and places a registration requirement on business entities
under RCM where they are otherwise engaged in taxable supply but operating at
lower turnover levels. Further, unlike
the definition of taxable person which includes person ‘liable to be
registered’, the URD provisions restricts its scope only to ‘registered
persons’. Importantly, the said section
does not override section 23 of the law which specifically waives any
registration requirement in case of a person not liable to tax or engaged in
wholly exempted goods/ services. The law cannot be interpreted to give a
benefit on one hand and take away the benefit by the other hand. Therefore, in the view of the author, URD
transactions cannot by itself trigger a registration requirement. The URD transactions will trigger registration
only where the supplier is in business activity and making a taxable supply but
operating below the minimum turnover threshold. As an example, an agriculturist appointing
contract labour for the tilling of the land under his supervision cannot be expected
to discharge RCM and/ or seek registration under the provisions of section 24
merely on account of section 9(4) of GST law, when he has been specifically
excluded from registration u/s. 23 of the said law. Similarly, a retailer
operating at turnover levels below 20 lakh would also not be required to seek
the registration under RCM in case of a liability u/s. 9(4) of the GST law.
However, if the retailer is already registered under GST (either under normal
or composition option), all procurements from URD will become liable for RCM.

Treatment of rcm transactions

The RCM provisions fixes the specified recipient as the person liable to
pay tax and seeks compliance of all the provisions of the GST law on the
transaction of supply. As a consequence,
all aspects of a transaction (listed below) have to be determined by the
recipient by placing himself into the shoes of the supplier. This would result in many challenges at the
recipient’s end.

Nature of Supply

A recipient would be
required to ascertain whether supply being made by the notified supplier or
unregistered supplier is in the nature of a composite supply or a mixed
supply. A simple example may be whether
a company providing end-to-end logistic solutions with or without warehousing
solutions under a single work order qualifies as a ‘goods transport agency’
service. A recipient cannot merely rely
upon the classification of the supplier as either a GTA or a logistic service
provider. The recipient would have to
resort to the concept of composite supply or mixed supply and ascertain
whether the RCM provisions apply itself.
If and only if the supply is a composite supply with the principal
supply being categorised as a GTA service would the RCM provisions be
applicable.

Place of
Supply

The qualifying recipient is
also required to ascertain the place of supply in determining the nature of tax
payable under the RCM scheme i.e. identify the location of the supplier and
also the place of supply and discharge the respective tax. RCM may be a local supply or an inter-state
supply depending upon the said parameters.
This would create anomalies as cited in an example – say a company
registered in State A books a hotel in state B for the stay of its sales employees
which has a declared tariff of more than Rs. 1,000 but is unregistered in
GST. Going by Place of supply rules, the
supplier (i.e. hotel) and the place of supply (immovable property) are in State
B and it amounts to a local supply in State B.
Now the company is unregistered insofar as State B is concerned. Going
by the view taken on registration above, the company does not come within the
ambit of section 9(4) of the GST law and the company should not be asked to
register as a non-resident taxable person in State B merely on account of the
RCM provisions.

An issue also arises in
case of inter-state supplies by an unregistered person, say a job worker. In case the said company send goods to an
unregistered job worker in State C for a job work and receive a job work bill
for the services rendered. Under the
Place of supply rules, the transaction amounts to an inter-state supply and
provisions of section 5(4) of the IGST law require the recipient to pay tax
under RCM provisions. However, if one
views section 24 of the CGST law, every person making an inter-state supply is
required to seek registration irrespective of the turnover threshold. Section 122(3) and 132(i) of the GST law
treats a person receiving services in violation of the GST law as an offender
and imposes a penalty/ imprisonment on such person for such offences. This seems contradictory since the law
recognises inter-state supplies by unregistered persons but on the other hand
treats inter-state supplies by an unregistered person as a violation of section
24 of the GST law. Until the law is settled on this issue, it may be
challenging to engage in inter-state transactions with URDs.

Rate of Tax/ HSN/ SAC

GST law expects that a
recipient of supply determines the rate of tax on each supply of goods/
services made from URDs and discharge the applicable rate of tax as if the
recipient is the supplier of goods. This
is going to place a herculean task on companies to fix the HSN on innumerable
items purchased. For example, a company
purchasing stationery/groceries from local vendors which are unregistered would
be required to undertake a HSN classification of every item purchased and
discharge the applicable rate of tax.
This would be a highly onerous obligation on the recipient to comply
with.

Time of Supply

In case of supply of goods, the time of supply would be earliest of the
receipt of goods or payment or thirty days from the date of issue of the
supplier’s document. Similarly in case
of supply of services, the time of supply would be earliest of the payment or
sixty days from the date of issue of the supplier’s document. The recipient is required to ensure that the
relevant documents are issued by the notified supplier/ unregistered supplier
in order to meet the tax liability requirements within the specified timelimits.

Invoicing and Reporting requirements

The recipient covered under RCM is required to raise a self-purchase
invoice on the date of receipt of the goods or services or both. The law also
requires the RCM recipient to raise a payment voucher at the time of making
paying to the specified supplier. The
format and contents of the invoice include, inter-alia, HSN, description
of goods/ services, quantity, etc.
The proviso to the said rule permits raising a consolidated monthly
invoice for URD transactions under the RCM scheme. The said invoices are required to be reported
in Part-3 of GSTR-2 and eligible for credit in the same month if the goods/
services have been received and other
ITC conditions have been complied with.

specific transactions

RCM mechanism poses significant hurdles in specific transactions which
have been discussed below:

Employee reimbursements

Employees incur various
expenses during the course of their official duties (such as travel, local
conveyance, food, etc.) and claim reimbursements from the Company for
such expenses. The key challenge which arises is whether such reimbursements
are subject to RCM under the provisions of section 9(3) or 9(4) of the GST
law. A simple example could be where an
employee avails the facility of an Air-Conditioned Bus travel for official
purposes and claims a reimbursement from the Company. In this transaction, it is important to
understand whether there are two supplies (ie., between the transporter to the
employee and then from the employee to the Company or just one supply directly
between the Transporter and the Company).
Another viewpoint could be whether the transportation service ends at
the level of employee or does it percolate through the employee and end at the
Company level. It is a well-accepted
fact that in these transactions, the privity of contract is usually between
Transporter and the employee and the company merely reimburses the travel costs
at a subsequent stage. Going by a strict reading definition of ‘recipient’, the
person liable for payment of consideration in such a transaction is the
employee and it is the employee to whom the service is rendered. In such transactions, the company cannot be
strictly termed as a ‘recipient’ (liable for payment for consideration) of the
supply and one may be tempted to conclude that supply ends with the
employee. The immediate next question
would be to identify whether the transaction between the employee and the
company is a supply of goods/ services in terms of section 7 of the GST
law. While this point appears prima-facie
taxable as a supply of service, one should also note that the said supply
(whether in terms of section 7(1)(a) or 7(1)(d) r/w entry 2 of Schedule I)
should be in the course or furtherance of business of the supplier
concerned. Evidently, the employees
cannot be considered to be engaged in any trade, commerce, etc while recovering
the reimbursement from the company.
Hence, the said transaction cannot be termed as a supply of either
goods/services by the employee to the Company. Another contention on
non-taxability of the transaction under RCM would be based on Entry 1 of
Schedule III of the said law which excludes any service by an employee to the
employer ‘in the course or in relation to’ employment as neither supply of
goods/ services under the GST law.

It would also be pertinent to state that the scenario changes
entirely if the supply is contractually agreed between the Company and the
supplier but the payment takes place by the employee and reimbursed by the Company
(say hotel bookings made by the company but settled partially/wholly by the
employee). In such a scenario, the
company would be party to the contract of service but the consideration for the
service is being routed through the employee on account of administrative
convenience. While there is only one
single supply from the supplier directly to the company, the rendition of
service may be to the employee concerned.
In such cases, the Company being the recipient would be obligated to
comply with the RCM provision on such transactions.

Accordingly, it is
important in such transaction to identify the ‘contractual flow’ as well as the
‘actual flow’ of the transaction. In case of transactions bearing a
consideration, the contractual flow rather than the actual flow of supply
assumes significance. Principles can also be drawn from the Australian GSTR
ruling (GSTR 2006/9) which cites the example of a therapist and the above two
variants to explain the taxability of the transactions by employees:

“……………… Example 5:
occupational therapist

161. A, an occupational
therapist, is engaged by B, a company, to assess the needs of C, its employee.
C suffers from multiple sclerosis and needs to use a wheelchair. A and B enter
into an agreement which requires A to undertake an assessment of C’s condition,
to give recommendations in a report to B and for B to pay for the service.

162. A’s supply of services is made to B. Although C may benefit from
these services, it is B who contracts for the supply of these services and is
the recipient of the supply.

163. This supply is not
GST-free under subsection 38-10(1). This is because paragraph 38-10(1)(c)
requires the supply to be generally accepted in the relevant profession as
being necessary for the appropriate treatment of the recipient of the supply. B
is the recipient of the supply. The supply is not for the treatment of B.
Paragraph 38-10(1)(c) is not satisfied.51F

164. If C engages the
occupational therapist to supply its services and B merely pays the therapist
on behalf of C, the recipient of the occupational therapist’s services is C.
This supply will be GST-free if all of the requirements of subsection 38-10(1) are satisfied.

The above ruling places
significance on identification of the contractual flow of the transaction
rather than the actual flow of consumption and directs that the law should
follow the contracting parties rather than the parties who actually pay for the
transaction or bear the cost of the transaction.

Custom house/Clearing house
agents (CHAs)

CHAs typically incur significant charges on behalf of the
importer of goods in order to render their services of custom clearance since
it engages with multiple agencies on behalf of the importer. Some of the many
line items which the CHAs recover (with or without a visible margin) are (a)
custom duty and statutory levies, (b) port charges, (c) delivery order charges,
(d) demurrage charges, (e) liner charges, (f) inland freight, etc. While
the statutory levies qualify as pure agent items and are excluded from the
valuation mechanisms, other recoveries by a CHA which purport to be
reimbursements may not be in-fact be reimbursements and amount to a taxable
supply at the supplier’s end. Where the CHA is a registered person, the
obligation to ascertain the appropriate value would vest on the CHA himself.
However, once the CHA is a URD, it gives rise to significant challenges to the
recipient for identification of the taxable line items and exclusions without
having any knowledge of the trade practices prevalent therein. As an example,
liner reimbursements though corroborated with liner documents have an element
of incentive camouflaged therein which is not disclosed to the importer. The
importer would be of the view that such payments would be reimbursements when
in fact they are not reimbursements but also contain an incentive to the CHA
which is includible in the transaction value in terms of section 15 of the GST
law. It is impossible for the recipient
to ascertain this incentive and determine the appropriate value on which RCM
would be leviable.

Job workers

Job workers of the textile
and jewellery industry are in the unorganised trade. A job worker in the jewellery trade is
compensated in terms of the difference in net weight of the precious metal
jewellery before and after the job work. The jeweller orders the manufacture of
jewellery of a particular net weight to the job worker and performs a reverse
calculation of the gross weight required for the said activity. The
differential takes into consideration the wastage and also compensates the job
worker for the services rendered. However, this is not documented in such a
trade and the recipient will not have any document to evidence recoveries of
precious metal by the job worker, in order to discharge the RCM liability.

Notification No.
8/2017-Central Tax (Rate) – De Minimus Exemption

The Central Government and
corresponding State Governments have issued a notification exempting the
applicability of RCM on transactions below five thousand in aggregate in one
day. The said notification categorically states that the limit of five thousand
should be aggregated by each recipient from all the unregistered suppliers on a
daily basis. Where the aggregate value crosses
the threshold, the entire transaction would be subject to RCM. The said
exemption applies only to intra-state supplies and such a notification under
the IGST law is absent. The said exemption would apply registration-wise and
not entity-wise.

The law also does not
permit the recipient to assess the threshold based on the statement of accounts
or the recording of ledger entries in its books of accounts. The law expects that each service is
individually identified with reference to its date of ‘receipt of such service’
and its ‘value’ and only then the said limit be tested at the recipient’s end.
This not only makes it administratively inconvenient but also practically
unviable for any entity to implement with accuracy.

It should also be noted
that the following transactions would be excluded from the ambit of the
calculation of Rs. 5000/ day – non-taxable supplies, exempt supplies, RCM
supplies covered u/s. 9(3), pure agent reimbursements (say RoC fees), supplies
of the same registrant but received/ consumed (place of supply) in a non-resident
state.

Conclusion

In conclusion, the authors
view RCM as a significant hurdle in complying with the GST law. The legislature in an effort to reduce its
administrative involvement has placed unmanageable administrative burden on the
business community. RCM breaks the input tax credit chain and consequently, the
entire purpose of solving the cascading effect of taxes seems to have taken a
back seat in this RCM scheme, only to gather a minor percentage of tax from
business enterprises.

shailesh.kwebmaker

Works Contract Vis-À-Vis Nature of Goods Sold In Works Contract

Introduction

Taxation of Works Contract
is a debatable issue from beginning. In fact the theory of works contract came
into existence because of complicated nature of the transaction. In case of
works contract, there is more than one element involved like goods, services,
labour and there may be other elements like land etc. Works Contracts
are composite transactions involving supply of goods as well as services.

Taxation of Works Contract

After judgment of the Hon.
Supreme Court in case of Gannon Dunkerly and Co. (9 STC 353)(SC), the
transaction of works contract remained outside the purview of sales tax. In the
above case, it was held that only “Sale” as understood under Sale of Goods Act
is covered under Sales Tax net and transactions of works contract etc. cannot be
covered. It is in 1983, that the 46^th Amendment was effected to the
Constitution, whereby clause (29A) was inserted in Article 366 of the
Constitution so as to include ‘deemed sale transactions’ in the taxation net of
sales tax. There are in all six transactions included in the Constitution. One
of them is works contract transaction. Thus, works contract transaction became
taxable transaction under sales tax as ‘deemed sale’.

Value of goods under Works
Contract

After the above amendment,
issue arose about taxable quantum of the works contract under Sales Tax. The
landmark judgment in case of Builders Association of India (73 STC 370)(SC)
gave the guidelines about taxation of works contract under sales tax. Hon.
Supreme Court held that under Works Contract the sales tax can be levied on the
value of the goods and not on the total value of contract including labour
charges. The relevant portion can be reproduced as under:

“Even after the decision
of this Court in the State of Madras vs. Gannon Dunkerley & Co. (Madras)
Ltd. [1958] 9 STC 353; [1959] SCR 379, it was quite possible that where a
contract entered into in connection with the construction of a building
consisted of two parts, namely, one part relating to the sale of materials used
in the construction of the building by the contractor to the person who had
assigned the contract and another part dealing with the supply of labour and
services, sales tax was leviable on the goods which were agreed to be sold
under the first part. But sales tax could not be levied when the contract in
question was a single and indivisible works contract. After the 46^th
Amendment, the works contract which was an indivisible one is by a legal
fiction altered into a contract which is divisible into one for sale of goods
and the other for supply of labour and services. After the 46^th
Amendment, it has become possible for the States to levy sales tax on the value
of goods involved in a works contract in the same way in which the sales tax
was leviable on the price of the goods and materials supplied in a building
contract which had been entered into in two distinct and separate parts as
stated above.”

Thus, after 46^th
Amendment, the State Government can levy sales tax on the value of the goods
involved in the execution of works contract. It is also clear that the levy
will be similar to tax levied on normal sale of goods.

Rate of tax

Under Sales Tax Laws, one
more important issue is about rate of tax to be applied to value of goods so as
to arrive at tax payable. In other words, after finding value of goods, it is
also equally important to find out the rate of tax applicable to goods involved
in the execution of works contract. This is again a vexed issue. Different
types of goods may be involved in a works contract. One view can be that there
is passing of property in all goods as one category of goods, attracting one
rate. The other view is that different goods are getting transferred and the
rate applicable to such goods respectively should be applied. So there can be
separate rates applicable to respective values of the goods.

Smt.
B. Narasamma vs. Deputy Commissioner Commercial Taxes Karnataka and another (96
VST 357)(SC)

This is the latest
judgment wherein the issue about rate of tax in works contract is dealt with by
Hon. Supreme Court. The issue arose out of Karnataka Sales Tax Law. The brief
facts of the case narrated in the Supreme Court judgment are reproduced below.

“This group of appeals
concerns the rate of taxability of declared goods- i.e., goods declared to be
of special importance u/s. 14 of the Central Sales Tax Act, 1956. The question
that has to be answered in these appeals is whether iron and steel reinforcements
of cement concrete that are used in buildings lose their character as iron and
steel at the point of taxability, that is, at the point of accretion in a works
contract. All these appeals come from the State of Karnataka and can be divided
into two groups—one group relatable to the provisions of the Karnataka Sales
Tax Act, 1957 and post April 1, 2005, appeals that are relatable to the
Karnataka Value Added Tax Act, 2003. The facts in these appeals are more or
less similar. Iron and steel products are used in the execution of works
contracts for reinforcement of cement, the iron and steel products becoming
part of pillars, beams, roofs, etc., which are all parts of the ultimate
immovable structure that is the building or other structure to be constructed.”

Thus, the controversy was
about rate of tax applicable on iron and steel products used in reinforcement
of cement in construction. The argument of State was that the items once used
lose their individual existence and they are chargeable at one rate as
residuary rate. However, Supreme Court has appreciated the contention of the
dealers. The factual position of the use of goods is also narrated by Supreme
Court in this judgment as under:

“Different types of
steel bars/rods of different diameters are used as reinforcement (like TMT
bars, CTD bars, etc.). The reinforcement bars/rods need to be bent at
the ends in a particular fashion to with- stand the bending moments and
flexural shear. The main reinforcement bars/rods have to be placed parallel
along the direction of the longer span. The diameters of such main
reinforcement rods/bars and the distance between any two main reinforcement
bars/rods is calculated depending on the required loads to be carried by the
reinforced cement concrete structure to be built based on various engineering
parameters. At right angles to the main reinforcement bars/rods, distribution
bars/rods of appropriate lesser diameters are placed and the intersections
between the distribution bars/rods and main reinforcement bars/rods are tied
together with binding wire. The tying is not for the purposes of fabrication
but is to see that the iron bars or rods are not displaced during the course of
concreting from the assigned positions as per the drawings. Welding of
longitudinal main bars and transverse distribution bars is not done. In fact,
welding is contra-indicated because it imparts too much rigidity to the
reinforcement which hampers the capacity of the roof structure to oscillate or
bend to compensate varying loads on the structure besides welding reduces the
cross section of the bars/rods weakening their tensile strength. The
reinforcements are placed and tied together in appropriate locations in
accordance with the detailed principles and drawings found in standard bar bending
schedules which lay down the exact parameters of interspaces between bars/rods,
the required diameters of the steel reinforcement bars/rods and contain the
required engineering drawings for placement of bars in a particular manner. The
placement of reinforcement bars/rods for different structures is done under the
supervision of qualified bar tenders and site engineers who are well versed
with the engineering aspects related to steel reinforcement for creating
reinforced cement concrete of desired load bearing capacities.“

After noting the above,
the Hon. Supreme Court held that the steel products were used as it is and they
were not different goods at the time of incorporation. Therefore, the rate
applicable to the goods purchased would apply. The relevant observations are as
under:

“Given the fact-situation
in these appeals, it is obvious that paragraph 101 of this judgment squarely
covers the case against the State, where, commercial goods without change of
their identity as such goods, are merely subject to some processing or
finishing, or are merely joined together, and therefore remain commercially the
same goods which cannot be taxed again, given the rigor of section 15 of the
Central Sales Tax Act. We fail to see how the aforesaid judgment can further
carry the case of the Revenue.”

Thus, the Hon. Supreme
Court laid down that the rate applicable to the goods transferred was
applicable. Further, if the goods transferred are same goods as purchased or
processed goods but the process was not amounting to manufacture, then also the
rate will be same as applicable to goods purchased. Thus, deciding nature of
goods, getting transferred in the contract, is important to decide the rate of tax.

Conclusion

The above judgment will be
useful to resolve the issue about rate of tax. It will be a guiding judgment on
the given issue.

shailesh.kwebmaker

CENVAT Credit – Third Party Services

Preliminary

It is very common in business to outsource a wide range of
third party services that are availed for business activities by manufacturers
and service providers. However, the said services may not be received / availed
in the factory / business premises. In such cases, efforts are often made by ST
Department to deny CENVAT credit availed by the manufacturers / service
providers in regard to service tax paid on such services. This aspect has been
recently considered in a Kolkata Tribunal ruling as discussed below:

Ruling in Tata
Motors Ltd. vs. CCE (2017) 50 STR 28 (Tri – Kolkata)

a) Facts in brief

In this case, the appellants were engaged
in the manufacture of commercial motor vehicles & chassis and parts thereof
at their factory located at Jamshedpur. The appellants availed CENVAT credit of
duty paid on inputs as well as input services received and used by them in the
manufacture of final products. Appellants did not have facility to manufacture
axles and gear boxes in their factory and accordingly, they supplied raw
materials to job workers to manufacture axles, gear boxes and components
thereof. The inputs procured/ purchased by the appellants were supplied
directly to the job workers and they always belonged to the appellants.

The appellants had also availed services of
some third party processors, who processed the raw materials / inputs sent to
job workers on behalf of the appellants and send those processed inputs / raw
materials to the said job workers for manufacturing of axles and gear boxes which
are used by the appellants in the manufacture of motor vehicles. The appellants
had paid processing charges to these third party processors along with
applicable service tax under the “Business Auxiliary Services”. Accordingly,
the appellants had taken credit of the service tax paid since the said services
were used in the manufacture of axles and gear boxes, which are used in the
manufacture of final products manufactured by the appellants.

However, Show Cause Notices were issued and
after due process of law, the demand was confirmed under Rule 14 of CENVAT
Credit Rules, 2004 read with section 11A of Central Excise Act, 1944. The
appellants went in for appeal before the Tribunal against the adjudication
order.

b) Arguments before the Tribunal in brief.

The appellant company reiterated the
grounds of appeal and submitted that they were receivers of services rendered
by the job workers and the said services were used directly or indirectly, in
or in relation to the manufacture of final products and accordingly they were
entitled to credit of service tax paid on the input services. It was further
submitted that the ld. commissioner in the impugned order totally ignored the
expression “services used by the manufacturer whether directly or indirectly, in
or in relation to the manufacture of final product”. It is a settled legal
position that the expression “in or in relation to the manufacture of final
product” itself is of wide import. Definition of “input services” not only uses
the expression “in or in relation to the manufacture of final product” but has
also used the expression “whether directly or indirectly, in or in relation to
the manufacture of final products.” Various judicial rulings to support the
stand were relied upon.

AR reiterated the discussion and findings
of the impugned order.

c) Findings of the Tribunal

On this issue paragraphs 7.2 and 7.3 of the
case law Endurance Technologies Pvt. Ltd. vs. CCE (2011) 273 ELT 248 (Tri. –
Mumbai) are relevant and are as follows:

“Para
7.2 Input services
rendered for manufacture of wind mills for generation of electricity is not in
dispute. The electricity so generated is used in the manufacture of final
product. Therefore, the service falls under the definition of input service. As
regards input service used at a different place it is pertinent that there is
no mandate in law that it should be used in the factory unlike inputs, which is
clear from Rules 4(1) and 4(7) of the CENVAT Credit Rules, 2004 reproduced
herein : –

Rule 4(1).
– The CENVAT credit in respect of inputs may be taken immediately on receipt of
the inputs in the factory of the manufacturer or in the premises of the
provider of output service:

……………

Rule
4(7) – The CENVAT credit in respect of input service shall be
allowed, on or after the day which payment is made of the value of input
service and the service tax paid or payable as is indicated in invoice, bill
or, as the case may be, challan referred to in Rule 9.”

Para 7.3

The Hon’ble High Court in the case of
Ultratech Cement Ltd. has held that the definition of input service read as a
whole makes it clear that the said definition not only covers services, which
are used directly or indirectly in or in relation to the manufacture of final
product, but also includes other services, which have direct nexus or which are
integrally connected with the business of manufacturing the final product. In
the case of CCE & C vs. Ultratech Cement Ltd. – 2010 – TIOL – 1227 – CESTAT
– MUM = 2011 (21) S.T.R. 297 (Tri.-Mum), this Tribunal has held that the denial
of CENVAT Credit on the ground that services were not received by the
respondent in factory premises is not sustainable.”

In the aforesaid decision, it was held that
services rendered outside the factory when having a nexus with the manufacture
of final product then such services are covered under definition of “input
service” of the CENVAT Credit Rules, 2004. This decision of the Tribunal has
been upheld by the Hon’ble High Court of Bombay in CCE&C vs. Endurance
Technology Pvt. Ltd. [2015 – VIL – 221-BOM-ST]. Similar view has been
expressed by the Larger Bench of the Tribunal in Parry Engg. &
Electronics. P. Ltd. vs. C.C.E. & S.T.
(2015) 40 S.T.R. 243 (Tri – LB)]. Paragraph No. 7 is relevant and is
reproduced as follows:

“We find that the Hon’ble Bombay High Court
in the case of Endurance Technologies Pvt. Ltd. (supra) held that CENVAT credit
is eligible on maintenance or repair services of windmills, located away from
the factory. It is well-settled that the decision of Hon’ble High Court is
binding on the Tribunal. It was pointed out at the time of hearing that the
definition of “input service” credit was subsequently amended in 2011. We find
that the present appeals are involving for the period 2006-2007. In any event,
this issue is not before the Larger Bench. Hence, the view taken by the
Tribunal in the case of Endurance Technologies Pvt. Ltd. (supra) is correct.”

Respectfully
following the above decision of the Hon’ble High Court and the Coordinate Bench
of the Tribunal, we hold that the appellants are the receiver of the services
rendered by the third party job workers and the said services have been used
directly or indirectly, in or in relation to the manufacture of motor vehicles
chassis. Hence, the appellants are entitled to credit of service tax paid on
the input service. The definition of input services is very clear; that the
receiver of service does not mean receiver of inputs. The CENVAT Credit Rules,
2004 itself recognise the distinction between input and input services
according to which it has been made mandatory to receive inputs in the factory
of production to avail CENVAT credit on inputs. There is no condition to avail
CENVAT credit on input services that services availed should be received by the
service receiver/ manufacturer in the registered premises. In the case on hand,
the goods, on which services were provided, instead of coming to the appellants
factory were dispatched to another job workers of the appellants. As already
emphasised, definition of input services does not specify that the services
should be received in the factory of the manufacturer. The condition to avail
CENVAT credit on input service is that it should be used in or in relation to
the manufacture of final products. In this case, the service was used in the
manufacture of motor vehicle chassis directly or indirectly. It is also a fact
that the service charge paid by the appellants to the job worker is included in
the assessable value of the final products.

In view of the above observations, the appeal was allowed
with consequential relief.

Conclusion

It is felt that the ratio of the Kolkata
Tribunal ruling discussed above would be relevant for deciding similar matters
under litigation.

shailesh.kwebmaker

Analysis of Input Tax Credit (Revised Provisions in the Act and Draft ITC Rules)

Introduction:

The Central GST Act, Union Territory GST Act, Integrated GST
Act and GST Compensation Act passed by the Central Government and received
presidential assent on 29^th March 2017 contain several changes vis a
vis the provisions contained in the draft Model GST Law which was released in
November 2016 (‘Earlier Draft Law’). Further various draft rules have also come
in public domain recently which include rules relating to ITC as well. In the
April 2017 issue of the BCAJ, the provisions relating to ITC contained in
Earlier Draft Law were discussed. The objective of this Article is to highlight
the changes in the ITC related provisions contained in the Earlier Draft Law
and in the enacted law (Revised Law) and also to discuss the draft rules
dealing with ITC.

I. Changes in the Earlier Draft Law and Revised
Law

1. Non- Payment of Value of Supply along with
Taxes to Supplier of Goods/Services.

Earlier Draft Law provided that, where the
recipient fails to pay to the supplier of services, the amount towards the
value of supply of services along with tax payable thereon within a period of 3
months from the date of issue of invoice by the supplier, an amount equal to
the Input Tax Credit (ITC) availed by the recipient shall be added to his
output tax liability, along with interest thereon.

Under the Revised Law provisions, this
time limit has been extended from 3 months to 180 days. The scope of provision
is expanded to cover not only the inward supply of services, but also inward
supply of goods. It’s further provided that, recipient shall be re-entitled to
avail the credit of such input tax on payment of amount towards the value of supply
of goods or services along with tax payable thereon. However, the recipient
shall not be entitled to re-claim the amount paid towards interest.

2. Meaning of “Exempt Supply” for the purpose of
Computation of goods/services used partly or fully for the purpose of exempt
supply.

Under the Earlier Draft Law, the term
“Exempt Supply” included (i) supply of goods/services not taxable under the Act
(ii) supply of goods/services which attract Nil rate of tax and (iii) supply of
goods/service exempted under the Act. However, “exempt supply” for the purpose
of ascertaining quantum of ineligible ITC also included the supplies on which
supplier was not liable to pay tax due to reverse charge mechanism.

Under the Revised Law, the definition of
exempt supply has remained the same. However, besides supplies covered under
RCM, it has now been explicitly provided that, such ‘exempt supply’ shall also
include transactions in securities, sale of land and sale of building (except
activity covered as deemed supply of service under Para 5(b) of Schedule II),
although in terms of Revised Law, they are neither regarded as
goods/services.

3. Non- Reversal of 50% ITC in case of banking
company or Financial Institution / Non-Banking Financial institution for
supplies made between ‘distinct persons’

The Revised law, provides that, although
banking companies or financial institutions or NBFCs, engaged in supplying
services by way of accepting deposits, extending loans or advances has availed
the option of availing only 50% of the ITC every month, such restrictions shall
not apply to tax paid on supplies made by one registered person to another
registered person having same PAN. (i.e. distinct persons covered u/s. 25(4)
& 25(5)). This is a welcome provision.

4. Rent-a-cab, life insurance and health
insurance services – the scope of Negative List of ITC reduced.

As regards rent-a-cab services, the
Earlier Draft Law provided that, ITC in respect of such services would be
allowed, where the Government notifies such services as obligatory for an
employer to provide its employee under any law. In the Revised Law, the ITC of
such services is permitted also in respect of cases where such services are
availed by the registered person for providing outward supplies of the same
category of goods or services or as the case may be mixed or composite
supplies.

5. The ITC available to non-resident taxable
person is reduced:

The Revised Law disentitles a non-resident
taxable person to avail ITC in respect of goods or services received by him
except on the goods imported by him.

6. The credit in respect of telecommunication
towers and pipelines laid outside the factory premises will not be eligible for
ITC

The Earlier Draft Law included pipelines
and telecommunication tower fixed to the earth by foundation a structural
support as “plant and machinery” and consequently the ITC in respect thereof
was allowed. In the Revised Law, they are specifically excluded from the
definition of “plant and machinery”. It therefore appears that, ITC of works
contract services or other goods or services for construction of
telecommunication towers and pipelines laid outside the factory premises would
not be an eligible credit.

II. Model Draft Input Tax Rules.

Although the Central GST Act and
Integrated GST Act has been enacted, the State GST Acts are yet to be enacted.
Besides the Rules discussed below are only draft rules and hence are subject to
change.

1. Rule 1 – General Rule – The ITC u/s.
16(1) shall be available subject to prescribed conditions. General conditions
are contained in Rule 1. As per Rule 1 following are regarded as eligible duty
paying documents:

(a) an invoice issued by the supplier of goods or
services or both in accordance with the provisions of section 31;

(b) a debit note issued by a supplier in
accordance with the provisions of section 34;

(d) an invoice issued in accordance with the
provisions of section 31(3)(f) (i.e. in case of inward supplies on which tax is
payable under RCM);

(e) a document issued by an Input Service
Distributor in accordance with the provisions of Invoice Rule 7(1) ;

(f) a document issued by an Input Service
Distributor, as prescribed in Rule 4(1)(g) – [clause (f) seems to be a
duplication of clause (e)]

The aforesaid documents will qualify as
duty paying documents only if all the applicable particulars as prescribed in
Invoice rules are contained in the said documents and the relevant information
is furnished in GSTR-2. (However, it’s felt that, this condition is no longer
required especially in view of the fact that, authenticity of such invoices,
will no longer be an issue since these invoices will be ‘matched’ on GSTN
portal which already contains all the requisite particulars)

No ITC shall be availed by a registered
person in respect of any tax that has been paid in pursuance of any order where
any demand has been raised on account of any fraud, willful misstatement or
suppression of facts.

2. Rule 2 – Reversal of ITC in case of
non-payment of consideration

Section 16(2) mandates reversal of ITC,
where the supplier fails to pay the amount towards value of the goods/services
and taxes thereon within 180 days of the date of issue of invoice. The details
of such supply and the amount of credit availed shall be furnished in form
GSTR-2 for the month immediately following the period of 180 days from the date
of issue of invoice. Such amount shall then be added to the output tax
liability of the registered person for the month in which the details are
furnished. The interest shall be payable on such amount from the date of
availing credit on such supplies till the date when the amount added to the
output tax liability. [Author is of the view that, there is no need for such
kind of provision in the Act or in the Rules. It’s only creating additional
compliance burden on the business community as also the burden of additional
interest. The law should not be drafted in a manner that would interfere with
the contractual relations between the parties. There will be various issues as
to non-payment of disputed amounts, retention amounts, the contracts allowing
the parties credit period beyond 180 days, settlement of accounts by way of
adjustment of debts, credit relating to deemed value (i.e. value of
non-monetary consideration or value as a result of deemed supply without
consideration, in which cases no monetary payment is involved)]

3. Rule 3 – Claim of credit by a banking company
or a financial institution

Banking company /NBFC / Financial institutions which are in
the business of supplying services by way of accepting deposits, extending
loans or advances, and opting to pay 50% ITC, shall avail ITC using following
formula.

Total Credit

100

(Less)

Credit of tax paid on
inputs/input services that are used for non-business purpose*

(Less)

Credit attributable to
supplies included in the negative list supplies for the purpose of ITC u/s.
17(5).

Balance Credit

(Multiplied by)

50%

(Add)

ITC in respect of supplies
received from deemed distinct persons ( i.e. person under the same PAN)

Total eligible Credit

*There is however no guideline as to how to compute the
credit of tax paid attributable to non-business purpose, in case of banking and
financial institution. It’s not clear whether it includes only those
input/input services which are exclusively used for non-business purpose or
also those common credits which are used partly for non-business purpose.

4. Rule 4 – Manner of distribution of ITC by
Input Service Distributor (ISD).

The draft rules require that, an ISD shall distribute the tax
credit in the same month in which it’s available for distribution. The ISD
shall separately distribute ineligible ITC as well as eligible ITC. The
particulars to be included in ISD invoice, are prescribed in sub-rule (1) of
rule invoice-7 and such invoice shall clearly indicate that it is issued only
for distribution of ITC. The credit on account of central tax, State tax, Union
territory tax and integrated tax shall be distributed separately. The manner of
distribution of ITC is similar to the one contained in current provisions of
rule 7 of the CENVAT credit Rules. The credit shall be distributed to all units
whether registered or not including the recipient(s) who are engaged in making
exempt supply, or are otherwise not registered for any reason. The ISD can
distribute the credit by issuing debit notes / credit notes. Any additional
amount of ITC on account of issuance of a debit note to an Input Service
Distributor by the supplier shall be distributed in the month in which the
debit note has been included in the return. However, any ITC required to be
reduced on account of issuance of a credit note to the Input Service
Distributor by the supplier shall be apportioned to each recipient in the same
ratio in which ITC contained in the original invoice was distributed. The ITC
shall be distributed under ISD mechanism as under:

a) The ITC on account of integrated tax shall be
distributed as ITC of integrated tax to every recipient.

b) If the recipient and ISD are located in the
same State, then the ITC on account of central tax and State tax shall be
distributed as ITC of central tax and State tax respectively.

c) If the recipient and ISD are located in the
different State, then the ITC on account of central tax and State tax shall be
distributed as integrated tax and the amount to be so distributed shall be
equal to the aggregate of the amount of ITC of central tax and State tax that
qualifies for distribution to such recipient.

[It’s felt that, distribution of ineligible credit u/s.
177(5) of the Act, to the units by the ISD is an unwanted exercise of
distributing the credit by issuing a separate invoice and then reversing the
credit as the end of each of the units. This will lead to increased compliance.
Such ineligible credit are never added to the electronic credit ledger of any
registered persons and therefore, such credits shall be deducted and only
balance credit shall be allowed to be distributed to the units.]

5. Rule 5 provides for conditions for the
purpose of availment of ITC for the purpose of section 18(1). Section 18(1)
covers the following four situations:

a) a person applying for registration within 30
days from the date on which he becomes liable to pay tax.

b) A person applying for voluntary registration.

c) A registered person who switches from
composition levy to normal levy u/s. 9.

d) A registered person who supplies good /
services which were exempt earlier and becomes taxable subsequently.

In case of (a) and (b), ITC of only inputs will be eligible,
whereas in case of (c) and (d) ITC of input as well as capital goods would
become admissible. In case of capital goods, tax paid on such goods shall be
reduced by 5 % per quarter or part thereof from the date of invoice shall be
available. A registered person shall in such case make a declaration in Form
GST ITC 01 within 30 days from the date of his becoming eligible to avail of
ITC u/s. 18(1), to the effect that he is eligible to avail ITC specifying
details of eligible stock and such details shall be duly certified by a
practicing chartered account or cost accountant if the aggregate value of claim
on account of central tax, State tax and integrated tax exceeds two lakh rupees.

6. Rule 6 provides for transfer of
credit on sale, merger, amalgamation, lease or transfer of a business for cases
covered u/s. 18(3). In the case of demerger, the ITC shall be apportioned in
the ratio of the value of assets of the new units as specified in the demerger
scheme. CA Certificate shall also be required the sale, merger, de-merger,
amalgamation, lease or transfer of business has been done with a specific
provision for transfer of liabilities. Transferor shall submit the details in
form GST ITC 02 and Transferee shall accept such details. Upon such acceptance
the un-utilised credit specified in FORM GST ITC-02 shall be credited to
electronic credit ledger of the transferee.

7. Rule 9 provides for reversal of ITC in
special circumstances mentioned in section 18(4) and section 29(5). Section
18(4) deals with a case where a registered person shifts from normal levy to
composition levy or where the goods /services supplied by him become wholly
exempt. Section 29(5) deals with cancellation of registration. In all these
cases, such person is required to determine ITC in respect of inputs held in
stock and inputs contained in semi-finished or finished goods held in stock and
on capital goods. Rule 9 provides for manner of computation as under:

(a) For inputs – ITC shall be proportionate
on the basis of corresponding invoices on which credit had been availed by
registered taxable person. For determining the amount contained in
semi-finished or finished goods, the registered person shall be required to
maintain the record of input-output ratio. There is no proper guideline in the
rules, as to how to determine the same. In many cases, such records would not
be available to identify the corresponding invoices. In such cases, it is not
clear whether the assessee can use methods like FIFO/LIFO to identify such
invoices. However, the rule provides that, where the tax invoices related to
such inputs are not available, the registered person shall estimate the amount,
based on prevailing market price of goods on such date of happening of event
mentioned in section 18(4) or section 29(5).

(b) For Capital Goods – The useful life
shall be regarded as 5 years and the ITC involved in the remaining useful life,
if any, shall be computed on pro-rata basis and will be accordingly reversed.
For example, if ITC pertaining to capital goods is ‘C”, and remaining useful
life is 12 month and 15 days, then ITC pertaining to 12 months shall be
reversed as C x 12 / 60

Details of such amount shall be furnished in Form GST-ITC 03
[in cases covered u/s. 18(4)] or as the case may be in Form GSTR-10 [in cases
covered u/s. 29(5)]

8. Rule 7 – Computation of ITC attributable to
Inputs and Input Services.

As per section 17(1) where the goods /
services are used “partly for the purpose of 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 business. As per section 17(2) where
the goods / services are used by the registered person “partly for effecting
taxable supplies (including zero-rated supplies) and partly for effecting
exempt supplies”, 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. The manner of computation of ITC of input and input
services, for the purposes of section 17(1) and section 17 (2) is contained in
Rule 7 & Rule 8 of the Draft Input Tax Rules. Rule 7 covers a situation,
where input/input services are used exclusively for making taxable
supplies zero rated supplies or exempt supplies. Further, it appears that the
expression “partly for the purpose of business and partly for other purposes”
is wide enough to cover supplies which are exclusively used for the other than
purposes also. It’s not applicable to ITC in respect of capital goods. The
computation of such credit that is required to be reversed is as under:

Step – 1 Identification of ITC relating to input/input
services:

ITC in a tax period which is
exclusively relating to taxable supplies.

100% Eligible

ITC in a tax period which is
exclusively relating to zero rated supplies

100% Eligible

ITC in a tax period intended
to be used exclusively for purposes other than business

100% Ineligible

ITC in a tax period intended
to be used exclusively for effecting exempt supplies

100% Ineligible

ITC which is not eligible in
terms of negative list of supplies covered u/s. 17(5)

100% Ineligible

Bifurcation of common ITC
into eligible and ineligible credit

Refer below

Step – 2 Apportionment of Common ITC attributable to
input/ input services.

The Balance amount of ITC attributable to input/input
services after deducting the amounts mentioned above 1 to 5 shall be regarded
as “Common ITC” used partly for the purpose of business and partly for other
business as also the credit which is used partly for effecting taxable supplies
and partly for exempt supplies. Of the said amount the ineligible is computed
as under:

Ineligible common credit relating to exempt supplies =
Common ITC (multiplied by) aggregate value of “exempt supplies” during
the tax period (divided by) total turnover of the registered person
during the tax period.

Where the registered person does not have any turnover during
the said tax period or the aforesaid information is not available, the ratio of
exempt supplies to total turnover of the last tax period for which details of
such turnover are available, previous to the month for which calculation is to
be made, shall be considered. In such case, the reversal of amount shall be
calculated finally for the financial year before the due date for filing the
return for the month of September following the end of the financial year to
which such credit relates. In case of short reversal, the interest becomes
payable from 1^st April of next financial year till the date of
reversal/payment. Similarly, excess amount of reversal, if any, shall be
claimed as credit. [Author is of the
view that, levy of interest on such amount from April onward of the next
financial year is not correct. Even today, in service tax law, interest is
levied only if the excess ineligible credit is not paid up to June of the next
financial year.]

Ineligible common credit relating to non-business purposes
= Common ITC x 5%

It may be noted that,
reversal of 5% of the common input credit is warranted only when there is use
of such common credit for non-business purpose. The rule does not presume that
in all cases, 5% of the common ITC is towards non-business purposes. [Readers
may compare this provision with the practice of voluntary disallowance of
certain expenses as non-business expenses in the Income-tax Act]

The remainder of the common credit shall be the eligible ITC
attributed to the purposes of business and for effecting taxable supplies
including zero rated supplies

The aforesaid computations shall be made separately for ITC
of central tax, State tax, UT tax and integrated tax.

9. Rule 8 – Computation of ITC attributable to
capital goods.

Rule 8 provides for manner of determination of ITC in case of
capital goods and reversal thereof u/s. 17(1)/(2) of the Act as under:

ITC of capital goods in a tax period which is exclusively
relating to taxable supplies. (Note 1)

100% Eligible

ITC of capital goods in a tax period which is exclusively
relating to zero rated supplies (Note 1)

100%
Eligible

ITC of capital goods in a tax period intended to be used
exclusively for purposes other than business (Note 2)

100%
Ineligible

ITC of capital goods in a tax period intended to be used
exclusively for effecting exempt supplies. (Note 2)

100%
Ineligible

Bifurcation of common ITC into eligible and ineligible credit

Refer below

Note
1:.Where
capital goods covered under (1) and (2) above are subsequently used for common
purposes, from the total input tax attributable to such capital goods, 5% shall
be reduced for every quarter or part thereof for which they were used
exclusively for making taxable or zero rated supplies, and the balance ITC
shall be treated as common ITC for that tax period, and shall accordingly be
reversed, every month ( upto 5 years) as per the computation explained in Step
2 to 4 below.

Note
2: Where
capital goods covered in (3) and (4) above are subsequently used for common
purposes, from the total input tax attributable to such capital goods, 5% shall
be reduced for every quarter or part thereof for which they was used
exclusively for making non-business or exempted supplies, and the balance ITC
shall be re-credited to the electronic credit ledger and added to the common
ITC for that tax period.

It may be noted that, the rule does not provide for any
adjustment, where the capital goods earlier used exclusively for exempted or
non-business supplies are subsequently used exclusively for making taxable or
zero rated supplies and vice versa. The only adjustment which is
provided is when such capital goods are subsequently used for common purpose.

Step – 2 Apportionment of ITC attributable to other
Capital Goods used for common purpose.

The balance ITC attributable to other capital goods, shall be
treated as “Common ITC” and shall be credited to electronic ledger and the
useful life of such goods shall be taken as 5 years. It shall include, ITC
availed during the tax period in respect of such capital goods which are not
exclusively used for making taxable supply or zero rated supply or exempt
supply. The opening balance of the tax period shall also include, balance
credit (computed in the prescribed manner) in respect of capital goods received
earlier and used earlier for exclusively making exempt supply or taxable supply
or zero rated supply, and now intended to be used for making common supply. It
appears that, the remaining useful life of such already used capital goods
shall also be deemed as 5 years for the purpose of computation.

Step- 3 Computation of common ITC for a tax period.

Total common ITC permissible during tax period shall be
computed as under:

Total common ITC for a tax period = Total common ITC / 60.

Step-4 Computation of Common ITC attributable towards
exempt supplies.

Common ITC attributable towards exempt supplies =
Total common ITC for a tax period (multiplied by) aggregate value of
exempt supplies during tax period (divided by) total turnover of the
registered person during the tax period

Since the ITC attributable to common capital goods are
already credited to the electronic ledger (as a part of opening balance), the
monthly ineligible amount of such common credit computed in Step – 4 shall be
added to output tax liability of the person making the claim, every month along
with applicable interest, during the period of residual life of the concerned
capital goods.[The author is of the view that, the tax payer should be given
an option to pay the entire amount in the same tax period in which such assets
are used for common purpose. In that case, the question of making payment of
interest every month would not arise]

10. Rule 10 deals with conditions and
restrictions in respect of inputs and capital goods sent to the job-worker.
Every Principal taking ITC in respect of goods sent to job-worker shall send
such goods under the cover of a delivery challan and such challan shall be
reflected in Form GSTR -1. If the goods are not returned within prescribed time
u/s. 143, such challan shall be deemed to be invoice. Surprisingly, section
143 only allows the Principal to avail the ITC but does not deal with reversal
of ITC, and therefore author is of the view that, Rule 10 should not form part
of ITC Rules.

Conclusion:

A cursory look at the provisions of the draft
input tax rules, gives a feeling that, there is still a scope for lot of
improvement in the same. The calculations dealing with reversal of input tax
credit contained in rule 7 and rule 8 are tedious and hence are not at all
assessee–friendly. Both the Act as well rules fail to address the situation as
to how the ITC in respect of supplies received by a person acting as a ‘Pure
agent’ of the receiver will be transferred to the actual recipient. Neither the
Act nor the rules, permit the ‘pure agent’ to avail the ITC and transfer the
same to the receiver under the cover of tax invoice. All these finer aspects
need to be looked into for the success of GST is largely dependent upon
seamless transfer of credits onwards from the principal supplier to end
customer through the chain of intermediary suppliers.

shailesh.kwebmaker

Welcome GST Flight Delayed But Expected To Land Safely

Introduction of GST has been one of the most important items
on the agenda in various sessions of parliament. And it will be of prime
importance in the upcoming session. As the Government of India is committed to
replace the existing system of various types of indirect taxes, being levied at
present by Central and State Governments, with only one tax called Goods and
Services Tax (GST). All efforts are being made to implement it at the earliest.
We have been waiting for long to welcome its arrival. Although it was expected
from 1^st April 2017, but whenever there is something new, certain
precautions are necessary. It is for the first time that the Centre and States
are coming together to administer a law on taxation of goods and services. It
was necessary, therefore, to understand the role and responsibility of each
other individually as well as collectively so as to have a smooth navigation.
It is in this background that a conscious decision has been taken to begin it
from 1^st July 2017. We are sure that keeping in mind the impact of
amendment made to the Constitution of India, the Centre as well as States will
work out appropriate strategies to implement GST well before the appointed date
i.e.16^th September 2017. Thus, in the present circumstances, 1^stJuly 2017as the implementation date is most appropriate. As it seems
certain, one can say ‘Although the flight is delayed but expected to land
safely’. Let’s hope to see ‘Der Aaye Durust Aaye’.

The delayed arrival may prove to be a blessing in disguise.
The period of delay may well be utilised in completing the unfinished task of
preparations. The draft law is yet to be finalised. Although, several
suggestions have already been considered in the revised version of Model GST
Act, a few are yet to be incorporated. We hope now that the important one will
not be missed out. Once the final draft is approved, Rules and Forms will
follow. As trade and industry will need at least three months to prepare
them-selves for the new regime, it is expected that the final draft of CGST
Act, SGST Act and IGST Act will be made available to the people by 28^th
February, and, the Rules & Forms etc., well before 31^st
March 2017.

As the Indian law on GST is being enacted after considering
VAT and GST laws of various other countries, it is expected that Indian GST Law
will be most fair and transparent, which is easy to understand and free from
all kinds of complexities. We wish the proposed Law will take care of all
aspects such as:

(1) Adequate
Revenue to Government

(2) Clarity of Law

(3) Ease of Administration

(4) Ease of Compliance

(5) (No Extra Burden on Businesses (particularly
small businesses)

(6) Due Care of Consumers (who are the ultimate tax
payers)

Apart from finalising the Model GST Law, the GST Council will
have to take a coordinated decision on rates of tax and list of items falling
in each of such rate schedule. This may prove to be a herculean task as it will
have direct impact on the ultimate tax payers i.e. the consumers. Whatever may
be the design of law, if consumer is dissatisfied, if the consumers (who are
the real tax payers) oppose, it would not be possible for any Government to
enforce such a law. It would be necessary, therefore, to decide the rates of
tax and brackets thereof with utmost care.

Another segment which has to be taken care is that of small
and medium size businesses, which constitutes more than 80% of the assessees
base of indirect taxes. The Government may be collecting 80% of its indirect
taxes revenue from 10 to 20% of total number of assessees. The remaining 80 to
90% assessees play a most important role in the production and distribution of
goods, as well as services, in our country. Ignoring the views of such a large
segment may be fatal for any VAT based system of indirect taxation. It is necessary,
therefore, that sincere efforts be made to mitigate the hardship likely to
cause to such small dealers and service providers.

Suggestions to mitigate hardship likely to cause to small
dealers and service providers:

Threshold for Registration

As per Schedule V, appended to revised draft of Model GST
Law, “Every supplier shall be liable to be registered under this Act in the
State from where he makes a taxable supply of goods and/or services if his
“aggregate turnover” in a financial year exceeds twenty lakh rupees:…”

It would be necessary to clarify that the threshold of Rs. 20 lakh should apply to taxable supplies only.
As such the turnover limit of Rs. 20 lakh is too low a limit and if the
exempt/taxfree supplies are also included therein then a very large number of
people will become liable for registration without any substantial revenue to
the Government. It may be necessary, therefore, to use the words “aggregate turnover of taxable supplies”
instead of “aggregate turnover”.

Composition Scheme/s

The revised Model GST Law, at present, provides for only one
Composition Scheme, which is applicable to certain dealers having turnover up
to Rs. 50 lakh a year. It does not provide for any kind of composition scheme
for service providers. It may be worth noting here that the activities of ‘works contracts’, ‘leasing’, ‘supply of food and beverages in a hotel/
restaurants’, etc. will now fall in the category of ‘supply of service’.
With several restrictions embedded in the proposed Scheme, it may not be of any
practical utility.

If one looks at the VAT/GST laws of other countries, they are
very liberal in designing such composition schemes. Even in the VAT laws of
various States, within our country, we find several such schemes – some are
general and some of them are sector specific. For example in Maharashtra, at
present, we have the following Composition Schemes:

1. Retailers Composition Scheme: Applicable to all
registered dealers having total turnover up to Rs. 1 crore. Composition amount
is 1% of total turnover. No input tax credit and no passing of the 1%
composition amount. It is working fine.

2. Restaurants, Clubs, Hotels and Caterers
Composition Scheme: Applicable to all such establishments, serving
food/beverages for human consumptions, having gradation of less than 3 stars.
There is no turnover limit. Tax (composition amount) payable is 5% of turnover
of sales. No input tax credit and no Tax Invoice. Most of the small hotels,
restaurants and eating houses have opted for this composition scheme.

3. Bakers Composition Scheme: Applicable in a
specified manner.

4. Second Hand Motor Car dealers Composition
Scheme: Applicable to all dealers in respect of that part of business which is
related to reselling of old motor cars after refurbishing, etc. (without any
limit of turnover).

5. Mandap Decorators Composition Scheme: No
turnover limit, composition amount 1% or so. No ITC and no Tax Invoice.

6. Builders/developers Composition Scheme: No
turnover limit, tax @ 1% of agreement value, no ITC and no Tax Invoice.

7. Works Contract Composition Schemes: There are
two different composition schemes for ‘works contractors’. One is applicable to
notified construction contract where composition amount is 5% of total turnover
(total value of contracts). And another is for other works contracts where the
rate of composition is 8% of total turnover (total value of contracts). These
composition schemes are most popular in Maharashtra. (Similar composition
schemes have been designed by other States also). In these schemes, the
contractor is eligible for ITC on his inputs but it is restricted by way of
certain percentages. But, the unique feature is
that the contractor can pass on the tax to his principal. He can charge the tax
separately and can issue ‘Tax Invoice’. The purchaser (principal), if entitled,
can claim input tax credit on the basis of ‘tax invoice’ issued by the
contractor.

In the light of the above, it may be suggested that the GST
law should provide for 3 or 4 or if necessary more such composition schemes
which a dealer/service provider may opt.

Time of Supply:

Section 12, in Chapter IV, defines ‘Time of Supply of Goods’
as follows:-

“12. Time of supply of goods

(1) The liability to pay CGST / SGST on the goods shall arise
at the time of supply as determined in terms of the provisions of this section.

(2) The time of supply of goods shall be the earlier of the
following dates, namely,-

(a) the date of issue of invoice by the supplier or the last
date on which he is required, u/s. 28, to issue the invoice with respect to the
supply; or

(b) the date on which the supplier receives the payment with
respect to the supply:

PROVIDED that ……

Explanation 1.-
For the purposes of clauses (a) and (b), the supply shall be deemed to have been
made to the extent it is covered by the invoice or, as the case may be, the
payment.

Explanation 2.- For the purpose of clause (b), “the
date on which the supplier receives the payment” shall be the date on which the
payment is entered in his books of accounts or the date on which the payment is
credited to his bank account, whichever is earlier.”

It may be suggested that sub clause (b) may kindly be
deleted and the explanation 1 and 2 may also be modified accordingly.

If suitable modifications are not done, at this stage, that
would mean that for each and every advance received, the supplier of goods
would be liable to pay tax as and when such advance amount is received. The
Government may need to consider that there is vast difference between ‘advances
received for supply of goods’ and ‘advances received for supply of services’.
They cannot be equated. The supplies may be of various types of goods falling
under different rate schedules, the advance may be for a specific supply or an
adhoc advance for various supplies, the final sale price of goods may be
decided in advance or may be decided later. The time schedule and the place of
supply may be different for various supplies for which adhoc amount is received
as advance from time to time. In such circumstances, it may be very difficult
for the supplier to work out the exact amount of tax payable on such advance/s.
And it may lead to unnecessary complications and litigations. It may be suggested, therefore, that ‘Time of
Supply of Goods’ should always be issuance of ‘Tax Invoice’, Bill or Cash Memo,
as the case may be, in accordance with the provisions of section 28 contained
in Chapter VII of the revised draft Model GST Law.

Filing of Returns and Payment of Taxes

Chapter VIII of Model GST Law deals with provisions regarding
furnishing of returns, etc.

Section 32 therein provides for furnishing ‘Invoice wise details of all Outward Supplies’
during a month by 10^thday of succeeding month.

Section 33 provides for furnishing ‘Invoice wise details of Taxable Inward Supplies’ during a month by
15^th day of succeeding month.

Section 34 provides for
furnishing monthly return by 20^th day of succeeding month.

A combined reading of all the provisions shows that every
registered dealer (other than a composition dealer) is liable to furnish at
least 3 returns/statements by 3 different dates every month.

It may be necessary to revisit the entire chapter
concerning filing of returns/statements.

However good may be the intention behind such a proposal, it
will be extremely difficult for all such dealers to comply with the
requirements in the manner so prescribed in the aforesaid Chapter. The worst
affected will be those who fall in the category of small and medium size
‘Taxable Person’.

It may be worth noting that small and medium size enterprises
do not have adequate infrastructure and manpower to comply with such a
requirement, which may be suitable for very big organisations only. The SMEs
are depending upon part time accountants and tax consultants to compile and
upload such returns and statements, etc. At
present, most of them are filing quarterly or six monthly returns. Thus,
they are visiting their tax consultant not more than four times during a year.
But, in the proposed procedure they will have to visit thrice in a month i.e.
36 times during a year. They are also expected to visit in between to find out
and reconcile differences which may be arising in the monthly Statements
furnished by their suppliers/customers. Consider
cost of compliance to such small dealers and service providers in terms of both
time and money.

It the light of the above, it may be suggested that;

1. The requirement of filing monthly returns
should apply to those only whose annual turnover is more than Rs. 5 crore (or 10 crore) or the net tax
payable is more than Rs. 10 lakh per annum.

2. All other dealers/taxable persons should be
asked to file quarterly returns.

3. There is
no need to prescribe separate dates for submitting (a) Statement of Outward
Supplies (b) Statement of Inward Supplies and (c) Return. All the three items
should be combined together. In fact, both these statements i.e. of Outward
Supplies and Inward Supplies should form part of the Return itself.

4. As the matching exercise can be done only after
filing of returns, there is no point in forcing the dealers to submit a return
in three parts on three different dates of the same month.

5. If one looks into the provisions of VAT/GST
laws of all those countries where GST has been implemented successfully, almost all of them have taken due care of ease
of compliance.

6. The
success of any reform depends upon mutual co-operation. The procedural aspects
need to be designed in such a manner that all the dealers, whether big or
small, are able to comply with the requirements without any hassles.

In its recent advertisement, in Times of India, Central Board
of Excise & Customs (CBEC) has boldly highlighted various advantages of GST
under the heading “a plethora of benefits all around”. Just picking up a major
one, it states: GST – ‘One Nation One Tax’, ‘Advantage for Trade &
Industry’, ‘Benefits to Economy’, ‘Simplified Tax Structure’ and ‘Tax
Compliance Easy’.

Hope the final product will be in concurrence
with the features so highlighted, in a colourful advertisement, published on
the eve of our Republic Day.

shailesh.kwebmaker

Declared Goods Vis-à-Vis Steel Structural

Introduction

Classification of goods under particular entry of Fiscal Laws
like VAT is always a debatable issue. Till date there are several judgments
determining classification and also laying down principles of classification.

“Declared good” is given special importance under the Central
Sales Tax Act (CST Act) and State VAT laws. One of the conditions about
taxation of declared goods, under VAT laws, is that the rate should not exceed
prescribed limit i.e., 5% at present.

If goods go out of the category of declared goods, they could
be taxable at a higher rate.

Iron and Steel

Iron and Steel is one of the items of declared goods. Under
Maharashtra VAT Act (MVAT Act) the entry reads as under:

Entry C-55 under MVAT Act

Entry

Name of Commodity

Rate
of tax

Date of effect

Iron and steel, that is to
say,

(i) pig iron, sponge iron
and cast iron including ingots, moulds, bottom plates, iron scrap, cast iron
scrap, runner scrap and iron skull scrap;

(ii) steel semis (ingots,
slabs, blooms and billets of all qualities, shapes and sizes);

(iii) skelp bars, tin bars,
sheet bars, hoe bars and sleeper bars;

(iv) steel bars (rounds,
rods, square flats, octagons and hexagons, plain and ribbed or twisted in
coil form as well as straight lengths).;

(v) steel structurals,
(angles, joints, channels, tees, sheet pilling sections, Z sections or any
other rolled sections);

1.5.2011 to date

The scope of above entry is being decided from time to time.

“Steel Structurals”

This item is covered at sub-entry (v) above. There was debate
about scope of above mentioned sub-entry.

As per Revenue the scope of ‘steel structural’ is limited up
to items mentioned in bracketed portion. However, as per assessee, steel
structural is a separate item and cannot be controlled by bracket.

The above controversy was resolved recently by Hon. Bombay
High Court in case of Zamil Steel Buildings India Pvt. Ltd. vs. The State of
Maharashtra (MVXA Tax Appeal No.1 of 2016 dated 23.12.2016).

Facts

The facts as narrated in the judgment are as under:

“(b) The Appellant is inter alia a manufacturer of various
structural steel components such as rigid frame columns, rafters, sheets,
angles, etc. in their factory in Pune. The Appellant has been engaged in
the supply of the said structural steel components since 2007. The Appellant
has regularly been filing returns and discharging its liability under the MVAT
Act.

(c) According to the Appellant, these structural steel
components are fabricated/manufactured based on customers’ as well as
geographical requirements etc.

According to the Appellant, these individual components are
then sold to the customers. The customers may subsequently optionally choose to
avail the service of installation and erection by a sister concern of the
Appellant or by a third party. Thus, according to the Appellant, the so-called pre-engineered
buildings only emerge at the site of the customer after erection and after the
completed sale of different components by the Appellant.

(d) Until the year 2011, the Appellant had been collecting
VAT from its customers at the rate of 12.5% on account of RFCs (Rigid Frame
Columns) and Rafters and remitting the same to the revenue. Thereafter,
sometime in 2011, pursuant to a legal opinion obtained by the Appellant, the
Appellant started collecting tax at the rate of 5% and not 12.5% specifically on
rafters and RFCs and started remitting the same to the revenue.

The opinion obtained by the Appellant was based, inter alia,
on a judgment of the Rajasthan High Court in the case of Prateek Technocom
vs. State of Rajasthan [(2006) 6 VAT Reporter 9 (Rajasthan)].
Simultaneously, the Appellant invoked the procedure for determination of
disputed questions (DDQ) under the provisions of the MVAT Act for one of the
products supplied by it i.e. RFCs. The invoice number referred to in the said
DDQ Application (i.e. ZSB-0023/2010-2011 dated 6th April, 2010) describes the
goods sold as “Supply of Pre-Fabricated Building Components (AS PER PACKING
SLIP)”. In turn, the said packing slip describes the commodities sold as “Rigid
Frame Columns and Interior Columns”. Accordingly, under the said DDQ
Application, the Appellant applied to Respondent No.2 to determine as to
whether the RFCs supplied to its customers would fall under Schedule Entry
C-55(v) of the MVAT Act. We must mention here that Schedule Entry C-55(v) attracts
sales tax at the rate of 5%.”

The assessee submitted that the steel structural, (RFC)
though made by welding and not structural as covered by items mentioned in
bracket, is still covered by plain language as given in sub-entry. It was
submitted that the rule of “ejusdem generis” cannot apply on reverse
basis, i.e. prior words cannot be controlled by subsequent words though
subsequent words can be controlled by prior words. It was submitted that the
bracketed items are by way of illustration. Supporting judgments were cited.

On behalf of Revenue, the main plank of argument was that
only items mentioned in bracket will be covered. It was also argued that Iron
and Steel entry intends to cover iron and steel in raw form and not made ups
from iron and steel. Therefore, it was argued that the steel structural in
present case, which is made ups by welding etc., cannot be covered.

The Hon. High Court concurred with the assessee, after giving
elaborate reasoning.

The Hon. High Court held as under:

“27. Looking to these authoritative pronouncements, it is
clear that the utility of a bracket is only as an illustration, explanation or
extra information. It is thus clarificatory. It is not always exhaustive of the
terms outside the bracket. It cannot curtail or limit the scope of the terms
employed outside the bracket. Eventually, no general rule can be laid down. As
held by the Supreme Court, ordinarily, words appearing in brackets are
illustrative and not exhaustive. Therefore, everything would depend upon the
context and purpose with which in an individual statute the words in the
bracket are inserted by the Competent Legislature. Applying these principles,
we are unable to agree with Mr. Sonpal that though the goods of the Appellant
may be “steel structurals”, but if they do not fall within the
description of the terms as set out in the brackets viz. “(angles, joints,
channels, tees, sheet piling sections, Z sections or any other rolled sections)”,
then they would not be covered either u/s. 14(iv)(v) of CST Act or Schedule
Entry C-55(v) of the MVAT Act. We are unable to agree with Mr. Sonpal that
enumeration of the six items in the bracketed portion are with a specific
purpose of restricting the meaning of the words “steel structurals” preceding
and outside the brackets. In fact, we find that the six items appearing in the
bracketed portion of section 14(iv)(v) of the CST Act and Schedule Entry
C-55(v) of the MVAT Act are clearly not exhaustive, but descriptive of the
words “steel structurals”.”

The High Court further observed as under:

“29. Equally, we are also unable to agree with the argument
of Mr. Sonpal as well as the finding of the MSTT that because the goods sold by
the Appellant are brought into being by a process of welding and not rolling,
the same cannot be classified under Schedule Entry C-55(v) of the MVAT Act. We
find this argument totally without any merit. As mentioned earlier, the items
mentioned in section 14(iv)(v) of the CST Act read with Schedule Entry C-55(v)
of the MVAT Act are goods of special importance in inter-state trade or
commerce. It would be ludicrous to suggest that “steel structurals” that
are manufactured from rolled sections are goods of special importance, whereas
“steel structurals” that are brought into being by a welding process are
not goods of special importance. We see nothing in the Statute to make this
distinction. Even otherwise, we find that the authorities below erred in
concluding that even the specific terms namely “angles, joints, channels,
tees, sheet piling sections, Z sections” should all be “rolled sections”.
As mentioned earlier, section 14(iv)(v) of the CST Act and Schedule Entry
C-55(v) of the MVAT Act deals with “steel structurals (angles, joints,
channels, tees, sheet piling sections, Z sections or any other rolled sections)”.
According to the authorities below, the words “or any other rolled sections”
would apply to all the other items including “steel structurals”. In
other words, according to the Revenue, only rolled steel structurals such as
rolled angles, rolled joists, rolled channels, rolled tees, rolled sheet piling
sections, rolled Z sections or any other rolled sections are covered u/s.
14(iv)(v) of the CST Act and Schedule Entry C-55(v) of the MVAT Act and nothing
else. To put it differently, only goods manufactured by the process of rolling
would be covered under the said provisions. We are unable to agree with this
interpretation for the simple reason that the authorities below have applied
the rule of ‘ejusdem generis’ in reverse. This, and as rightly submitted
by Mr. Sridharan, is impermissible.”

With the above observations the Hon. Bombay High Court
classified the given item, RFC, as steel structural duly covered by entry
C-55(v) as declared goods.

Conclusion

The above judgment not only decides the
controversy but throws light upon various shades of principles of
classification. It will also go a long way to decide scope of entry relating to
Iron and Steel, The wrong impression created so far that the entry for ‘Iron
and Steel’ covers only Iron and steel as raw material has also been clarified. It can include made ups also based on words of the Entry.

shailesh.kwebmaker

Shared Expenditure: Whether Taxable as Service?

Introduction

Taxability of shared expenditure has been a subject of
extensive litigation under service tax for quite some time. It is a common
business practice to share common facilities or outsourced services by group
companies under a common roof. Typically, one company receives the invoice from
outsourced service provider and then the cost is shared by each participating
entity by way of reimbursements generally in proportion of actual usage.
Similarly, sometimes, common expenses like advertisement expense is incurred by
a manufacturer and shared with its dealers as the benefit is derived by both,
the manufacturer and the dealers. In the case of Union of India vs. Mahindra
and Mahindra Ltd. 1989 (43) ET 611 (Cal), the High Court observed that the
manufacturer and distributor had mutual interest in maximising sale of its
products. The contract between them was to further this desire and it no way
affected the real nature of transaction which appeared to be of sale on
principal-to-principal basis. However, in the case of Maruti Suzuki India
Ltd. vs. CCE 2008 (23) ELT 566 (Tri.-Del), it was held that when the
contract envisages such expenses to be incurred by the dealer and failure to do
so gives a right to the manufacturer to get advertisement done on their own and
recover such expenses from the dealer, such expense incurred by the dealer
would be payment on behalf of manufacturer and requires to be considered
additional consideration for sale and added to the assessable value.

The Mumbai Tribunal in JM Financial Services Ltd. vs. CST
Mumbai-I 2013-TIOL-757-CESTAT-MUM held to the effect that whether revenue
such as incentive or processing fee or expense like electricity etc., when
shared by the parties on principal-to-principal basis, no service is said to
have been rendered. Also in Reliance ADA Group Pvt. Ltd. vs. CST Mumbai-IV
2016-TIOL-603-CESTAT-MUM, it was held that when common services are procured
by one company from service providers, that company acts as a manager/trustee
to incur expenses on behalf of participating group companies and then cost
thereof is shared by all the beneficiaries by making reimbursements.These
reimbursements of the cost incurred cannot be regarded as consideration flowing
for taxable service, but it is rather a receipt towards the reimbursement of
cost/expenses in terms of cost sharing agreement with the participating group
companies.Similarly, in case of CST vs. Arvind Mills Ltd. 2014 (35) STR 496
(Guj), the High Court of Gujarat held that in case of deputation of
employees to subsidiary company, salary and perquisites reimbursed by group
companies, the assessee could not be said to be engaged in providing specified
services to client. Hence, they were not liable for service tax.Identically,
recently in Franco Indian Pharmaceutical (P) Ltd. (2016) 69 taxmann.com 198
(Mumbai-CESTAT), it was held that services provided to many employees and
respective share in salaries paid by the employer is not taxable as a service
of manpower supply. It was further observed that the position will remain the
same even if appointment letter is not signed jointly and any one company has
hired employees and employees are lent or deputed to other companies.

Recent decision of Supreme Court

Recently, the matter of Gujarat State Fertilizers and
Chemicals Ltd. vs. CCE 2016 (45) STR 489 (SC) came up for examination of
Supreme Court wherein GSFC had collected incinerating charge from Gujarat Alkalies
& Chemicals (GACL). The service tax department issued a show cause notice
alleging that the said charges are towards storage and warehousing service
provided by GSFC to GACL. The fact of the matter was that both GSFC and GACL
received Hydro Cynic Acid (HCN) from Reliance Industries Ltd. through a common
pipeline which was used by them for manufacturing of their final product and
used by the two companies in 60:40 ratio. Subsequent to the use, incineration
also was required to be undertaken; the expense on this process was shared by
the two in 50:50 ratio. This arrangement was made in terms of an agreement
between GSFC and GACL. The said facts were adequately explained to the service
tax department. However, the contention of GSFC against service tax liability
was not accepted by the adjudicating authority as well as the first and second
Appellate authorities.

The Appellant, GSFC explained that HCN being one of the main
raw materials was received from RIL, Vadodara directly through a pipeline by
gravity from their plant. As per agreement between GSFC and GACL, sodium
cyanide unit, the quantity received in an intermittent hold tank was consumed
in 60:40 ratio. The hold tank existed for sustaining continuous process of both
the plants facilitating smooth operation of suction pumps and specifically
avoiding starvation of pumps which could disturb the process. If there was any
problem at any of the consumers’ end, the supply from RIL would be stopped and
remaining quantity in the tank would be consumed immediately by either of the
plants. Hence storage of HCN did not happen at all. Moreover, the agreement
between the parties clearly provided that though HCN handling and incineration
facilities were installed in GSFC premises, the expenses thereto were to be borne
by both the parties. For incineration, neither GACL paid nor GSFC received any
fee or a charge but shared cost of incineration as per agreement including
those of repair, maintenance or replacement of spare parts and other overheads.
Thus, both GSFC and GACL were equally responsible for storage and consumption
and no one worked for another and the expense was shared in predetermined
proportion. In facts of the case, GSFC contended that in any case, the
arrangement did not involve storage or warehousing service to GACL and
therefore service tax was not attracted.

The revenue at the other end contended that since HCN was
first kept in holding tank and from this it was distributed in 60:40 ratio, the
holding tank would qualify as storage facility. Further, the fact that GSFC
collected incineration charge from GACL, it was correctly held that GSFC
provided service of storage. According to revenue, since there were questions
of fact based on which concurrent findings were reached by authorities, they
should not be interfered with by the Court as the scope of appeal required the
Court to deal with substantial question of law only.

Considering all the facts and the terms of agreement between
the parties, the Court observed that there was no dispute that joint investment
was made by the parties for creation of common facility. On accepting this
fact, handling and incineration facilities were in the nature of joint venture
between two of them and they simply agreed to share expenditure. The payment
made by GACL was towards its share of expense. In order to attract service
tax, there has to be element of service provided by one person to the other for
which charges for providing service are collected. When this ingredient is
missing in the facts of the case, the question of service tax does not arise.

Conclusion

When the Apex Court has decided in principle that the element
of service does not exist when common expenses are shared by beneficiaries on
principal-to-principal basis, the long drawn litigation should find a
closement. However, considering approach of the revenue for all practical
purposes, it is less likely that at lower levels, raising dispute would stop.

The question in most of the cases did not per
se involve “classification issue” although different categories of services
were dealt with which mainly included management consultancy, business
auxiliary/support service and manpower supply. The core issue revolved around
whether there exists an element of service when common services are procured or
when there is a pooling of expenses which is later shared by participating
group companies. Under the negative list based taxation of services from July
01, 2012 also, if there is no element of ‘service’ present, the decision should
continue to apply. However, the authorities now under the guise of ‘testing’
negative list based service taxation vis-a-vis the definition of
‘service’ would continue litigation, considering the scenario in the department
of service tax where a majority of demands made in the show cause notices
issued based on facts or legal grounds are routinely confirmed.

shailesh.kwebmaker

Entry Tax on Goods Vis-à-Vis Import of Goods

Introduction

One of the fiscal statutes operative in Maharashtra is
Maharashtra Tax on the Entry of the Goods into Local Areas Act, 2002. The Act
contemplates a levy of Entry Tax when the goods come into Maharashtra from
outside Maharashtra. The tax is leviable only on the goods which are specified
in the Schedule.

One of the items covered by the schedule is low sulphur fuel
oil. The assessee M/s.Tata Power Company Limited imported above item
from foreign country and used the same in its electricity manufacturing activity.
The department levied Entry tax on the same.

While the assessee had many contentions, the main argument of
the assessee was that Entry Tax cannot apply to goods imported from outside
India. Its contention was that the tax can apply only if the goods are imported
from outside Maharashtra but from any place within India.

The Tribunal confirmed the levy. Therefore, the matter was
taken to the Hon. Bombay High Court. The Hon. Bombay High Court has decided the
issue vide judgment reported in Tata Power Company Ltd. and
another vs. State of Maharashtra and ors. 95 VST 147 (Bom).

The relevant statutory provisions as referred to in the
judgment are reproduced below for quick reference:

“2. Definitions:- (1) In this Act, unless the context
otherwise requires,–

(a) …..

(b) “entry of goods”, with all its grammatical
variations and cognate expressions means entry of goods into a local area from
any place outside the State, for consumption, use or sale therein;

(c) “General Sales Tax Act” means any Sales Tax Law
in force in any State which provides for the levy of taxes on the sale or
purchase of goods generally or on any specified goods expressly mentioned in
that behalf or any class of transactions expressly specified in that behalf;

(d) …..

(e) …..

(f) “import”, with all its grammatical variations
and cognate expressions means bringing or causing to be brought or receiving
any goods into a local area from a place outside the State;”

“3. Levy of tax:– (1) There shall be levied and collected
a tax on the entry of the goods specified in column (2) of the Schedule, into
any local area for consumption, use or

sale therein, at the rates respectively specified against
each of them in column (3) thereof and different rates may be specified in respect
of different goods or different classes of goods or different categories of
persons in the local area. The tax shall be levied on the value of the goods as
defined in clause (n) of sub-section (1) of section 2. The State Government
may, by notification in the Official Gazette, from time to time, add, modify or
delete the entries in the said Schedule and on such notification being issued,
the Schedule shall stand amended accordingly:”

Important observations about arguments of the Petitioner
as noted by Hon. High Court are as under:

“30. In the additional written submissions, it is urged that
a tax on entry of goods into a local area is patently in violation of Article
301 and no further burden is required to be discharged by the petitioners. When
a tax falls within the inhibition of Article 301 and is not compensatory or
regulatory, then it can be saved only by taking recourse to Article 304. The
requirement thereof is not admittedly satisfied. Further, the impugned levy is
discriminatory. The Act cannot be saved by reading the impugned provisions
thereof together with the MVAT Act. That would not enable this Court to hold
that the same is Constitutional. Additionally it is submitted that if a levy is
held to be non-discriminatory and thus meets Article 304(a), still it must
satisfy the requirements of Article 304(b) as well. For all these reasons, it
is submitted that the impugned levy must be declared as unconstitutional and
ultra vires the above noted provisions or Articles of the Constitution of
India.

31. In support of his contentions, Mr. Dada has placed
reliance on a number of judgments and which can be taken in the order of his
submissions as follows:

1) Father William Fernandez vs. State of Kerala. 115 STC
591(Ker)

2) Primus Imaging Pvt. Ltd. vs. State of Assam. 9 VST 528
(Gauhati)

3) Batliboi & Co. vs. State of Maharashtra. 47 STC 321
(Bom).”

Similarly about arguments of State Government, the Hon. High
Court observed as under:

“36. Mr. Sonpal then relied upon the language of the
Maharashtra Entry Tax Act to submit that the legal challenge also has no basis.
He would submit that what this Court is dealing with in the present matter is
an entry tax. That is a subject dealt with by Entry 52 of List II of the VIIth
Schedule to the Constitution of India. Emphasising the language of this entry
Mr. Sonpal would submit that it provides for a tax on the entry of goods into a
local area for consumption, use or sale therein. Mr. Sonpal submits that mere
entry of the goods into a local area is not the taxable event. The taxable
event is entry of the goods into a local area for consumption, use or sale
therein. It is only in that event that liability to pay the tax arises and not
otherwise. The import of goods into the local area is not prohibited. It is their
consumption, use or sale therein which attracts the tax. Mr. Sonpal submits
that the petitioners do not dispute that import simpliciter does not attract
the levy. Accepting Mr. Dada’s contentions would be doing violence to the plain
language of the statute. Once the levy is on the entry of goods specified in
Column (II) of the Schedule to the Maharashtra Entry Tax Act into any local
area for consumption, use or sale therein, then, it is not permissible to
dilute the rigour of the provisions in that behalf. Mr. Sonpal submits that the
three provisos to sub-section (1) of section 3 would clarify that the
rate of tax to be specified by the Government in respect of any commodity shall
not exceed the rate specified for that commodity under the MVAT Act and the tax
payable by the importer under the Maharashtra Entry Tax Act shall be reduced by
the amount of tax paid, if any, under the law relating to general sales tax in
force in the Union Territory or the State in which the goods are purchased by
the importer. Therefore, if the goods attract the above tax in the State in
which they are purchased and thereafter they are imported into a local area,
then, and to that extent, the liability to pay the entry tax is reduced.
Lastly, Mr. Sonpal would submit that no tax is leviable or can be collected on
specified goods entering into a local area for the purpose of such process as
may be prescribed, if after such processing these goods are sent out of the
State. Mr. Sonpal relies upon the explanation to this sub-section and
thereafter sub-sections (2), (3), (4) and (5) of section 3 to submit that there
is no liability to pay entry tax in the event the goods are brought for the
purpose set out in sub-section (5) of section 3. He also relies upon the provisos
to sub-section (5) of section 3 in that regard.”

After noting the arguments as above, the Hon. High Court came
to a conclusion that no distinction can be made for the goods coming from out
of India or from any place within India. In other words, so far as goods are coming
from outside the State of Maharashtra, the entry tax would apply. The Hon. High
Court observed as under about validity of levy on the imported goods.

“85. Following it and applying it even to cases of octroi or
entry tax, the Hon’ble Supreme Court held conclusively that entry tax is a tax
on the entry of goods into any local area for consumption, use or sale therein.
So long as the levy is of this nature, it is wholly irrelevant as to from where
the goods have been brought. The statute’s provisions must be given their plain
and clear meaning. In other words, if the act of bringing in the goods is
termed as an import and this is also defined, and if the particular act
complained of falls within the definition, then there is no escape from the
levy. It is in this context that we must look at section 3 of the Act which
also has been reproduced by us above. We are not in agreement with Mr. Dada
that only those goods which have been brought within the local area from a
place outside the State of Maharashtra but within the territory of India will
attract the levy and not those goods which enter the local area after being
imported from abroad. The argument of Mr. Dada is that the expression
“outside the State” cannot mean outside the territory of India. We do
not find any support for such an argument. The reported decisions seem to hold
otherwise. Even otherwise, it is difficult to appreciate the implications of
this argument. It would lead to needless complexity and incongruous and
inconsistent results. For instance, if goods are imported into the port of
Mumbai, and used in Mumbai, then, according to Mr. Dada’s formulation, such
goods are not covered by the levy and entry tax is not attracted. But what
might happen if the goods were imported into Kandla, Vishakapatnam or Kolkata,
for instance, and transshipped from there, across other states, and then
brought into Mumbai? Such an entry or bringing in would be, even on Mr. Dada’s
formulation, subject to the levy, for the goods would be brought in from within
the territory of India though from outside the State of Maharashtra. It surely
cannot be suggested that all foreign imports are, by definition, exempt from
the levy of all local entry taxes. What, therefore, Mr. Dada’s argument amounts
to is saying that the local entry tax levy is not attracted where the port of
entry from abroad is within the state itself; but if the port of foreign import
is outside the state, then the entry tax levy is attracted. If this be so, then
it is a self-defeating argument and clearly shows that the mere importation
from abroad is not a reason to deny the levy of the local entry tax. We find
nothing in any judgment or the statute to support the proposition that the
situs of the port of foreign importation within the state furnishes any point
of exemption or escape from the local levy of entry tax.”

Conclusion

There are contrary judgments on the above
subject. Some of the High Courts have held that the entry tax, being
compensatory, can apply if the goods are coming in the State from any place
outside the State but within India and not imported from a foreign country.
However, the above judgment has settled the position so far as Maharashtra is
concerned and the liability will be attracted even for imported goods.

shailesh.kwebmaker

Insertion of Explanation in Entry Vis-à-Vis Effective Date

Introduction

Under the scheme of
Indirect Taxation, tax is attracted if the concerned goods are classified under
the taxable entry. There are instances when the entry is interpreted in a
particular manner. Subsequently the Government adds Explanation in the entry
for making its intentions clear. The dispute arises when such Explanation/s
have retrospective or prospective effect.

Taxation of Unmanufactured
Tobacco

Under Maharashtra Value
Added Tax Act, 2002 (MVAT Act), Entry A-45A exempts sale of unmanufactured
tobacco from levy of tax. However, an Explanation was added in said entry from
1.4.2002 stating that unmanufactured tobacco will not include the tobacco sold
in packages under a brand name. A dispute arose between assessees and Sales Tax
Department as to effective date of the Explanation. The view of Sales Tax
Department was that Explanation is clarificatory and it is effective
retrospectively from 1.4.2007 itself (since when the entry was existing) and
hence, liability arises retrospectively. The assessees were insisting that the
Explanation is substantive, hence effective from 1.4.2012 (i.e. from date of
insertion of such explanation) and hence no liability till 31.3.2012. In other
words, the issue was whether the given Explanation is clarificatory or
substantive.

The matter went to the
Bombay High Court, Aurangabad Bench in case of Amar Agencies (W.P. No.4944
of 2013) and others which was decided on 5.5.2017

Relevant Entry

The Hon. High Court has
reproduced the controversial entry and also given verdict on dispute as under:

“7. Upon consideration of
the arguments canvassed by learned counsel for respective parties, it is
manifest that we will have to deal with Entry 45A, it’s explanation, so also
entry 2401. For the sake of convenience, the same are reproduced below.

MAHARASHTRA VALUE ADDED TAX
ACT 2002

SCHEDULE A

1. ………

Before amendment

45A (a) unmanufactured tobacco covered
Nil 1.4.2007

under tariff heading No.
2401
to

of the Central Excise Tariff Act,
1985. 31.3.2012

After amendment

45A (a) unmanufactured tobacco covered Nil
1.4.2012

under
tariff heading No. 2401 to date

of
the Central Excise Tariff Act, 1985.

Explanation. For the removal of the doubts, it is hereby
declared that, the unmanufactured tobacco shall not include unmanufactured
tobacco when sold in packets under the Brand name.

8. The moot question would
be reading the explanation, as a substantive amendment or clarificatory.

9. Entry 45A of the Act of
2002 was amended by notification dated 31.03.2012 by the Government exercising
its powers u/s. 09 of the Act of 2002. Entry 45A as it stood prior to amendment
of 31.03.2002, it contained Clause B with no explanation. Vide notification
dated 31.03.2012 Clause B which dealt with biris is deleted and an explanation
is added. The bone of contention between the parties is the date of
applicability of amendment.

By the explanation, it is
declared that the unmanufactured tobacco shall not include unmanufactured
tobacco when sold in packets under the brand name. Prior to 31.03.2012, the
legislature did not make any distinction between unmanufactured tobacco sold in
brand name or otherwise. The Entry 45A is part of Schedule A, which details the
list of goods for which the rate of tax is nil. The unmanufactured tobacco
covered under tariff heading No. 2401 of the Central Excise Tariff Act, 1985 is
not taxable i. e. it’s tax is nil as per Entry 45A(a).

10. The Trade Circular,
under challenge, lays down that the said explanation is clarificatory in
nature. If the explanation is interpreted as a mere clarificatory, then the
question of its applicability prospectively or retrospectively may not arise.
When the explanation serves the purpose of clarification of the existing law,
there is no question of its prospective or retrospective operation, as the said
explanation would only explain and clear any mental cobwebs surrounding meaning
of statutory provision and to prevent controversial interpretation.
Explanations generally are intended more as a legislative exposition or
clarification of the existing law than as a change in it. If we go to the
literal words employed in the explanation, then the said explanation is
introduced for the removal of the doubts. The language of the explanation
depicts such intention. If the explanation is interpreted as merely clarificatory,
then the trade circular cannot be held to be erroneous.

11. Yet, we will have to
bear in mind that, the taxing statutes have to be interpreted strictly. We will
have to consider whether the incorporation of explanation to Entry 45A of the
Act of 2002 has altered the law as existing prior to the amendment dated
31.03.2012. While adding the said explanation, the entry 12 to Schedule D is
also amended.

12. As per section 9(1A) of the Act, the State
Government has the powers to amend the Schedule by adding or modifying any
entry in the Schedule. The notification dated 29.03.2007 was in force upto 31^st
March, 2012. Item B in the entry 45A is deleted with effect from 01.04.2012,
that would be interpretation of the fact that, notification dated 31.03.2012
operates prospectively. The trade circular dated 30^th March, 2007
clarifies that the unmanufactured tobacco cleared under Chapter Head 2401 of
the Central Excise and Tariff Act will be exempted from tax. The trade circular
dated 6^th August, 2009 also clarifies the same. Incorporation of
explanation has amendatory implication with effect from 1^stApril,
2012. The explanation in the notification dated 31^stMarch, 2012
will have to be held as amendatory and not clarificatory. We are only concerned
with the position prior to 31.03.2012. As from 1^stApril, 2012, the
unmanufactured tobacco sold in brand name is taxable. We are only concerned
with unmanufactured tobacco covered under heading 2401 of CETA.

13. Considering the trade
circular dated 30^thMarch, 2007 and 6^thAugust, 2009, it
would be clear that the Department considered the unmanufactured tobacco
covered under Chapter Head 2401 of the Central Excise and Tariffs Act exempted
from tax. The said position subsisted till 31.03.2012. It would appear that, no
distinction was made between sale of unmanufactured tobacco in packet or in
retail or whether branded or not branded. For the first time, the said
distinction is made by virtue of explanation to Entry No. 45A of the
Maharashtra Value Added Tax Act 2002.

14. The explanation no
doubt begins with the expression “for removal of doubts”. However,
the same does not appear to be plain and conclusive in nature. The operative
implication of the expression “for removal of doubts” in the explanation
does not show nexus to legislative intent of taxing liability. By virtue of
explanation, a particular class is created. By inserting explanation to Entry
No. 45A, new class is created i. e.
‘unmanufactured tobacco sold in packets under a brand name’. A distinction is
made for the first time by insertion of said explanation between the
unmanufactured tobacco sold in retail, loose and those unmanufactured tobacco
sold in packets under a brand name. The said distinction has been introduced by
way of an explanation. By reason of explanation a substantive law is introduced
and if a substantive law is introduced, wherein a class is created thereby
making it liable for tax, the explanation will have to be held amendatory to
operate prospectively and not retrospectively.

15. In the light of the
above, it will have to be held that the addition of explanation to Entry No.
45A under notification dated 31.03.2012 is substantive provision and it is not
merely clarificatory, as such would operate prospectively. It will have to be
held that, unmanufactured tobacco sold in packets under a brand name would not
be taxable from 01.04.2007 to 31.03.2012. The impugned trade circular 9T dated
30.06.2012 stating that explanation is merely clarificatory is held to be
erroneous to that extent.”

Conclusion

The judgment clears the
legal position. It is expected that the government will appreciate substance of
the judgment.

It is expected that there
should not be retrospective burden on tax payers by way of inserting an
explanation/s which when earlier it was understood that the goods / commodities
concerned were understood to be under an exempt category. We hope that under
GST era, there will be much better clarity of law and no ambiguous situations
will arise.

shailesh.kwebmaker

Privatisation Of Airports: Whether A Franchise Service By Airport Authority?

Introduction:

Under selective approach of service tax litigation often
centered around whether a given transaction was one of service apart from the
issue of appropriate classification entry. When the said issue requires
determination based on terms of contract, the importance of reading the terms
of contract as a whole hardly requires any debate. A recent decision covering
this aspect is analysed below:

Facts in brief

In a recently decided set of writ petitions, a division bench
of Hon. Delhi High Court in the case of Delhi International Airport P. Ltd.
vs. UOI 2017 (50) STR 275 (Del) had to examine whether privatisation of
airports done by Airports Authority of India (AAI) under long term Operations,
Management and Development Agreements (OMDA for short) entered into with
consortium led by GMR group and GVK group for Delhi and Mumbai airports
respectively was an arrangement of franchise service. In this case, the dispute
arose when the revenue claimed that upfront fee and an annual fee received by
AAI from the petitioners, Delhi International Airport P. Ltd. (DIAL) and Mumbai
International Airport P. Ltd. (MIAL) was liable for service tax as franchise
service. Under OMDA, DIAL and MIAL undertook the task to design, construct,
operate, upgrade, modernize, finance, manage and develop the respective
airports and in lieu of which AAI granted them various rights interalia,
long term rights to provide aeronautical and non-aeronautical services to
various consumers for a charge. As per the said OMDA, DIAL and MIAL had to pay
an upfront fee as well as revenue share termed as annual fee to AAI. Consequent
upon OMDA, AAI simultaneously leased out all the land along with buildings,
constructions or immovable assets to the petitioners under separate lease deeds
with each petitioner. AAI informed the petitioners post Finance Act, 2007 that
annual fee payable under OMDA was liable for service tax under the
classification entry renting of immovable property service, the annual fee
being consideration for the leasing of immovable property. However, according
to DIAL and MIAL, they had entered into OMDA primarily for grant of various
rights for better operation and management of airports whereas the lease deeds
were separately entered into and only consequent upon OMDA and therefore no
service tax could be paid by them to AAI over and above the amount paid as annual
fee. AAI therefore instructed escrow bankers of the petitioners to block an
amount equivalent to service tax chargeable on the said annual fee. According
to the petitioners, AAI did not render any service to them and annual fee
payable was under OMDA towards grant of rights to develop, finance, operate,
manage and modernize airports. If at all service tax was chargeable on the
annual fee, it would be the liability of AAI from their own revenue share.
Though no notice was issued to DIAL and MIAL, aggrieved by the order of
adjudication passed against AAI wherein liability of service tax was confirmed
under franchise service, DIAL and MIAL filed writ petitions in the High Court
of Delhi.

Case of petitioners, DIAL and MIAL

As per petitioners, upfront fee and annual fees were paid to
AAI as revenue share and not as consideration for any service. OMDA was not a
franchise agreement but a statutory divestation of right in favour of DIAL and
MIAL respectively to build, operate and maintain the airports. Further, both
DIAL and MIAL are joint venture companies wherein AAI itself holds 26% shares.
Also, since there was complete divestation of rights, it could never be a
considered franchise. Both the petitioner companies had to invest their own
funds to build, operate and maintain the airports and consequently get right to
charge various customers for availability of services liable under service tax
as “airport service” and they paid service tax on this service. They ran their
own operation and did not act as franchisee of AAI. They had to pay AAI
specified percentage of gross revenue termed as “annual fee” in addition to an
upfront fee of Rs.150 crore by each DIAL and MIAL. Thus annual fee was not a
consideration for any service but an appropriation of revenue by AAI before
petitioners received any part of the revenue. In order to be attracted under
service tax, the franchisee should be granted representational right and they
did not perform the activity on behalf of AAI. Alternatively if at all service
tax was payable, it would have to be paid by AAI.

Case of AAI

AAI also contended that there was no franchise agreement in
place and factually DIAL and/or MIAL never claimed that they represented AAI.
The arrangement only allowed private parties to do an activity of profit under
the rights granted by the State. Since the revenue’s case was to bring OMDA
under franchise service, there was no question of examining whether the
arrangement could be construed renting of immovable property as defined u/s.
65(90)(a) of the Finance Act, 1994 (the Act). In response to petitioner’s
contention that if any service tax liability was to be fastened, it would be
that of AAI, they contended that it was a contractual dispute and writ petition
in respect thereof would not be maintainable and more so when there was an
arbitration clause formed part of the contract.

Case of Revenue

Revenue in turn had a case that writ was primarily not
maintainable since alternate remedy was available by filing an appeal with
CESTAT. Further, on merits OMDA reflected relationship between the parties
which squarely falls within the term ‘franchise’ as used in service tax law and
since the term “representational right“ is not given specific meaning in the
Finance Act, 1994 it should be understood in common parlance meaning. OMDA had
various elements of franchise agreement wherein although responsibility of
operating, maintenance and development was with the petitioners, strict
standards were prescribed for performance and the control was retained by the
franchisor. The functions of AAI are so unique that even without any use of
logo or trademark, the function of airport operation remains identifiable with
AAI. Further, on assuming that the transaction between the parties is of lease
of immovable property for carrying out specific purpose, it actually led to
value addition. In such a case, it would be exigible to service tax. The term
‘service’ therefore must be construed in broad sense. In the case where AAI
entered into a franchise agreement for operation, development and maintenance
of airports, there is a significant amount of value addition to the overall
services offered at the airports. Therefore also service tax was attracted on
the annual fees.

Analysis

The Hon. High Court limited its examination to whether or not
upfront fee and annual fee were exigible to service tax under the
classification of franchise service and not renting of immovable property
service since the revenue so contended. Thus, for OMDA to be construed a
franchise, it would have to satisfy requirement of section 65(47) of the Act as
reproduced below:

“Franchise means an agreement by which the franchisee is
granted representational right to sell or manufacture goods or to provide
service or undertake any process identified with franchisor, whether or not a
trade mark, service mark trade name or logo or any such symbol as the case may
be, is involved.”

The above interalia requires that ‘DIAL’ and ‘MIAL’
should have been granted representational right by AAI. The said right would
envisage the franchisee to represent as franchisor and the franchisee could
lose its individual identify. For this, the Court perused in detail certain
relevant clauses of OMDA to ascertain as to what kind of operational rights
were granted by AAI and whether AAI provided any service to DIAL and MIAL.
Reading OMDA as a whole, the Court essentially found as follows:

At the end of the transition phase, the petitioners had to
operate and maintain airports independently and to employ in a phased manner,
increasing number of senior management personnel during transition period so
that at the end of the said period, no employees would continue at the airport.
Joint Ventures were in fact entered into so that functions of AAI under
Airports Authority of India Act could be effectively carried out with AAI to
have 26% stake in the said joint ventures. Petitioners had to prepare a master
plan of development for over 20 year time frame. Petitioners were also given
right to sub-lease or license any part of the airport site to third parties for
the purpose of fulfillment of their obligation under the OMDA. Petitioners
spent their own money for the design, development, construction and
modernisation etc. of the airports. Operation, maintenance and
development is carried out by them in their own right. They have “exclusive
right and authority” to undertake various listed functions and to provide
aeronautical and non-aeronautical services at the airports. Thus it is clear
that the petitioners did not undertake any process identified with AAI. The
sole responsibility is theirs and they perform their operation using their own
policies, techniques and processes. Once the functions of AAI are completely
divested and assigned to petitioners, there does not remain any representation
of AAI by the petitioners. There is no representation right assigned to the
petitioners under OMDA. Annual fee was paid to AAI not because any service was
provided by AAI to petitioners. For the transaction to be taxable there should
be a service provided by AAI to the petitioners. What AAI has done is
entrusting petitioners with some of its functions under the Airports Authority
of India Act. Therefore OMDA does not constitute franchise service.

The Court however left open the issue raised by DIAL and MIAL that
the annual fee was inclusive of service tax or whether the said issue was a
contractual dispute. However, the action of AAI to block the escrow account was
found unsustainable as the categorical stand of revenue was to treat the
transaction as exigible to service tax under franchise service alone.

Conclusion

The
judgment provides guiding principles to interpret a contract for determining
both taxability and classification and when not correctly applied, it indicates
how the revenue missed to collect a large amount of revenue for most of the
relevant period of time.

shailesh.kwebmaker

Welcome GST Reverse Charge Mechanism under Goods and Services Tax (GST)

Preamble:

Usually a supplier of goods or service is a taxable person liable to
discharge tax liability under Goods and Service Tax Act (‘GST Act’). However in
exceptional cases, GST legislation stipulates discharge of tax liability by
recipient instead of supplier of goods or services. This is popularly known as
reverse charge mechanism (‘RCM’).

Neither excise nor VAT legislation presently provides for RCM. It is a
well- founded concept in service tax legislation and same is adopted in GST
also.

Administrative convenience and ease of tax collection are prime
objectives of RCM. The tax authorities prefer to collect tax from small number
of assessees from organised sector instead of chasing large number of small and
unorganised tax payers. Broadening tax base could be another purpose of RCM.

Basics of RCM:

Reverse charge applies only when there is a charge on supply. If supply
is exempted, nil rated or non-taxable, RCM does not apply in such a case.

Recipient of goods or services discharges GST under RCM as if he is the
person liable for paying the tax on supply procured by him. All provisions of
the Act including the collection, recoveries and penal provisions apply to the
recipient.

Recipient is required to pay applicable tax i.e. CGST and SGST, CGST and
UGST or IGST depending on location of supplier and place of supply. The tax
liability needs to be discharged under RCM at applicable rate of tax.

Recipient makes payment on his own account. It is paid under recipient’s
GSTIN number and is declared in his GST Returns as taxable supplies on which
tax liability is discharged.

Payment made under RCM is not a Tax Deducted at Source (‘TDS’) paid by
recipient on behalf of supplier. The supplier does not get credit of tax paid
under RCM by the recipient.

Tax paid under RCM by the recipient is an input tax and not output tax.
The recipient (payer of tax under RCM) is entitled to avail Input Tax Credit
(‘ITC’) thereof subject to other provisions contained in Chapter V of CGST Act
and Input Tax Credit Rules.

Relevant Legal Provisions:

Section 9 of Central Goods and Services Tax Act, 2017 (‘CGST Act’)
provides for levy and collection of Central Goods and Service Tax (‘CGST’). The
power to collect tax under RCM from recipient is derived by government u/s.
9(3) and 9(4) of CGST Act which reads as under:

“Section 9(3) – the Government, on recommendation of the Council, by
notification, specify categories of supply of goods or services or both, tax on
which shall be paid on reverse charge basis by recipient of such goods or
services or both and all the provision 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.

Section 9(4) – the central tax in respect of the supply of taxable goods
or services or both by a supplier who is not registered, to a registered person
shall be paid by such person on reverse charge basis as the recipient and all
the provisions of GST legislation 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.”

Section 5 of Integrated Goods and Services Tax Act, 2017 (‘IGST Act’),
section 7 of Union Territories Goods and Services Tax Act, 2017 (‘UGST Act’)
and respective section of State Goods and Services Tax Act, 2017 (‘SGST Act’)
also provide for RCM on a similar pattern to that of CGST Act.

Reverse Charge Mechanism (‘RCM’) in brief:

RCM on notified goods or services:

Recipient of notified goods or services or both is liable to pay CGST
under RCM on supply of notified goods or services u/s. 9(3) of CGST Act.

Recipient is liable to discharge GST liability under RCM irrespective
of:

– Recipient being registered person or
unregistered person; or

– Supplier of notified goods or services is
registered person or unregistered person.

Notified goods under RCM

GST Council has recommended only tobacco leaves as notified goods
for the purpose of RCM. Any person buying tobacco leaves will be liable to
discharge GST under RCM on purchase of tobacco leaves.

The Government, on the recommendation of GST Council, may in future
expand the list of goods liable under RCM.

Notified services under RCM

GST Council has recommended following services on which tax will be
payable on RCM:

Nature of Service	Service Provider (‘SP’)	Service Recipient (‘SR’)	% of GST payable by SR
Import of Services	Any person who is located in non-taxable territory	Any person located in taxable territory other than non-assessee online recipient (Business Recipient)	100%
Goods Transport Agency Services in respect of transportation of goods by road	Goods Transport Agency	a. Factory b. Society c. Co-operative society d. Person registered under GST Act e. Body corporate f. Partnership Firm g. Casual taxable person	100%
Legal Services	Individual advocate or firm of advocate	Any business entity	100%
Arbitration Services	Arbitral Tribunal	Any business entity	100%
Sponsorship Services	Any person	Body corporate or partnership firm	100%
Services by Government or local authority excluding: u Renting of immovable property u Services by department of posts u Services in relation to aircraft or vessel inside or outside precincts of port / airport u Transport of goods or passengers	Government or local authority	Any business entity	100%
Director’s service	Director of company or body corporate	Company or body corporate	100%
Insurance agency service	Insurance agent	Any person carrying on insurance business	100%
Recovery agency service	Recovery agent	Banking company, financial institution , NBFC	100%
Transportation of goods by a vessel from a place outside India up to customs station of clearance in India	Person located in non-taxable territory to a person located in non-taxable territory	Importer as defined under Customs Act, 1962	100%
Transfer or permitting use or enjoyment of Copyright relating to original literary, dramatic, musical or artistic works	Author or music composer, photographer, artist, etc.	Publisher, Music Company, Producer	100%
Rent-a-cab service through e-commerce operator	Taxi driver or rent-a-cab operator	Any person	100% by e-commerce operator

Nature of Service

Service Provider (‘SP’)

Service Recipient (‘SR’)

% of GST payable by SR

Import
of Services

Any
person who is located in non-taxable territory

Any
person located in taxable territory other than non-assessee online recipient
(Business Recipient)

100%

Goods Transport
Agency Services in respect of transportation of goods by road

Goods
Transport Agency

a. Factory

b. Society

c. Co-operative society

d. Person registered under GST Act

e. Body corporate

f. Partnership Firm

g. Casual taxable person

100%

Legal Services

Individual
advocate or firm of advocate

Any
business entity

100%

Arbitration
Services

Arbitral
Tribunal

Any
business entity

100%

Sponsorship
Services

Any
person

Body
corporate or partnership firm

100%

Services
by Government or local authority excluding:

u Renting of immovable property

u Services by department of posts

u Services in relation to aircraft or vessel
inside or outside precincts of port / airport

u Transport of goods or passengers

Government
or local authority

Any
business entity

100%

Director’s
service

Director
of company or body corporate

Company
or body corporate

100%

Insurance
agency service

Insurance
agent

Any
person carrying on insurance business

100%

Recovery
agency service

Recovery
agent

Banking
company,
financial institution , NBFC

100%

Transportation
of goods by a vessel from a place
outside India up to customs station of clearance in India

Person
located in non-taxable
territory to a person located in non-taxable territory

Importer
as defined under Customs Act, 1962

100%

Transfer
or permitting use or enjoyment of Copyright relating to original literary,
dramatic, musical or artistic works

Author
or music composer, photographer, artist, etc.

Publisher,
Music Company, Producer

100%

Rent-a-cab
service through e-commerce operator

Taxi
driver or
rent-a-cab operator

Any
person

100% by e-commerce operator

Under service tax, partial reverse charge is prescribed on
few services wherein certain portion of tax liability is to be discharged by
service provider and balance to be discharged by service recipient under RCM.

There is no concept of partial reverse charge in GST.

RCM on procurement of goods or services from unregistered
persons:

Registered person is liable to pay tax under RCM on any goods
or services or both procured by him from an unregistered person. Following may
be the unregistered person:

– Person not carrying on any business or
profession; or

– His aggregate turnover is below the threshold
limit; or

– He is located in Jammu & Kashmir; or

– He is located outside India; or

– He is not registered though obliged to get
registered

Following are a few illustrations to demonstrate the
circumstances in which RCM triggers:

– An unregistered architect (whose turnover is
Rs. 15 lakh) raises an Invoice of Rs. 1 lakh on builder. In such a case,
builder being registered person will be liable to pay GST on Rs. 1 lakh under
RCM.

– An item of stationery is bought by registered
business entity from small unregistered shop. In such a case, such business
entity will have to discharge GST under RCM.

Time of supply for RCM:

Due date of payment of tax under RCM is linked to the time of
supply as prescribed u/s. 12 and 13 of CGST Act.

Time of Supply for goods:

It shall be earliest of following:

– Date of receipt of goods; or

– Date of payment entered in books of accounts
or date of debit in bank, whichever is earlier; or

– Date immediately after 30 days from date of
invoice

Where it is not possible to determine time of supply as
above, time of supply shall be date of entry in books of accounts of recipient
of supply.

Illustration:

Date of Invoice	Receipt of goods	Date of payment	31^stday from date of invoice	Time of Supply
30/09/17	30/09/17	15/10/17	31/10/17	30/09/17
30/09/17	15/11/17	30/11/17	31/10/17	31/10/17
30/09/17	15/11/17	16/08/17	31/10/17	16/08/17

Date of Invoice

Receipt of goods

Date of

payment

31^stday
from date of invoice

Time of Supply

30/09/17

15/10/17

31/10/17

30/09/17

15/11/17

30/11/17

31/10/17

30/09/17

15/11/17

16/08/17

31/10/17

16/08/17

Time of supply for services:

It shall be earliest of following:

– Date of payment entered in books of accounts
or date of debit in bank, whichever is earlier; or

– Date immediately after 60 days from date of
invoice

Where it is not possible to determine time of supply as
above, time of supply shall be date of entry in books of accounts of recipient
of supply.

Illustration:

Date of Invoice	Date of payment	61^stday from date of invoice	Time of Supply
30/09/17	15/10/17	30/11/17	15/10/17
30/09/17	10/12/17	30/11/17	30/11/17

Date of Invoice

Date of payment

61^stday
from date of invoice

Time of Supply

30/09/17

15/10/17

30/11/17

15/10/17

30/09/17

10/12/17

30/11/17

Mandatory registration for person liable to pay GST under RCM:

Section 24(iii) of CGST Act mandates compulsory registration
for persons liable to pay tax under RCM. Threshold limit is not applicable to
persons liable to pay under RCM. Person having less than 20 lakh turnover or
supplier of exclusively exempt or non-taxable goods / services will also be
liable for GST registration if he is obliged to discharge tax under RCM.

Illustration: Co-operative society availing goods
transport agency (‘GTA’) services of nominal value will be liable to pay GST
under RCM and consequently liable to get itself registered irrespective of the
fact that such a society is not making any taxable supply or their aggregate
turnover is below the threshold limit.

Documentation:

Section 31(3)(f) mandates registered person liable to pay GST
under RCM to issue an invoice in respect of goods and services received by him
from un-registered supplier. Such invoices should contain all particulars as
prescribed u/s. 31(1) and 31(2) read with GST Invoice Rules to the extent
applicable. This would mean registered person procuring goods and services and
paying tax under RCM is obliged to mention HSN Codes and Service Accounting
codes of goods or services procured by him.

Rule 1 of Input Tax Credit Rules provides that a registered
person shall avail input tax credit on the basis of an invoice raised in
accordance with provisions of section 31(3)(f).

Further registered person liable to pay GST under RCM shall
issue a payment voucher at the time of making payment to supplier.

Conclusion:

The person paying tax under RCM is entitled to tax credit in
most of the cases. The Government may not be getting substantial revenue from
RCM. In the past, most of the State legislations for sales tax were having
concept of ‘purchase tax’ to be paid by registered dealer on purchases from
unregistered dealers. However, it was found to be a futile exercise (not
resulting into any substantial revenue to Government), and therefore, in most
of the State VAT legislations, the concept of URD tax (purchase tax) was
scrapped.

RCM has inherent disadvantage of being obstacle in free flow
of tax credits across the businesses and nation. It also raises the question
whether it is fair on the part of government to put more burden of compliance
on law abiding organised sector of the economy.

It would be too cumbersome for majority of the assessees to
comply with such a rigid compliance requirement. Moreover, it is difficult for
assessee to reconcile their expenses as per financial statements with tax paid
under RCM as per returns. It is indeed a pain for any organisation to reconcile
such figures and satisfy the authorities in course of scrutiny, assessment,
audit and investigations, etc.

RCM provisions, as stated in the CGST Act as on
today, may be described as totally against the concept of ease of doing
business. One may feel that Government should not have brought the concept of
RCM (in this manner) under GST. The GST legislation, without RCM, would be much
more tax-payer friendly law.

shailesh.kwebmaker

INTER STATE SALE VIS-À-VIS INTRA STATE SALE

Introduction

Whether transaction is Inter State
or Intra State sale is always a very delicate issue. The nature of transaction
depends upon facts of case. By now, there are number of precedents laying down
tests for deciding nature of inter-state sale. However, it still cannot be said
that it is a settled law.

Section 3(a) of the Central Sales
Tax Act (CST Act) lays down the principles to define inter-state sale.

Although, section 3(b) also
describes certain transaction to be inter-state sale but the same is not
discussed here.

Section 3(a) reads as under:

“S.3. When is a sale or purchase of
goods said to take place in the course of inter-State trade of commerce.- A
sale or purchase of goods shall be deemed to take place in the course of
inter-State trade or commerce if the sale or purchase-

a. occasions the movement of goods from one
State to another; or ……………..…”

Thus, normal understanding is that
the sale which is linked with inter-state movement of goods is inter-state
sale. And it is also expected that same goods are moved, which are subject
matter of sale.

If the goods sold and goods
actually moving are different then it is difficult to say that there is
inter-state sale in the hands of seller. However, we find contrary judgments on
the issue as discussed here under.

Inter State sale under section 3(a) –
Scenario I

State of Tamil Nadu vs. Sun Paper
Mill Ltd. & Ors. (23 VST 191)(Mad)

The facts in this case, in words of
Hon. High Court are as under:

“The assessee – first respondent is
a public limited company, which is engaged in the business of manufacture and
sale of papers. They are dealers in newsprint and assessed on the file of the
Deputy Commercial Tax Officer, Ambasamudram, in TNGST 802529/93-94. The
relevant assessment year is 1993-1994. The assessee has effected sales of
newsprint to the tune of Rs. 25,07,671 during the assessment year to Tvl. Kerala
Sabdam and Tvl. Kollam Muthari, Kollam and claimed those sales as inter-state
sales. But the assessing officer rejected their claim on the ground that the
newsprints sold to them were not moved to another State. They were moved only
to Sivakasi and later the said newsprints were converted into news magazine in
Pioneer Press (P) Limited, Sivakasi and then the same were moved to Kerala.
Therefore, the assessing officer assessed the said turnover under the Tamil
Nadu General Sales Tax Act, 1959. Aggrieved by that order, the assessee filed
an appeal before the Appellate Assistant Commissioner (CT), Tirunelveli in CST
AP No. 345 of 1995. The Commissioner allowed the appeal on the ground that the
movement of goods from the State of Tamil Nadu to Kerala would certainly form
an inter-State transaction. Later, the Joint Commissioner (CT)(SMR) suo motu
revised the order of the Appellate Assistant Commissioner and treated the
transaction as local sales.

Assessee pursued the matter further
and ultimately came before Hon. Madras High Court by way of a Writ Petition.
After hearing parties, Hon. High Court ruled as under:

“After taking note of the
principles enunciated in the above Supreme Court judgments, we have to find out
whether there is movement of goods. The present case falls u/s. 3(a) of the
Act. There are two ingredients in the section, i.e., (i) it must be a sale of
goods; (ii) the sale occasions the movement of goods from one State to another.
In respect of sale, there is no dispute. We have to see here whether there is
sale occasioning the movement of goods. In the case on hand, the seller and the
buyer contemplated movement of goods from Tamil Nadu to Kerala. At the
instruction of the buyer, the goods were dispatched to Sivakasi, wherein
conversion took place and after conversion, the goods were moved to Kerala.
Because of conversion, it cannot be held that there is no movement of goods. It
is only for the purpose of section 5(3) of the Act that any goods undergoing
commercial change is relevant. It is not for the purpose of determining the
inter-state sale u/s. 3(a) of the Act.

Mere stoppage at Sivakasi and
conversion would not alter the character of the transaction. The stoppage and
conversion occurred only at the instance of the buyer at Kerala. There is no
dispute in respect of the contract. The goods were moved pursuant to the
contract. The goods dispatched to Sivakasi were not meant to be sold in the
open market. There is no restriction that the goods should be moved intact. It
is not for the Revenue to suggest that the goods must reach as it is. The
authorities, who are acting as guardian of the Revenue, must examine and
consider the transaction from the standpoint of a businessman. The yardstick is
that of a prudent businessman. Otherwise, first, the goods have to go to Kerala
and then betransported back to Sivakasi for conversion and once again after
conversion, it must go to Kerala. To avoid multiplicity of transaction, the
seller sent the goods to Sivakasi at the instance of the buyer and after conversion,
the same were sent to Kerala. There is no material available to show that the
goods are meant to be in Sivakasi. It is not the contention of the petitioner
that the goods were not moved from Tamil Nadu to Kerala. Stoppage and
conversion do not make the transaction a local sale. After applying the
principles enunciated in the judgments cited supra and also taking into
consideration the facts involved, we are of the view that the transaction
involved is only an inter-State sale.”

Inter State sale under section 3(a) –
Scenario II

Tamil Nadu Petro Products Ltd. vs.
Assistant Commissioner (CT), Fast Track Assessment Circle II, Chennai and
another’s (95 VST 118)(Mad)

The facts in this case, as narrated
by the High Court are as follows:

“2. The controversy which led to
the petitioner seeking for the clarification arose under the following
circumstances. HLL are engaged in the manufacture of detergents and they are
registered dealers on the file of the Assistant Commissioner (CT), Fast Track
Assessment Circle-II, Greams Road, Chennai, under the provisions of the TNGST
Act and the Central Sales Tax Act, 1956, (CST Act). HLL placed purchase order
dated 15.06.2000, for sale of LAB and for delivery of the same at M/s. Ultra
Marine and Pigments Limited, Ranipet, (Job Worker). The said purchase order was
raised by HLL from their Mangalore office. The job worker is required to
manufacture Acid Slurry from LAB and such product is stock transferred to the
factory of HLL at Mangalore. Therefore, the question arose as to whether the
petitioner can avail the concessional rate of tax on production of form-XVII
declaration.”

The following argument on behalf of
Revenue further clarifies the controversy:

“5. Mr. Manokaran Sundaram, learned
Additional Government Pleader appearing for the respondents submitted that the
petitioner entered into a contract with HLL, Mangalore for supply of LAB; a raw
material for manufacture of detergent and as per the agreement, it had to be
supplied and delivered to their job worker at Ranipet and later after
conversion of raw material as Acid Slurry, the same would be transported to
HLL, Mangalore for further processing and manufacturing as detergents.
Referring to the purchase order dated 15.06.2000, it is submitted that it
clearly shows the dealer at Mangalore had placed the purchase order and in
pursuance to the same, the petitioner had effected sale to the dealer at
Mangalore and the transaction is clearly an interstate sale and the only
difference being delivery has been made to the job worker at Ranipet and after
completion, for onward transmission to the purchaser at Mangalore.”

After examining controversy, the
Hon. High Court held as under:

“12. Undoubtedly, the products sold
by the petitioner was not the product which was moved out of the Ranipet
factory on stock transfer to HLL Mangalore. Thus, the factory at Ranipet had
manufactured a commercially distinct product than what was sold by the
petitioner to HLL. In other words, the products sold by the petitioner was LAB,
the product which was manufactured from LAB was Acid Slurry. In my view, it
would be unnecessary to test the present transaction based on whether the
product manufacture within the State was an intermediary product for
manufacture of another product outside the state.

14. If the case on hand is tested
on the anvil of the decision of the Hon’ble Supreme Court, it is not in dispute
that the contract of sale with the petitioner stood completed within the State
of Tamil Nadu upon delivery of the goods at Ranipet. The movement of the goods
after undergoing a process of manufacture and after being converted into a
commercially different product is an independent transaction and the
transaction could not be treated as an interstate element.”

Thus, the transaction of sale by
seller to buyer (HLL) is held to be intra state sale.

Conclusion

It can be seen that on similar
facts, the same High Court has given different rulings. Thus, the situation
becomes very uncertain. The dealer community remains in great confusion about
the correct tax to be collected from buyer. It is felt that the latert judgment
specifies correct scope of section 3(a) of CST Act for inter-state sale. The
goods sold and moved to other State should be same goods, else it will create
an unexpected situation.

It is expected that the controversy
will get settled by the later judgment. _

shailesh.kwebmaker

ONUS OF LIABILITY TO PAY SERVICE TAX

Preliminary

Service providers often face
practical difficulties (due to financial constraints, non-recoveries from
clients etc.) in paying service tax to the Government in time resulting in
interest and other penal consequences. In such situations, issues arise as to
whether service providers can direct service tax authorities to recover tax
dues from their debtors. This aspect and related issues are discussed hereafter
with the help of a Delhi High Court ruling, special leave petition against
which has been dismissed by the Supreme Court.

Relevant Extracts from the Finance
Act, 1994 as amended (“Act”)

– Section 68 of the Act (payment of service tax)

(1) Every person providing
taxable service tax to any person shall pay service tax at the rate specified
in section 66B in such manner and within such period as may be prescribed.

(2) Notwithstanding anything
contained in s/s. (1), in respect of such taxable services as may be notified
by the Central Government in the Official Gazette, the service tax thereon
shall be paid by such person and in such manner as may be prescribed at the
rate specified in section 66B and all the provisions of this Chapter shall
apply to such person as if he is the person liable for paying the service tax
in relation to such service;

Provided that the Central
Government may notify the service and the extent of service tax which shall be
payable by such person and the provisions of this Chapter shall apply to such
person to the extent so specified and the remaining part of the service tax
shall be paid by the service provider.

– Section 87 of the Act (recovery of any amount due to Central
Government)

Where any amount payable by a
person to the credit of the Central Government under any of the provisions of
this Chapter or of the rules made thereunder is not paid, the Central Excise
Officer shall proceed to recover the amount by one or more of the modes
mentioned below:

(a) the Central Excise Officer
may deduct or may require any other Central Excise Officer or any officer of
customs to deduct the amount so payable from any money owing to such person
which may be under the control of the said Central Excise Officer or any
officer of customs;

(b) (i) the Central Excise Officer may, by notice in
writing, require any other person from whom money is due or may become due to
such person, or who holds or may subsequently hold money for or on account of
such person, to pay to the credit of the Central Government either forthwith
upon the money becoming due or being held or at or within the time specified in
the notice, not being before the money becomes due or is held, so much of the
money as is sufficient to pay the amount due from such person or the whole of
the money when it is equal to or less than that amount;

(ii) every person to whom
a notice is issued under this section shall be bound to comply with such
notice, and in particular, where any such notice is issued to a post office,
banking company or an insurer, it shall not be necessary to produce any pass
book, deposit receipt, policy or any other document for the purpose of any
entry, endorsement or the like being made before payment is made,
notwithstanding any rule, practice or requirement to the contrary;

(iii) in a case where the
person to whom a notice under this section is sent, fails to make the payment
in pursuance thereof to the Central Government, he shall be deemed to be an
assessee in default in respect of the amount specified in the notice and all
the consequences of this Chapter shall follow;

…………….

Delhi High Court Ruling in Delhi
Transport Corporation (DTC) vs. CST (2015) 51 GST 511 (DEL)
(2015-TIOL-961-HC-DEL-57

Facts in Brief

With the objective of augmenting
its revenue, DTC entered into contracts with seven agencies
(contractors/advertisers) providing space to such parties for display of
advertisements on bus queue shelters and time keeping booths. Two of the said
contracts contained similar stipulations including clause No 9 which reads as
under:

“It shall be
responsibility of the contractor/advertiser to pay direct to the authority and
MCD concerned the advertisement tax or any other taxes levy payable or imposed
by any authority and this amount will be in addition to the license fee quoted
above”

According to the Revenue, on the
basis of inputs received from its anti-evasion branch, DTC having engaged
itself in aforementioned contracts had failed to pay tax on services. Hence
show cause notices were issued by the revenue demanding service tax on receipts
by DTC on account of “sale of space or time for advertisement” along with
interest and penalty.

DTC submitted replies to the
effect that it is an autonomous body of government of NCT of Delhi created
under the Road Transport Act and had no intention to violate the provisions of
the taxing statutes. They further submitted that the obligation for
registration under the Service Tax Rules had escaped the notice of its accounts
department and chartered accountant/auditors and thus, the omission was neither
intentional nor deliberate. It was submitted that after the requirement had
come to its notice, DTC had taken requisite steps for registration. It further
stated that since it was obliged to provide transport services to the public at
large at subsidised rates, it was incurring losses and consequently depended on
grants from the government and for this reason it was moving the Central
Government to grant exemption. DTC further stated that in terms of the
contractual arrangement, the liability towards statutory taxes, including
service tax, was to be borne by the contractors engaged by it and that all such
contractors, except the two mentioned above, were paying the service tax
chargeable in their respect pursuant to supplementary bills raised from time to
time and further that all such remittances received were duly deposited with
the service tax department.

DTC resisted the show cause
notices also on the ground that the two contractors had taken a stand contradictory to the
contractual terms in such regard, failing to abide by their obligation in terms
of clause 9 (as quoted earlier), in spite of directions of this Court on the
petitions u/s. 9 of Arbitration and Conciliation Act, 1996. DTC informed the
Revenue that it intended to institute contempt/execution proceedings against
the said contractors for failure to deposit the service tax in spite of
contractual obligation and the directions of the High Court. It added that the
amount of service tax to the extent realized from the contractors was deposited
with the service tax department.

The show cause notices were
confirmed upon adjudication. In reaching at conclusions, the adjudicating
authority repelled the contentions of DTC objecting to the assessment for the
extended period of five years holding that the assessee contravened the
relevant statutory provisions thereby indulging in “suppression of
material facts”. In addition to penalty u/s. 77 of the Act, penalty was
imposed u/s. 78 of the Act, declining benefit of section 80, referring in this
context to the facts that the assessee had neither applied for service tax
registration nor discharged its service tax liability even though it had been
made aware of the obligations.

Appeal before CESTAT

The order of Commissioner
(Adjudication), service tax was challenged before CESTAT. As noted by the
CESTAT in (para 5 of) the impugned order, DTC did not assail the conclusion of
the adjudicating authority as to the classification of the service nor
impeached the quantum of service tax that was confirmed. Its contentions were
restricted to the following (para 11) :

“5. … that since under
agreements with advertisers, the reciprocal obligation of the parties
covenanted that the recipient of the service would be liable for tax, the
appellant was under a bona fide belief that the liability to remit service tax
stood transferred to the recipient qua the agreements; that this was a bona
fide belief which caused the failure to file returns and remit service tax.
Therefore, the extended period of limitation invoked while issuing the first
show cause notice dated 04/01/2008 is unjustified and for the same reasons,
penalty u/s. 78 of the Act should not have been imposed, by exercising
discretion u/s. 80 of the Act.”

The appellant relied on the
Supreme Court Ruling in Rashtriya Ispat Nigam Limited vs. Dewan Chand Ram
Saran (2012) 35 STT 664 (SC) to urge that having entered into the contracts
in the nature mentioned above, it was a legitimate expectation that the service
tax liability would be borne by the contractors/advertisers and thus, there was
no justification for the appellant being held in default or burdened with the
penalty u/s. 78 of the Act. It was argued that in the wake of orders of this
Court on the applications of the two contractors u/s. 9 of Arbitration and Conciliation
Act, 1996, fastening the liability of service tax (in the event of it being
imposed) on such contractors, the revenue ought not to insist upon such payment
by DTC. The CESTAT, however, held that such considerations would not transfer
the substantive and legislatively mandated liability to service tax from the
appellant (the service provider) to the advertisers (the service recipients).

The CESTAT rejected the claim of
DTC as to “bona fide belief” by observing in para 13 as under:

“6. A bona fide belief
is a belief entertained by a reasonable person. The appellant is a public
authority and an instrumentality of the State and should have taken care to ascertain whether it was liable to tax in
terms of the provisions of the Act. There is neither alleged, asserted nor
established that there is any ambiguity in the provisions of the Act, which
might justify a belief that the appellant/service provider, was not liable to
service tax. It is axiomatic that no person can harbour a “bona fide
belief” that a legislated liability could be excluded or transferred by a
contract. The appellant was clearly and exclusively liable to service tax
on rendition of the taxable service of “sale of space or time for
advertisement”. This liability involved the non-derogable obligation to
obtain registration, file periodical ST-3 returns and remit service tax on the
consideration received during the period covered by such ST-3 returns. These
were the core and essential obligations the appellant should have complied
with. We therefore find no basis for the claim that the appellant harboured a
bona fide belief.”

Accordingly, the appeals of DTC
were dismissed by CESTAT.

OBSERVATIONS AND FINDINGS OF
THE DELHI HIGH COURT

– There is no dispute that services provided are taxable within the
meaning of section 65 (105) (zzzn) and that the appellant is liable to pay
service tax thereupon. We, however, do not agree with the views of CESTAT that
the service tax liability could not have been transferred by way of a contract.
The reliance of DTC on the ruling in Rashtriya Ispat case (supra) on
this score was correct and it appears that the same has not been properly
appreciated by CESTAT. Noticeably, the claim of the assessee in that case was
also founded on contractual terms similar to the one relied upon by the
appellant here. [Para 17]

– The service tax liability in Rashtriya Ispat case arose out of
contract given out for transportation of goods. The contractor engaged had
undertaken to “bear and pay all taxes, duties and other liabilities in
connection with discharge of his obligation”. The contractor had invoked
the arbitration clause for raising a dispute as to its liability to pay service
tax. The claim petition was dismissed by the arbitrator which award was
challenged by a petition u/s. 34 of Arbitration and Conciliation Act before a
Single Judge of Bombay High Court. The learned Judge held that insofar as the
service liability is concerned, the appellant (Rashtriya Ispat which had given
the contract was the assessee and liable to tax. The appeal preferred against
the said order on the petition was dismissed by the division bench of the High
Court. [Para 18]

– Against the backdrop of the above-noted facts in civil appeal
carried to Supreme Court, it was observed
as under:-

“37. As far as the
submission of shifting of tax liability is concerned, as observed in para 9 of
Laghu Udyog Bharati vs. Union of India, (1999) 6 SCC 418, service tax is an
indirect tax and it is possible that it may be passed on. Therefore, an
assessee can certainly enter into a contract to shift its liability of service
tax.

……………

39. The provisions concerning service tax are relevant only as
between the appellant as an assessee under the statute and the tax authorities.
This statutory provision can be of no relevance to determine the rights and
liabilities between the appellant and the respondent as agreed in the contract
between two of them. There was nothing in law to prevent the appellant from
entering into an agreement with the respondent handling contractor that the
burden of any tax arising out of obligations of the respondent under the
contract would be borne by the respondent.” [Para 19]

– The above ruling of Supreme Court in the case of Rashtriya Ispat,
however, cannot detract from the fact that in terms of the statutory provisions
it is the appellant which is to discharge the liability towards the Revenue on
account of service tax. Undoubtedly, the service tax burden can be
transferred by contractual arrangement to the other party. But, on account of
such contractual arrangement, the assessee cannot ask the Revenue to recover
the tax dues from a third party or wait for discharge of the liability by the
assessee till it has recovered the amount from its contractors. [Para 20]

– The
directions of this Court on the two petitions u/s. 9 of Arbitration and
Conciliation Act (instituted by the two contractors) would only govern the
rights and obligations arising out of the contracts entered upon by DTC with
the contractors. It may be that in terms of the said orders, DTC would be in a
position to recover the amount of service tax paid by it to the Revenue
respecting the services in question. The
fastening of liability on such account by such order on the contractors is,
thus, a matter restricted to claims of the appellant against such parties. It
would have no bearing insofar as the claim of the Revenue against the appellant
for recovery of the tax dues is concerned. [para 21]

– We agree with the observations of CESTAT that the plea of
“bona fide belief” is devoid of substance. The appellant is a public
sector undertaking and should have been more vigilant in compliance with its
statutory obligations. It cannot take cover under the plea that contractors
engaged by it having agreed to bear the burden of taxation, there was no need
for any further action on its part. For purposes of the taxing statute, the
appellant is an assessee, and statutorily bound to not only get itself
registered but also submit the requisite returns as per the prescription of law
and rules framed thereunder. [Para 22]

For the foregoing reasons, it was
held that the imposition of service tax liability and the levy of interest
thereupon cannot be faulted. For the same reasons, the penalties imposed under
sections 76 and 77 of the Act, were upheld. However, penalty u/s. 78 of the
Act was dropped invoking provisions of
section 80 of the Act.

SLP before the Supreme Court

– SLP against the foresaid ruling of Delhi High Court ruling was
dismissed by the Supreme Court through a short order [Ref (2016) 55 GST 763
(SC)].

Recovery of service tax by the
service providers from the service recipient – Some judicial considerations.

– Since the commercial understanding is between the service provider
and service recipient, if service recipient does not pay taxes to the service
provider, the latter is entitled to file civil suit in terms of applicable
commercial laws and obtain appropriate orders. As far as service tax department
is concerned, it should, ordinarily deal only with person liable to pay service
tax, who is an ‘assessee’ under the Act. In this regard attention is drawn to a
Court ruling in Damodar Valley Corpn. vs. CCE&ST (2014) 41 taxmann.com
58 (JHARKHAND), wherein the High Court set aside a direction of the
department to the service recipient to pay Service tax to the service provider,
essentially because no opportunity of hearing was given by department to the
service recipient.

– In Bhagwati Security
Services vs. UOI [2013] 31 STR 537 (All), it was held that that, since
service tax is an indirect tax and is a statutory liability, even if agreement
between parties is silent as to levy of service tax, service providers may
bring suit before Courts to seek collection of service tax from the service
recipient, inasmuch as service providers are merely a collecting agency who
collect service tax from recipient and pay it to Government.

– As regards recovery of levy / increase in service tax, useful
reference can be made to the ruling in Satya Developers Pvt. Ltd. vs. Pearey
Lal Bhawan Association (2015) 39 STR 429 (DEL) and 39 STR J173 (SC). In
the said ruling in particular, it was held that, section 64A of the Sale of
Goods Act, 1930 is also applicable for service tax. However, in a contrary
view, it was held in Multi Engg & Scientic Corp. vs. Bihar State
Electricity Board (2015) 39 STR 414 (PAT) that liability to pay service tax
is on service provider and in absence of any agreement to the contrary,
reimbursement of service tax cannot be claimed from service recipient. Section
64A of the Sale of Goods Act, 1930 was held inapplicable to services.

Summation

In light of foregoing discussions,
it can be reasonably summed up as under :

– Under the service tax law service provider is liable to pay
service tax, excepting in cases notified in terms of section 68 (2) of the Act
read with Notification No. 30/2012 – ST dated 20/06/2012 (as amended), in which
case the persons liable to pay service tax shall be as prescribed in Rule 2(d)
of Service Tax Rules, 1994 (Rules).

– In terms of section 65B (12) of the Act, ‘assessee’ means a person
liable to pay tax and includes his agent. Hence, in appropriate cases, agents
of service providers / persons specified in Rule 2(d) of Rules could be liable
to pay service tax.

– Being an indirect tax, service tax can be recovered by the service
provider from the service receiver, subject to commercial understanding to the
contrary.

– Though service tax burden can be transferred by contractual
agreement by a service provider to the service receiver, such consideration would
not transfer the substantive and legislatively mandated liability to service
tax from a service provider to the service recipients. Further, service
providers cannot ordinarily ask the service tax department to recover tax dues
from a third party or wait for discharge of their liability till it has
recovered the amounts from their clients.

– In appropriate cases, service providers can in terms of applicable
commercial laws seek directions / orders from the Court as regards tax amount
due to them which is not paid by their clients.

– Section 87 of the Act which in particular empowers service tax
department to recover service tax from an assessee’s debtors can be usually
invoked in extreme cases where a service provider fails to pay service tax to
the government. _

shailesh.kwebmaker

Amendment in Rules

N o . VAT. 1 5 1 5 / C R – 1 5 8 / Ta x a t i o n – 1 d a t e d 30.12.2015

Maharashtra Government has amended the Maharashtra Value added Tax Rules, 2005. Rule 52B has been added under which if the claimant dealer has purchased goods covered under Entry 13 of Schedule D -Aerated and Carbonated non-alcoholic beverages, whether or not containing sugar or other sweetening matter or flavor or any other additives and under Entry 14 of Schedule DCigar and cigarettes, then he will be entitled to set-off in respect of the said goods only to the extent of aggregate of the tax paid or payable under the Central Sales Tax Act, 1956 on interstate resale of the corresponding goods and the taxes paid on the purchase of said goods if resold locally under the Act.

The set-off in respect of said goods shall be claimed only in the month in which corresponding sales of such goods is effected by the claimant dealer. Above conditions are not applicable to the purchases of such goods which are sold in the course of export of goods out of the territory of India. (Applicable wef 1-1-2016).

shailesh.kwebmaker

Restructuring of Maharashtra Sales Tax Department

Trade Circular 20T of 2015 dated 31.12.2015

With the view to provide single window system to dealers, the Department has undertaken restructuring of work allotment which entails changing the present functional set up into a single desk multi functional setup wherein dealers will be allocated to the officers to be called as Nodal officers. Under this system, each dealer will have a Nodal Officer who will look after functions of amendment and cancellation of registration, returns follow up, audits/ assessments/issue based audits, processing of refunds, issuance of CST forms, cross checks and recovery of dues etc.

shailesh.kwebmaker

Downloading of Digitally Signed Registration Certificate

Trade Circular 19T of 2015 dated 21.12.2015

In order to ensure immediate availability of the (TIN) registration certificate to the applicant, a facility has been made available to download the digitally signed (TIN) registration certificate from the website www.mahavat.gov.in Detailed procedure explained in this circular. The registration officer shall continue to send the physical copy of (TIN) registration certificate to the applicant on the address mentioned in the application through India post.

shailesh.kwebmaker

M/s. G. E. Capital Transportation Financial Services Ltd. V. State of Haryana and Another, [2013] 63 VST 329 (P&H)

VAT – Turnover of Sales – Deemed Sale – Transfer of Right to Use Goods – Rentals Received or Receivable in Given Period Only Taxable, Section 2 (2C) (iv) of The Haryana Value Added Tax Act, 2003.

FACTS
The appellant entered into agreement for lease of vehicles. The assessment orders were finalized by taking aggregate amount of all installments payable for the entire term of the lease periodfor the month in which the vehicles were delivered to the lessee. The appellate authorities including the Tribunal dismissed the appeal. The appellant filed appeal before the P & H High Court against the said order of the Tribunal dismissing the appeal.

HELD
The definition of tax period in terms of rule 2 (2f) of the Rules means a period of time usually a month, quarter or a year for which tax payable by a dealer is quantified. The turnover is aggregate of the goods sold or purchased by a dealer during a tax period in terms of rule (2g) of the Rules. Since the transfer of right to use in the vehicles is the sale falling within the definition of section 2(f), therefore, rentals received or receivables during the tax period is the sale price received by the dealer, exigible to tax in a financial year. The right to use vehicles is dependent upon monthly payment of rentals and therefore, the monthly rentals received or receivable by the dealer is a turnover and consequently the sale price. The lease rentals received or receivable during the tax period only, as a right to use goods, is the turnover forming part of sale price. Accordingly, the High Court allowed appeal filed by the appellant company and set aside the order passed by the Tribunal.

shailesh.kwebmaker

M/S.Vikas Poha Mill vs. Divisional Dy. CCT, [2013] 63 VST 132 (Chhatisgarh)

Sales Tax – Sale of Poha and Murmura – Are Forms of Rice – Are “Cereals” – Exempt from Payment of Tax, Entry 23 of Part II of Schedule II of The Madhya Pradesh General Sales Tax Act, 1956.

FACTS
The Petitioner manufacturer of Poha and Murmura claimed exemption from payment of tax on sale of it being covered by the term “Cereals” under Notification dated March 30, 1994 read with section 14 of the CST Act, 1956. The department rejected the claimas the sale of Poha and Murmura is covered by specific entry 23, Part IV of Schedule II of the Act and also held that it is not covered by the term cereals, as there is a separate schedule entry. The petitioner filed writ petition before the Chhattisgarh High Court against the aforesaid assessment order.

HELD
The State has placed Poha and Murmura in the separate entry for the purpose of exigibility to taxation. However, in the exemption notification the word cereals includes, inter alia “rice” as enumerated in (i) to (x) in section 14 of the CST Act. All the terms used are the basic products, not other forms of the product. The term rice includes beaten and puffed rice both. Thus, the exemption is granted to all the goods, as specified in the State Act, the State can not get any advantage from the fact that there has been a separate entry for exigibility to tax in respect of Poha and Murmura. Accordingly, Poha and Murmura are one form of rice and entitled to exemption under the above stated notification. The exemption has been granted to Cereals which are enumerated after “that is to Say”. The term “Cereals” used in section 14( i) of the CST Act clearly means “rice “ and other like products of rice like Poha and Murmura. Thus, rice including Poha and Murmura are included within the definition of Cereals and as such covered by the notification dated March 30, 1994 for the purpose of exemption. Accordingly, the High Court allowed the writ petition and the matter was referred back to the assessing officer to make assessment a fresh in the light of law decided by the High Court.

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[2015-TIOL-12-ARA-ST] M/s J. P. Morgan Services India Private Ltd.

Provision of a car to an employee by the employer during the course of his employment and only because the employee is in service is covered by section 65B(44)(b) of the Finance Act, 1994 and will not amount to service.

Facts
The applicant desires to hire cars from car leasing companies and under the scheme those cars would be made available to such employees who are firstly continuing to be the employees and secondly who accept the option to have the car for their personal as well as official use and in lieu of this, the company was to charge the said employees the same amount which it would be paying to the car leasing company from which they hire the car. The question before the authority is whether the amount to be charged to its employees for the use of the vehicles is subject to service tax.

Held
The Authority noted that the service of “making available” a car to the employee is being rendered by the applicant. In this context, both the conditions of clause (b) of section 65B (44) are fulfilled. Firstly, it is in the course of the employment because the agreement between the applicant and employee clearly suggests that this will be during the course of his employment only. Second condition is also satisfied that it is only because the employee is in service and in that sense the service becomes in relation to his employment. Since both these conditions are fulfilled, it is held that the transaction will not amount to service.

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[2016-TIOL-166-CESTAT-ALL] M/s Tanya Automobiles Pvt. Ltd vs. Commissioner of Central Excise and Service Tax, Meerut-I

When value of goods used is shown separately in invoice and VAT/Sales Tax has been paid, the transaction has to be treated as sale and cannot be a service transaction.

Facts
Appellant is an Authorised Service Station of Motor Vehicles and was paying service tax on the labour charges only and not on value of spare parts and lubricants used in the course of servicing of the motor vehicles. Department demanded service tax on the entire amount of invoice including the value of spare parts on the contention that without the use of spare parts and consumables in the course of servicing of vehicles, the service is not complete and therefore is an integral part of service. It was further observed that benefit of Notification No. 12/2003-ST is also not available as they are not issuing separate invoices for sale of spares.

Held
The Tribunal noted the decision of Samtech Industries vs. Commissioner of Central Excise [2014-TIOL-643- CESTAT-DEL] upheld by the Hon’ble High Court of Allahabad [2015(38) STR 162] and the CBEC letter dated 27.09.2013 addressed to the CCE, Meerut specifically providing that service tax on cost of goods supplied during repair does not appear sustainable. The Tribunal held that the cost of items supplied/sold with a documentary proof specifically indicating value of goods, demand of service tax on the cost of goods supplied during repair is not sustainable.

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[2016-TIOL-149-CESTAT-DEL] M/s National Engineering Industries Ltd. vs. Commissioner of Central Excise, Jaipur

Where commission is paid by the Indian buyers directly to the
appellant instead of the commission alongwith price being first remitted
to the foreign supplier and then the foreign supplier remitting the
commission amount, such direct receipts are deemed to be receipts in
foreign exchange.

Facts
The appellant used to find
buyers in India for the products of a foreign company. The Indian buyers
made payments directly to the foreign seller and the foreign seller
paid commission to the appellant. In some cases buyers opted to pay the
commission directly to the appellant and in such cases commission part
shown in the invoice was not paid on to the seller by the buyer. The
Commissioner (Appeals) held that the service was delivered in India even
though the commission was received from foreign supplier and therefore,
it will not be tantamount to export of service and upheld the primary
order. Aggrieved by the same, the present appeal is filed.

Held
The
Tribunal held that in case of the commission received from foreign
supplier, the service rendered clearly satisfies the requirement of
export of service as has been held in the case of Paul Merchants Limited
vs. CCE, Chandigarh [2013 (29) STR 267 (Tri.-Del). Even in the other
situation where the commission is paid by the Indian buyers to the
appellant, in effect, the commission was paid on behalf of the foreign
supplier only and can be deemed to have been paid in foreign exchange as
the buyers would have had to remit the commission part also to the
foreign supplier who would have in turn sent it to the appellant and
thus this arrangement makes the procedure simple. Further, relying on
the judgement of the Supreme Court in the case of J. B. Boda – 1997
(229) ITR 271 (SC), where such payments are deemed to be received in
foreign exchange the appeal is allowed.

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[2016-TIOL-132-CESTAT-MUM] M/s Sharayu Motors vs. Commissioner of Service Tax, Mumbai.

When issue is settled by the Larger Bench, penalties can be set aside considering the bonafide of the Appellant. Target incentive received from manufacturer in the nature of trade discount not exigible to service tax.

Facts
The Appellant received certain amount from financial institutions as commission for marketing of Auto Loan products and also an amount from manufacturers of car under the head Target Incentive Scheme. Department demanded service tax under ‘business auxiliary service’ in relation to the aforesaid receipts and also imposed penalties. In the matter of incentives it was argued that the issue is well settled by the judgement of the Tribunal in favour of the Appellant in the case of Commissioner of Service Tax vs. Sai Service Station Ltd [2013-TIOL-1436- CESTAT-MUM} and in case of commission from financial institution, it was stated that the issue is settled against them by the larger bench of the Tribunal in the case of Pagariya Auto Centre vs. Commissioner of Central Excise, Aurangabad [2014-TIOL-2875-CESTAT-MUM], however penalties should be set aside in relation thereto.

Held
The Tribunal confirmed the demand along with interest in relation to the amount received from financial institution for promoting their products by considering the decision of the larger bench in the case of Pagariya Auto Centre (supra). However, it was held that since the issue has been settled by the Larger Bench, Appellant could have entertained a bona fide belief and therefore penalties are set aside by invoking provisions of section 80 of the Finance Act,1994. Further relying on the decision of Sai Service Station (supra) demand against the amounts received as incentives is set aside.

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[2016-TIOL-12-CESTAT-MUM] M/s Bharat Forge Ltd. vs. Commissioner of Central Excise, Pune-III

When service tax paid under reverse charge is available as CENVAT
credit, the non-payment would not result in any financial benefit and
therefore deserves waiver of penalty.

Facts
The
Appellant availed External Commercial Borrowings (ECB) and raised
capital in overseas market and availed services of Lead Managers based
abroad having no office in India. The department demanded service tax on
the fees paid to the lead managers abroad u/s. 66A of the Finance Act,
1994 and imposed penalties u/s. 76,77 and 78 of the Act. Entire amount
of service tax was paid before the issue of Show Cause Notice and only
the penalties are disputed.

Held
The Tribunal noted
the prompt payment of service tax before the issue of Show Cause Notice
and the payment of interest soon after passing the adjudication order
which showed the genuineness of the Appellant. It was held that whatever
tax is paid is available as CENVAT credit and thus there is no
intention to avoid payment of service tax. Non-payment would not result
in any financial benefit and therefore penalty is waived u/s. of the
Finance Act, 1994.

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[2015] 64 taxmann.com 126 (Mumbai – CESTAT) Commissioner of Central Excise, Nagpur vs. P.B. Bobde

As hiring and renting can be distinguished from each other, service tax cannot be levied on hiring of cabs under category of rent-a-cab service.

Facts
The Appellant entered into a contract for supply of vehicles on hiring basis & did not pay service tax based on a view that hiring of vehicles is not liable for service tax under category of ‘Rent a cab Service’.

Held
The Tribunal relied upon recent judgment of the Hon’ble High Court of Uttrakhand in the case of CC&CE vs. Sachin Malhotra 2014-TIOL-2039-HC-UKAND-ST [digest reproduced in the January 2015 issue of BCAJ]. In that case, the High Court noted that, even though the word “hire” is used in rent-a-cab scheme, both are different transactions. In case of hiring, control of vehicle is retained by owner irrespective of the fact whether he himself drives vehicle or engages a driver and customer merely pays charges for travelling in such vehicle. But in case of “rent-a-cab” service, rent is paid as per terms of contract and vehicle is used by the person as his own & he is free to take it anywhere as per his choice, but subject to terms & conditions of contract. The Hon’ble High Court held that unless control of vehicle is passed on to hirer under rent-a-cab scheme, there does not arise any service tax liability as envisaged by provisions of section 65(91) of the Finance Act, 1994. In the light of this judgment, the matter was decided in favour of assessee.

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[2015] 64 taxmann.com 26 (New Delhi – CESTAT) Kelly Services India (P.) Ltd. vs. Commissioner of Central Excise & Service Tax, Gurgon-II

Under Explanation to section 67, in case of associated concerns, when assessee paid service tax on book adjustment made prior to 10.05.2008, interest cannot be demanded for period prior to 10.05.2008.

Facts
For services received from overseas associated concern in FY 2006-07 and 2007-08, the assessee made book entries for consideration payable. Consideration for such services was paid in January 2011. An explanation was inserted u/s. 67 w.e.f. 10.05.2008, that in case of associated enterprise, the gross value charged shall include book entries made in the books of accounts of person liable to pay tax. Therefore service tax was discharged based on book entries, under reverse charge in January 2009 along with applicable interest. However, while quantifying interest, only period after 10.05.2008 was considered. However, department contended that interest is required to be paid prior to 10.05.2008 commencing from the date of book entries.

Held
The Hon’ble Tribunal noted that the Appellant did not contest interest paid for the period after 10.05.2008 but, only interest attributable for the period commencing from due date pertaining to the date of book entries up-to 10.05.2008, when explanation was inserted. It was noted that even in the Order-in- Original, the levy of interest is held to have commenced only after 10.05.2008. Relying upon decision of CESTAT in Sify Technologies Ltd. vs. CCE & ST [ Appeal No.ST/279/2010 dated 08-11-2010] on similar issue, the Hon’ble Tribunal observed that legislative intention of such amendment by way adding explanation was to introduce new provision and not to remove any doubts in existing provision. Decision of Larger Bench of the Tribunal in case of Commissioner of Customs vs. Skycell Communications Ltd. [2008 (232) ELT 434] was also relied upon which clarified that Explanation placing restrictions prejudicial to the assessee will not be retrospective. Consequently, the Tribunal held that there is no liability to pay interest on the book adjustments made prior to 10.5.2008.

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[2015] 64 taxmann.com 243 (Allahabad – CESTAT) Amit Pandey Physics Classes vs. Commissioner of Central Excise & Service Tax, Kanpur

Even though some portion of service tax as determined by central
excise officer is paid before issuance of show cause notice (SCN), such
prepayment cannot be reduced while quantifiying penalty u/s. 78.

Facts
The
appellant neither declared services in returns nor paid the service
tax. He admitted his mistake during investigation and paid around 75% of
such liability prior to issuance of SCN. In the SCN, penalty u/s. 78
was imposed on entire service tax liability by ignoring such service tax
already paid. It was contended that service tax liability was not
correctly determined as amount already paid was ignored and hence, after
considering service tax already paid, penalty should be levied only on
25% of service tax which remained unpaid.

Held
The
Hon’ble Tribunal observed that since the assessee was aware of the
provisions of service tax and yet failed to pay tax on due date, central
excise officer correctly determined total service tax liability of
assessee in terms of provisions of section 73(2). Accordingly,
imposition of penalty u/s. 78 was on total tax liability quantified in
SCN was also held to be correct.

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[2015] 64 taxmann.com 171 (Mumbai – CESTAT) Owens Corning (India) (P.) Ltd. vs. Commissioner of Central Excise, Belapur

Possession of components of capital goods in subsequent years is not
necessary for availing balance 50% CENVAT credit as per Rule 4(2)(b) of
CENVAT Credit Rules, 2004

Facts
The Appellant, a
manufacturer of glass fibre, was using ‘bushings’ as components and
availed 50% of CENVAT credit in respect thereof as part of capital
goods. In subsequent year, such ‘bushings’ were re-exported for remaking
& assessee availed balance 50% CENVAT credit. By applying
provisions of Rule 4(2) of CENVAT Credit Rules, 2004, revenue rejected
subsequent availment on ground that such capital goods were not in their
possession at the time of availment & ‘bushings’ received in
subsequent year are newly manufactured goods.

Held
The
Tribunal noticed that as per Rule 4(2)(b) of CENVAT Credit Rules, 2004,
balance CENVAT credit can be availed in sub-sequent financial year
provided capital goods other than components, spares & accessories,
refractories & refractory materials, moulds and dies, are in
possession of manufacturer of final product or output service provider.
It was held that ‘bushings’ being components, condition of possession of
same in subsequent year for availing balance 50% CENVAT credit is not
applicable.

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[2015] 64 taxmann.com 203 (New Delhi – CESTAT) Commissioner of Service Tax, Delhi-III vs. Denso Haryana (P.) Ltd.

Provision of ‘intellectual property service’ is complete on the date
of transfer/permission to use the same. When such date is before
introduction of service tax on such services, even though royalty
payments are received over a period of time including period post
introduction of service, service tax not leviable.

Facts
The
agreement for transfer of technology and right to manufacture and sell
products using same technology was entered into before levy of service
tax on ‘Intellectual Property Services’ came into force. As per payment
terms, consideration was required to be paid by making one-time lump sum
payment in addition to a running royalty based on number of products
manufactured using technology transferred. The revenue initiated
proceedings against appellants to recover service tax under reverse
charge in capacity of service recipient on amounts of royalty paid after
period in which ‘Intellectual Property Services’ were brought into
service tax net, based on the contention that appellants were providing
continuous supply of service.

Held
Relying upon
decision in the case of Modi-Mundipharma (P.) Ltd. vs. CCE [2010] 24 STT
343 (New Delhi – CESTAT), the Tribunal held that transfer of technology
in the present case cannot be held to be continuous supply of service
merely because of periodic payments. Provision for service was complete
as soon as technology was transferred. Revenue’s contention that use of
technology over number of years covered by periodic payments would form
the basis for continuous supply of service was rejected. Since transfer
of technology took place before introduction of service tax on
intellectual property services, it was held as not liable to service
tax.

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2015 (40) STR 1069 (Tri.-Mum.) Bank of Baroda vs. CST, Mumbai

If the assessee has a bona fide belief and service tax liability is paid voluntarily for the period beyond normal period of limitation, liability of interest does not arise.

Facts
The appellant paid service tax under protest along with interest for a disputed matter during the pendency of the proceedings. At the adjudication stage, the matter was contested on merits as well as on limitation. The adjudicating authority confirmed service tax demand with interest but dropped penalties. The service tax liability was not contested further in view of the clarification on the subject matter. However, interest liability was contested for extended period as they had no intention to evade service tax. Department argued that irrespective of the intention to evade service tax or otherwise, interest liability arises.

Held
In view of the clarification, the appellant’s appeal failed on merits. With respect to the liability of interest, the Gujarat High Court in the case of Gujarat Narmada Fertilizers Co. Ltd. 2012 (285) ELT 336 (Guj.), had observed that if the period of limitation had expired and if the assessee has paid service tax voluntarily, SCN was not valid. Further, having regard to the intention of legislature it was held that in any case, it was not open for department to recover interest. The above decision was held to be squarely applicable in the present case since the appellant had a bona fide belief which was undisputed by the department. Accordingly, demand of interest was set aside.

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2015 (40) STR 1146 (Tri.-Mum.) CCE, Nasik vs. Deoram Vishrambhai Patel

Renting of property by individual co-owners is a service provided in individual capacity and not as association of persons.

Facts
The respondents are co-owners of a property which was neither divided nor legally partitioned. A Joint agreement was executed with banks to let out the said premises and collect rent and charges for amenities. Though first appellate authority had decided the case in favour of revenue for a partial demand of service tax, penalties were set aside except penalties u/s. 77 (1) (a) and 77 (2) of the Finance Act, 1994. Department filed an appeal arguing that there was no documentary evidence to prove the partition of property and the agreement was a composite agreement for renting out entire property and commonly used for business. Further it was stated that the Small Scale Service Provider’s exemption was available ‘qua service’ and not ‘qua service provider’ and therefore, in the present case, the exemption was not available. Since there was intentional suppression of facts, penalties u/s. 76 and 78 of the Act were applicable. Relying on Shiv Sagar Estate 1993 (201) ITR 953 (Bom.), the Respondents contested that adjudicating authority grossly erred in holding him and his brothers as association of person.

Held
The Tribunal observed that since service providers were individuals, co-owners of the property were not liable to pay service tax jointly or severally. The property was jointly owned; lease agreements were entered in their individual capacity, the monthly rent was received by each co-owner equally and all the co-owners had obtained separate service tax registration. As was evident from records, they had paid appropriate service tax before initiation of investigation. Therefore, penalties u/s. 76 and 78 were not imposable.

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Forms substituted

MVAT UPDATE

NO . VAT / Adm – 2 0 1 6 / 1 B / / Adm – 8 Extra . ord.17,18,19 dated 24.2.2016

The Commissioner of sales tax, Maharashtra State in respect of the periods starting on or after 01.04.2016 has substituted Form No. 423 – for Tax Collection at Source, Form No. 424 for Tax Deduction at Source by an employer, MVAT returns in Forms 231 to 235 requiring invoice wise details to be submitted.

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Customs, Excise and Service Tax Dispute Resolution Scheme, 2016

Indirect Tax Dispute Resolution Scheme, 2016

Chapter XI of Finance Bill, 2016 has introduced the Indirect Tax Dispute Resolution Scheme, 2016 in order to reduce litigation and an environment of distrust in addition to increasing the compliance cost of the tax payers and administrative cost for the Government. The Scheme shall come into force with effect from 01.06.2016. This scheme is applicable to the declarations made up to 31.12.2016.

All the appeals pending before the Commissioner (Appeals) as on 01.03.2016 under the Central Excise Act, 1944 or the Customs Act, 1962 or the Finance Act, 1994 are eligible for settlement under the Dispute Resolution Scheme. However, if the impugned order is in respect of certain specified cases, the same cannot be settled under the Dispute Resolution Scheme, 2016.

Further, the cases of eligible assessees can be concluded by paying disputed tax along with interest and penalty equal to 25% of the penalty imposed under the impugned order. The eligible assessees are required to make declaration for settlement after enactment of the Finance Act 2016 between 01.06.2016 and 31.12.2016.

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Changes in Service Tax Rules

Notificaiton No. 19/2016-ST dated 01. 03. 2016

Vide this Notification, following changes are made in Service Tax Rules, unless otherwise stated, which will be effective from 01.04.2016 :

1. Rule 2(1)(d)(i)(D)(II) is being modified so that legal services provided by a senior advocate shall be on forward charge.

2. Rule 2(1)(d)(EEA) making service recipient, that is, mutual fund or asset management company as the person liable for paying Service tax is being deleted. Meaning thereby, services provided by mutual fund agents/distributors to a mutual fund or asset management company are being put under forward charge.

3. Rule 2(1)(d)(i)(E), which provides for liability of service receiver to pay Service tax under Reverse Charge in relation to support services provided or agreed to be provided by Government or Local authority with certain exceptions.

4. Rule 6(1): Following benefits presently available to individual or proprietary firm or partnership firm, are being extended to One Person Company (OPC) whose aggregate value of taxable services provided from one or more premises is up to Rs. 50 lakh in the previous financial year:
a) Quarterly payment of Service tax and
b) Payment of Service tax on receipt basis

5. Rule 6(7A): The Service tax liability on single premium annuity (insurance) policies is being rationalised and the effective alternate Service tax rate (composition rate) is being prescribed at 1.4% of the total premium charged, in cases where the amount allocated for investment or savings on behalf of policy holder is not intimated to the policy holder at the time of providing of service.

6. Service tax assessees above a certain threshold limit shall also submit an annual return for the financial year, in such form and manner as may be specified by the CBEC, by the 30th day of November of the succeeding financial year;

The Central Government may, subject to such conditions or limitations, specify by notification, an assessee or class of assesses who may not be required to submit the annual return

7. Sub-Rule 2 has been inserted to provide that an assessee, who has filed the annual return by the due date, may submit a revised return within a period of 1 month from the date of submission of the said annual return.

8. Sub-Rule 2 has been inserted to provide that where the annual return is filed by the assessee after the due date, the assessee shall pay to the credit of the Central Government, an amount calculated at the rate of Rs. 100 per day for the period of delay in filing of such return, subject to a maximum of Rs. 20,000/-.

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Changes in Reverse Charge Mechanism

Notification No. 18/2016 dated 01. 03. 2016

This Notification has proposed changes in Reverse Charge Mechanism by amending Notification No. 30/2012-ST dated 20.06.2012 which will be effective from 01.04.2016 :

1. In Paragraph I, in clause (A), sub-clause (ib) is omitted to provide that services provided by mutual fund agents/ distributors to a mutual fund or asset management company are being put under forward charge;

2. In Paragraph I, in clause (A), sub-clause (ic) is substituted by “provided or agreed to be provided by a selling or marketing agent of lottery tickets in relation to a lottery in any manner to a lottery distributor or selling agent of the State Government under the provisions of the Lottery (Regulations) Act,1998 (17 of 1998)”, to bring in line with changes made in section 65B(44) of the Finance Act;

3. In Paragraph I, in clause (A), sub-clause (iv), item (B) has been substituted to provide that legal services provided by a senior advocate shall be on forward charge.

4. The words “support services” have been omitted from Serial No.6 making any service provided by Government taxable .

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Definition of Support Services stand deleted

Notification No. 15/2016-ST & 17/2016 dated 01. 03. 2016

The Finance Act, 1994 was amended vide the Finance Act, 2015 so as to make any service (and not only support services) provided by Government or local authorities to business entities taxable from a date to be notified later. 1st April, 2016 has already been notified as the date from which any service provided by Government or local authorities to business entities shall be taxable. Consequently, 1st April, 2016 is also being notified as the date from which the definition of support services shall stand deleted from the Finance Act, 1994.

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Rationalisation of Interest Rates :

Notification No. 13/2016 –ST & 14/2016

Interest rates on delayed payment of duty/tax across all indirect taxes is proposed to be made uniform at 15%, except in case of service tax collected but not deposited with the Central Government, in which case the rate of interest will be 24% from the date on which the service tax payment became due.

Further, for the amount collected in excess of the tax assessed or determined, rate of interest would be 15% as against 18%.

In case of assessees, whose value of taxable services in the preceding year/years covered by the notice is less than Rs. 60 lakh, the rate of interest on delayed payment of service tax will be 12%.

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Government Exempted Services provided by Bio Incubators :

Notification No. 12/2016 dated 01. 03. 2016

Vide this Notification, services provided by Bio Technology Incubators which are approved by Biotechnology Industry Research Assistance Council (BIRAC) to the incubates are being exempted from Service Tax with effect from 1st April, 2016.

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Exemption to Software recorded on Media bearing RSP

Notification No. 11/2016 dated 01. 03. 2016

By this Notification Service Tax has been exempted w.e.f. 1st March, 2016 on Information Technology Software if such software is:

(1) recorded on a media which is notified under Chapter 85 of the CETA ;
(2) on which RSP is required to be declared;
(3) the value of the package of such media domestically procured or imported, has been determined under Section 4A of the CE Act;
(4) Excise Duty / CVD has been paid by the manufacturer / importer on RSP basis;
(5) the service provider has to make a declaration on the invoice that no amount in excess of the declared RSP has been recovered from the customer;
(6) E xemption from excise to the extent of value liable for service tax in case of customized software which does not require RSP (Notification no. 11/2016 – CE refers).

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Amendment in Point of Taxation Rules, 2011

Notification No. 10/2016-ST dated 01. 03. 2016

Section
67A is proposed to be amended to obtain specific rule making powers in
respect of Point of Taxation Rules, 2011. Point of Taxation Rules, 2011
are being amended accordingly. The amendment in the Rules would come
into force with effect from the date of enactment of the Finance Bill,
2016.

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SERVICE TAX UPDATE – Changes in Abatement Notification No. 26/2012

Notification No. 08/2016 dated 01. 03. 2016
CBEC vide this notification has made the following changes in Abatement Notification No. 26/2012, which will be effective from 1st April 2016 :

Notification No.2 :
Transport of Goods by Rail (other than service specified below): Taxable Value 30%: Subject to condition that Cenvat Credit of Input & Capital Goods used for providing the said service is not availed. Earlier, credit of Input service was also not allowed along with Inputs & Capital Goods. However, now Cenvat credit of Input Service is allowed.

Notification No.2A :
Transport of goods in containers by rail by any person other than Indian Railways : Taxable Value 40% : Subject to condition that Cenvat Credit of Input & Capital Goods used for providing the said service is not availed. This is a newly inserted entry.

Notification No.3:
Transport of passengers, with or without accompanied belongings, by rail : Taxable Value 30% : Subject to condition that Cenvat Credit of Input & Capital Goods used for providing the said service is not availed. Earlier credit of Input service was also not allowed along with Inputs & Capital Goods. However, now Cenvat credit of Input Service is allowed.

Notification No.7:
Services of goods transport agency in relation to transportation of goods OTHER THAN USED HOUSEHOLD GOODS : Taxable Value 30% : Subject to condition that Cenvat Credit of Input, Input Service & Capital Goods used for providing the said service is not availed. Earlier, this was applicable for “Services of goods transport agency in relation to transportation of goods”. So, all goods including household goods were covered. Now, same is omitted from this Entry & separate entry No. 7A is provided for the same.

Notification No.7A:
Services of goods transport agency in relation to transportation of USED HOUSEHOLD GOODS : Taxable value 40% : Subject to condition that Cenvat Credit of Input, Input Service & Capital Goods used for providing the said service is not availed. This is a newly inserted entry.

Notification No.8:
Services provided by a foreman of chit fund in relation to chit: Taxable value 70% : Subject to condition that Cenvat Credit of Input, Input Service & Capital Goods used for providing the said service is not availed. This is a newly inserted entry.

Notification No.9:
Transport of passengers, with or without accompanied belongings, by- a) a contract carriage other than motorcab. b) a radio taxi c) a Stage carrier : Taxable value 40%: Subject to condition that Cenvat Credit of Input, Input Service & Capital Goods used for providing the said service is not availed.

Notification No.10:
Transport of goods in a vessel : Taxable value 30% : Subject to condition that Cenvat Credit of Input & Capital Goods used for providing the said service is not availed. Earlier, credit of Input service was also not allowed along with Inputs & Capital Goods. However now, Cenvat credit of Input Service is allowed.

Notification No.12:
Construction of a complex, building, civil structure or a part thereof, intended for a sale to a buyer, wholly or partly except where entire consideration is received after issuance of completion certificate by the competent authority : Taxable value 30% : Subject to condition that (i) CENVAT credit on inputs used for providing the taxable service has not been availed. This entry was earlier also in existence, however it includes categories such as carpet area less than 2000 sq.ft. or more than that etc. (ii) The value of land is included in the amount charged from the service receiver. Now these categories are removed and such taxable service is charged at 30% of total value.

Notification No.11 :
Substituted (Defin. of ‘Package Tour’ given at para-2 is omitted)

Service by Tour Operator in respect of : (i) tour, only for arranging or booking accommodation : Taxable value 10 : This abatement of 90% cannot be claimed in such cases where the invoice, bill or challan issued by the tour operator, in relation to a tour, only includes the service charges for arranging or booking accommodation for any person and does not include the cost of such accommodation.; (ii) other than (i) above : Taxable value 30 : CENVAT credit on inputs, capital goods and input services other than input services of a tour operator, used for providing the taxable service is not availed.

Changes in Mega Exemption Notification No. 25/2012 dated 01. 03. 2016

[A] New Entries inserted to exempt services :

(1) Entry 9B w.e.f. 01.03.2016: Services provided by the Indian Institutes of Management (IIM), as per the guidelines of the Central Government, to their students, by way of the following educational programmes, except Executive Development Programme, –

a. two year full time residential Post Graduate Programmes in Management for the Post Graduate Diploma in Management, to which admissions are made on the basis of Common Admission Test (CAT ), conducted by the IIM;

b. fellow programme in Management;

c. five year integrated programme in Management.

(2) Entry 9C: Services of assessing bodies empanelled centrally by Directorate General of Training, Ministry of Skill Development and Entrepreneurship by way of assessments under Skill Development Initiative (SDI) Scheme.

(3) Entry 9D: Services provided by training providers (Project implementation agencies) under Deen Dayal Upadhyaya Grameen Kaushalya Yojana under the Ministry of Rural Development by way of offering skill or vocational training courses certified by National Council For Vocational Training.

(4) Entry 12A and 14A w.e.f. 01.03.2016: Restoration of certain exemptions withdrawn last year for projects, contracts in respect of which, contracts were entered into before withdrawal of the exemption. [Refer changes discussed supra under newly proposed Section 102 and Section 103 of the Finance Act, for details].

(5) Entry 14 (ca): Services by way of construction, erection, commissioning, installation of original works pertaining to low cost houses up to a carpet area of 60 sq. m. per house in a housing project approved by the competent authority under the “Affordable housing in partnership” component of PMAY or any housing scheme of a State Government.

(6) Entry No. 23(bb): Service of transportation of passengers, with or without accompanied belongings, by a stage carriage, was in the Negative list of services vide Section 66D(o)(i) of the Finance Act. With the proposed deletion of said entry under the Negative List, a new entry is being inserted under the Mega Exemption Notification so as to exempt services by a stage carriage other than air conditioned stage carriage.

(7) Entry No. 26(q): Services of general insurance business provided under ‘Niramaya’ Health Insurance scheme launched by National Trust for the Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disability Act, 1999 (44 of 1999).

(8) Entry No. 26C: Services of life insurance business provided by way of annuity under the National Pension System regulated by Pension Fund Regulatory and Development Authority of India (PFRDA) under the Pension Fund Regulatory And Development Authority Act, 2013 (23 of 2013).

(9) Entry No. 49: Services provided by Employees’ Provident Fund Organisation (EPFO) to persons governed under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (19 of 1952).

(10) Entry No. 50: Services provided by Insurance Regulatory and Development Authority of India (IRDA) to insurers under the Insurance Regulatory and Development Authority of India Act, 1999 (41 of 1999).

(11) Entry No. 51: Services provided by Securities and Exchange Board of India (SEBI) set up under the Securities and Exchange Board of India Act, 1992 (15 of 1992) by way of protecting the interests of investors in securities and to promote the development of, and to regulate, the securities market.

(12) Entry No. 52: Services provided by National Centre for Cold Chain Development under Ministry of Agriculture, Cooperation and Farmer’s Welfare by way of cold chain knowledge dissemination.

(13) Entry No. 53 w.e.f 01.06.2016: Services by way of transportation of goods by an aircraft from a place outside India upto the customs station of clearance in India.

[B] Withdrawal of Exemption :

(1) Entry No. 6(b) & (c) has been amended to withdraw exemption in respect of the following: Services provided by a senior advocate to an advocate or partnership firm of advocates and to a person other than a person ordinarily carrying out any activity relating to industry, commerce or any other business or profession; and a person represented on an arbitral tribunal to an arbitral tribunal.

Hence, Service tax in the above instances would be levied under forward charge. However, legal services provided by a firm of advocates or an advocate other than senior advocate is being continued i.e. under Reverse Charge.

(2) Entry 14(a): Exemption to construction, erection, commissioning or installation of original works pertaining to monorail or metro is being withdrawn. However, the said services, where contracts were entered into before 01.03.2016, on which appropriate stamp duty, was paid, shall remain exempt.

(3) Entry No. 23(c): Exemption to services for transport of passengers, with or without accompanied belongings, by ropeway, cable car or aerial tramway is being withdrawn by deletion of this entry.

[C] Expansion of Scope :

(1) Entry No. 13: Scope expanded to also cover the following: Services provided by way of construction , erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of:

(ba) a civil structure or any other original works pertaining to the ‘In-situ rehabilitation of existing slum dwellers using land as a resource through private participation’ under the Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana, only for existing slum dwellers;

(bb) a civil structure or any other original works pertaining to the ‘Beneficiary led individual house construction / enhancement under the Housing for All(Urban) Mission/ Pradhan Mantri Awas Yojana’.

(2) Entry 16 : The threshold exemption limit of consideration charged for services provided by a performing artist in folk or classical art form of (i) music, or (ii) dance, or (iii) theatre, has been extended from Rs. 1 lakh to Rs. 1.5 lakh per performance (except brand ambassador).

[D] New definitions inserted :

(1) “approved vocational education course” means, –

(i) a course run by an industrial training institute or an industrial training centre affiliated to the National Council for Vocational Training or State Council for Vocational Training offering courses in designated trades notified under the Apprentices Act, 1961 (52 of 1961); or

(ii) a Modular Employable Skill Course, approved by the National Council of Vocational Training, run by a person registered with the Directorate General of Training, Ministry of Skill Development and Entrepreneurship.

(2) “senior advocate” has the meaning assigned to it in Section 16 of the Advocates Act, 1961 (25 of 1961).

(3) “(oa) “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 recognised by any law for the time being in force;

(ii) education as a part of an approved vocational education course;”

These definitions will be effective from the date of enactment of the Finance Bill, 2016.

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M/s. G. K. Micro Metal Pvt. Ltd. vs. State of M. P. Ltd Others, [2013] 64 VST 147 (MP)

VAT – Entries in Schedule – Aluminium Granules (Powder) – Are Same as Aluminium, Entry 36 of Part III of Schedule II of The Madhya Pradesh Value Added Tax Act, 2002.

FACTS
The assessee dealer, a company, sold aluminium powder and had paid sales tax @ 4% treating it aluminium covered by Entry 36 of Part II of the Schedule II of the Act. The department levied tax @12.5% under residual entry. The company filed writ petition before the Madhya Pradesh High Court (Gwalior Bench) against aforesaid assessment order.

HELD
Under Entry 36 of Part II of Schedule II of the Act, rate of tax on sale of aluminium is 4%. The company is selling aluminium granules (Powder). It is used as aluminium. There is no different use. Since the nature of the product is the same and use is the same, the petitioner company is not liable to pay tax 12.5% under residual entry. The residual entry would not be applicable when a specific rate of tax entry has been prescribed on a particular commodity. Accordingly, the High Court allowed the writ Petition filed by the company and directed the assessing authority to reassess the tax liability of the company after calculating payment of rate of tax payable by the company at four per cent on sale of aluminium granules (powder).

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M/s. MRF Ltd. vs. State of Tamil Nadu, [2013] 64 VST 103 (Mad)

Inter-State Sales – Delivery of Goods – Against Allotment Letter – Subsequent Dispatch of Goods Outside the State – Local Sale – Purchase Tax Payable – At Last Point, Section 3(a) of The Central Sales Tax Act, 1956 and Item 74 of Schedule I of The Tamil Nadu General Sales Tax Act 1959.

FACTS
The appellant company purchased rubber from State Trading Corporation against allotment letter. Delivery thereof was given within the State of Tamil Nadu by STC and the appellant dealer subsequently dispatched it to its branches outside the State of Tamil Nadu. Since goods were sent by the appellant dealer outside the State, the STC charged CST on such sales to applicant. The enforcement department visited place of business of the appellant dealer and found that delivery is given within the State as such did not accepted claim of inter-State purchase of appellant dealer and levied purchase tax at last point, despite tax paid by selling dealer under the CST Act treating it as inter-State sale. The Tribunal confirmed the order of lower authorities. The appellant filed revision petition before the Madras High Court against the order of Tribunal.

HELD
The terms and conditions of allocation of natural rubber shows that they are general in character, that whenever there is a movement of rubber in the course of inter-State trade, as an incidence of sale, certainly, as per the clause, central sales tax provisions would stand attracted. Therefore, the inclusion of a clause referring the to furnishing of C forms as regards inter-State sale in the general conditions, per se, would not in any manner, speak on the character of the transaction. There is nothing on the record to show that the parties intended on the facts of the case that allotment was intended to result in the movement of goods to various branches of the assessee. The application of the delivered rubber to any particular unit outside the State is a matter of choice and the discretion of the assessee and the seller, at no point of time, was involved in this. On a reading of facts of the case, the High Court held that the assessee after having purchased the goods had issued dispatch instruction for movement of goods to other State. Thus there was no link between the purchase and dispatch. It is difficult to say that the movement is nothing but an inter- State sale. Accordingly, the claim of applicant for inter-State purchase was rejected by the High Court and confirmed the levy of purchase tax as last point purchase. However, since selling dealer had charged CST @4% and remitted to the Government and rate of purchase tax is 5%, the State was directed to give necessary adjustment in respect of four per cent tax paid by selling dealer STC as the payment made in respect of the assessment made on the assessee as last purchaser and that the balance tax payable by the assessee would be only to the extent at one percent. Accordingly, the High Court dismissed the applications with above direction for adjustment of CST paid by selling dealer towards payment of purchase tax by the appellant.

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M/s. Paul Varghese vs. CCT, [2013] 64 VST 6 (Ker)

Sales Tax – Penalty – Levied Under Special Provision – Then Penalty Under General Provision Cannot be Levied for Same Offence, sections 17(4), (5A) and 45A of the Kerala General Sales Tax Act, 1963.

FACTS
The Petitioner had opted for simplified procedure of assessment u/s. 17 (4) of the Act and the assessment was completed accordingly, subsequently, upon investigation, the dealer was reassessed and subjected to penalty u/s. 17(5A) of the Act. Further, the dealer was also subjected to penalty u/s. 45A of the Act.

The dealer filed a writ petition before the Kerala High Court against the levy of penalty under the general provision of the act contained in section 45A of the Act particularly when penalty order for same offence u/s. 15(5A) was levied and accepted.

HELD
Admittedly, the liability u/s. 17(5A) of the act for levy of penalty upon reassessment of an order of simplified assessment passed u/s. 17(4) of the Act had become final. The dealer is not liable to be punished for the same offence by referring to the general provision of section 45A as to the failure to maintain proper accountants and non response to the notice, which stands on a much lower pedestal. Even though sections 17(5A) and 45A are distinct and different, governing separate situations, the offence involved is measured in greater scales, imposing punishment in a mandatory manner, that too by “three times” of the tax effect in respect of the years 1998- 1999 and 1991-2000, while leaving the rest in respect of 2000-2001 as the turnover did not touch the limit to suffer any tax liability in respect of 2000-2001 for imposing the “mandatory penalty” u/s. 17(5A), there is no question of considering the same for imposing the “discretionary penalty” u/s. 45A as well. When a “special provision’ is there the “general provision” has to be excluded, so as to give way to the former. In the instant case, section 17(5A) is the special provision and section 45A is the general provision, which in term has to yield to the former. Accordingly, the High Court allowed writ petition filed by the dealer and levy of penalty u/s. 45A of the Act was set aside.

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[2016-TIOL-08-ARA-ST] M/s Godaddy India Web Services Pvt. Ltd.

Promotion and marketing, branding etc. without securing orders or facilitating provision of service are naturally bundled services of support and accordingly are covered under Rule 3 of the Place of Provision of Service Rules, 2012.

Facts
The Applicant proposes to enter into a “service agreement” with a foreign company providing web services to customers across the world. Services to be provided include marketing and promotion services, direct marketing, branding, offline marketing by conducting road shows, arranging seminars, supervising third party customer care center services, payment processing etc. for a consideration of cost plus mark-up of 13% in US dollars. The Applicant is not authorised to enter into any contract on behalf of the foreign company or secure orders or facilitate the provision of services. The question before the authority is whether the aforesaid services are support services naturally bundled in terms of section 66F of the Act and if so, whether the place of provision is outside India and whether the service qualifies as export in terms of Rule 6A of the Service Tax Rules, 1994.

Held
The Authority noted that the services proposed to be provided are with a sole intention of promotion of the brand of the foreign company by augmenting its business and therefore would support their business interests in India. Further it was held that the definition of ‘intermediary’ under Rule 2(f) of the Place of Provision of Service Rules, 2012 excludes a person who provides the “main service” on his own account. Supporting the business of the foreign company is the main service and processing payments and supervision of third party call centers are ancillary and incidental to the main service of support which is offered as a package for a lumpsum payment. Thus in view of these indicators the proposed services are support services naturally bundled in the normal course of business and fall under Rule 3 of the POPS as per which the place of provision is the location of the service receiver. There is no contract between the applicant and the customers of the foreign company in India and no consideration is received from the Indian customers. The benefit of the service accrues to the foreign company outside India and thus the support service is provided outside India i.e. the location of the service receiver. Further since the payment is received in convertible foreign exchange and all other clauses of Rule 6A of the service tax rules are satisfied the service qualifies to be an export.

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2016 (41) STR 454 (Tri.-Mum.) Commr. Of C Ex. Nashik vs. Sahastronics Controls Pvt. Ltd.

If any service is provided for fulfilment of a condition of the contract, the services are provided to self and hence, not taxable.

Facts
The Respondent was awarded with a contract on build, own, operate and transfer (BOOT) mode by Nasik Municipal Corporation for micro processor based energy saving devices and its maintenance. As per the contract, post commencement of operations, the operations and maintenance of these devices was to be done by the Respondent and if a device/s did not function optimally, then to that extent, they would not get remuneration. The remuneration was fixed as a percentage of operating profit to be arrived after reducing the cost from the savings in electricity consumption. Show Cause Notice was issued proposing to demand service tax on operating profit. The adjudicating and first appellate authority took a view that service was rendered to self as Respondent was required to maintain the equipments in order to earn revenue and the ownership of the equipment was with them and accordingly, dropped the demand. The department challenged the order before the Tribunal.

Held
The Tribunal observed that the lower authorities have given their findings on the basis of the facts and documents on record. As per grounds of appeal, no allegations are made which contradicts with the findings of the lower authority and hence the Appeal was dismissed.

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2016 (41) STR 441 (Tri-Mum.) Maharashtra Chamber of Housing Industry vs. C.C.E, C. & ST, Mumbai

New plea/ground regarding limitation cannot be taken at the stage of second appeal.

Facts
In the present case, the Appellant was challenging the leviability of service tax on amounts received from nonmembers. During the hearing a new ground of demand getting barred by limitation was raised.

Held
Since the Appellant had neither raised the limitation ground at adjudication stage nor in the first appeal, it was held that no new ground can be raised at the second appeal stage.

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[2016] 66 taxmann.com 244 (Chennai-CESTAT) – Sify Technologies Ltd. vs. Commissioner of Service Tax, LTU, Chennai.

When CENVAT credit is systematically allocated between departments providing taxable services and those providing exempt services, Rule 6(2) of CENVAT Credit Rules, 2004 becomes applicable and Rule 6(3) cannot be invoked.

Facts
Appellant had 3 types of departments namely Department A (providing taxable services), Department B (providing exempt services) & Department C (administrative department). The Appellant apportioned input service tax credit earned by Department C, between Departments A & B in the ratio of their respective turnover. It was submitted that when the records clearly demarcated the extent of credit allocable the credit cannot be disallowed without bringing any cogent evidence to demonstrate that those services were not relevant. Whereas department contended that once the assessee comes under Rule 6(2) of CENVAT Credit Rules, the application of Rule 6(2) and 6(3) simultaneously is not possible. As assessee failed to comply with the conditions prescribed by Rule 6(3) read with Rule 6(3A) of CENVAT Credit Rules, the entire CENVAT credit was disallowed.

Held
The Tribunal observed that the Appellant had already reversed credit allocated to Department B which provided exempt services. It held that Rule 6(3) of CENVAT Credit Rules contains overriding provisions which are independent of provisions of Rule 6(1) and (2). Since proper records were maintained which enabled substantial allocation of CENVAT credit in respect of taxable as well as exempt services, its case would get covered under Rule 6(2). Therefore, there cannot be a presumption by the Revenue that such method falls under Rule 6(3) of CENVAT Credit Rules. Accordingly, the matter was remanded to adjudicating authority to a limited extent to examine allocation of the credit received by Department A through Department C.

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[2016] 66 taxmann.com 77 (Chennai CESTAT) – Smt. A Vijaya vs. Commissioner of Central Excise, Salem.

In multi-level marketing; profit earned by first level distributor from sale of manufacturer’s product on his own account and volume based incentive / commission received by him on his purchases would not be liable for service tax under Business Auxiliary Services. However, commission earned on purchases made by next level distributor sponsored by him would attract service tax.

Facts
Appellants being individuals and household agents (i.e. first level distributors) bought products from ‘Amway’ for sales to retail customers at MRP. They also identified second level distributors and sold Amway products to them for further retail sale. First level distributors had three types of income namely (i) profit from products purchased from Amway at Distributor’s Acquisition Price and sold at amount not exceeding product’s MRP (ii) volume based commission based on purchases made by them from Amway and (iii) commission earned from Amway on the basis of purchases made by second level distributor sponsored by them in the chain of direct marketing. Department levied service tax on gross commission earned by distributors under category of “Business Auxiliary Services” on the ground that they not only made retail sale by direct marketing, but they also engaged in sales promotion on behalf of Amway by appointing 2nd line and 3rd line distributors.

Held
While deciding the case, the Hon’ble Tribunal applied the ratio laid down in similar case by Principal Bench of New Delhi CESTAT in Final order Nos. 51818 51855/2015 dated 09/06/2015 in case of Mr. Charanjeet Singh & others (Batch of 38 appeals). It observed that Amway products are not sold on the shelf but only through distributors and that Amway products cease to belong to Amway once they are purchased by a distributor and ownership of goods gets transferred to the distributor. It held that “Business Auxiliary Services” would cover promotion, marketing or sale of those goods which belong to client and not those goods which belong to distributor themselves. Hence, sale of these goods by distributors/ sub-distributors would not constitute service to Amway. Further it concurred with the decision of the Principal Bench on the aforesaid case in which Tribunal held that any incentive or commission received by the distributor from Amway for buying certain quantum of goods during a month cannot be treated as consideration received for promotion or marketing or sale of goods, more so, as this commission is not linked to goods sold by the first level distributor but his purchases, it is in the nature of volume discounts. However, commission received by Appellants on the basis of volume based purchases of Amway products made by their sales group i.e. group of second level of distributor appointed by Amway as identified qua the Appellants is held to be liable for service tax, on the ground that by sponsoring such second level distributors, the Appellants in fact promote sales of Amway products and commission paid for the same is also linked to sales made by Amway company directly to such second-level distributors.

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[2016] 68 taxmann.com 147 (New Delhi-CESTAT) – Commissioner of Central Excise, Delhi- III vs. Fiamm Minda Automotive Ltd.

The manufacturer is eligible to take CENVAT credit of service tax, inadvertently paid by job worker whose activities are exempt from service tax.

Facts
The Respondent Manufacturer availed CENVAT credit of service tax charged and collected by the job workers. CENVAT credit was denied contending that such services were not liable to service tax.

Held
Tribunal observed that job workers were registered with service tax department and paid service tax which was accepted and retained as statutory dues by department. Also proper invoices evidencing service tax payment were issued. It was therefore held that when service tax is paid by the service provider and the CENVAT credit thereof is availed by recipient of service in conformity with statutory provisions, such credit cannot be denied at recipient’s end merely on the ground that activities were exempt from service tax.

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Sales made to Diplomatic Authorities etc.

No.VAT.1515/C.R.102/Taxation-dated 15.1.2016

The Government of Maharashtra has amended Notification issued for the grant of refund of tax collected by any registered dealer on his sales made to the diplomatic authorities or international bodies or organisations.

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Amendment in Schedule A

No.VAT.1515/CR-169/Taxation-1 dated 2.1.2016

Maharashtra Government has amended Schedule A by inserting Entry 12B to exempt drugs and medical equipments used in dialysis for treatment of patients suffering from kidney disease as may be notified from time to time by the state government in the official gazette with effect from 2.1.2016.

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2016 (42) STR 247 (All.) Prosper Build Home Pvt. Ltd. vs. Union of India

Department cannot initiate proceedings for recovery of disputed dues without adjudication.

Facts
The petitioner admitted liability of service tax on specified transactions during the recording of statement. Consequently, the petitioner was arrested for non-deposit of service tax vide section 89(1)(d) of the Finance Act, 1994 i.e. for failure to deposit service tax collected beyond a period of six months from the due date. After the due process of prosecution, bail was granted and an interim order was passed directing a deposit of 25% of entire outstanding. On obtaining legal advice post prosecution it was known that service tax was not liable on material supplied free of cost. The said fact was represented to the department. However, ignoring the submissions and on the basis of statements recorded, department started adopting coercive methods to recover disputed dues. Therefore the present writ petition is filed objecting recovery of service tax by department without formal adjudication u/s. 73 of the Finance Act, 1994. The revenue contended that the matter is still under investigation and the process to issue SCN was under contemplation.

Held
The High Court held that since there was no assessment order against the petitioner, he cannot be forced to pay an amount merely because he admitted the service tax liability in statements recorded. Department has the liberty to initiate appropriate action for recovery only after service tax liability is confirmed vide adjudication order and is not deposited. In case the petitioner misuses or does not comply with the terms of bail order or interim order, department can apply for cancellation of the bail order or vacation of the interim order.

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[2016-TIOL-1105-CESTAT-HYD] Commissioner C& CE & ST, Hyderabad vs. State Bank of Hyderabad

When excess payment made is not in dispute, denial of adjustment against subsequent liability on a mere procedural lapse and strict interpretation is not justified.

Facts
The Assessee made an excess payment of service tax in the month of October 2007, June and September, 2008 and adjusted the same in the months of April, July and October 2008 without following the procedure provided under Rule 6(4A) and 6(4B) of the Service Tax Rules, 1994. The department contended that since the amount was adjusted suo-motto without intimating and being in excess of the prescribed limit, the same was recoverable with interest and penalties. Commissioner (Appeals) dropped the demand and the Revenue is in Appeal.

Held

The Tribunal noted the undisputed fact of excess payment of service tax which is required to be adjusted against the liability for subsequent period. It was held that Rule 6(1A) of the Service Tax Rules, 1994 provides for adjustment of service tax paid in advance. Similarly Rule 6(3) of the said rules cannot be given a narrow interpretation of adjustment only at the time of refund to the client. Thus non-observance of a procedure is only technical lapse and therefore condonable. It was further held that refund can be claimed of the excess paid in which case interest is also payable to the assessee. When one opts for adjustment so as to eliminate the hassles of refund by foregoing the interest, strict interpretation and denying adjustment would result in unjust enrichment of the revenue which can never be the intention of the Rule.

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[2016-TIOL-947-CESTAT-MUM] M/s Electronica Finance Ltd. vs. Commissioner of Central Excise, Pune-III

In case of a Hire-Purchase contract the taxable event is the date of entering into the contract, installment payments are only obligations of the hirer.

Facts
The Appellant is engaged in lease financial business and has discharged service tax at the applicable rate prevailing on the date of entering into the hire purchase agreement. The department contends that service tax is payable at the rate prevalent when the lease rental is being paid and accordingly there is a demand for the differential service tax liability. It was argued that service tax liability is factored in the EMI that is fixed for their client and therefore the applicable rate is the rate prevailing on the date of the agreement only.

Held
The Tribunal relied upon the decision in the case of Art Leasing Ltd vs. CCE [2007 (8) STR 162 wherein it is held that the installment payments are only obligations of the hirer whereas the taxable event occurs when the contract is entered into. Therefore the contention that service is continued to be provided during the payment of installments is not correct. Accordingly it was held that rate of service tax will be the rate prevalent on the date of contract and the demand for differential liability is set aside.

(Note: The ratio of the aforesaid decision may be applied to the applicability of Rule 5 of the Point of Taxation Rules, 2011 wherein, in case of new services and new levies where the payment is received after the applicability of the new levy, the new rate is made applicable. As per the aforesaid decision, if the taxable event occurs prior to the applicability of the new levy, new rate cannot be made applicable merely because the payment is received later.)

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[2016-TIOL-1035-CESTAT-HYD] M/s Aster Pvt. Ltd vs. CC & CE, Hyderabad-III

II. Tribunal

Failure to intimate the department under Rule 6(3A) of the CENVAT Credit Rules is a mere procedural lapse and denial of benefit of proportionate reversal of credit is not justified.

Facts
The Appellant is a manufacturer availing the benefit of Notification No. 6/2006-CE and clearing goods at a NIL rate of duty. A show cause notice was issued demanding 10%/5% of the value of exempted goods under Rule 6(3)(i) of the CENVAT Credit Rules, 2004 (CCR) on the contention that common inputs and input services were used in the manufacture of exempted and dutiable goods and no separate accounts were maintained. It was argued that assessees not maintaining separate accounts have two options under the CCR i.e. either pay 5% or 10% of the value of exempted goods or do a proportionate reversal of CENVAT credit on inputs and input services attributable to manufacture of exempted goods as per the formula prescribed under Rule 6(3A) of CCR. The second option being beneficial was chosen and credit was reversed. The department argued that no intimation was provided as required under Rule 6(3A) of the CCR and therefore they were bound to pay as per the first option.

Held
The Tribunal observed that sub-rule 6(3) provides for two options and it was noted that Rule 6(3A) of the CCR did not provide that failure to intimate would make the assessee lose the choice of a proportionate reversal of credit. It was held that failure to intimate would not automatically result in application of Rule 6(3)(i) and such a procedural lapse was condonable and denial of a substantive right was unjustified. Further the revenue’s plea of remanding the matter was also rejected on the ground that the amount of credit proportionately reversed along with interest formed a part of the reply to the show cause notice and the same was never disputed.

(Note: Readers may note that Notification No. 13/2016-CE(N.T) has inserted a new sub-rule (3AA) in the CENVAT Credit Rules, 2004 effective from 01/04/2016 providing that on failure to exercise the option under sub-rule 6(3) and follow the procedure provided under sub-rule 6(3A), the Central Excise officer may allow the assessee to follow the procedure and pay the proportionate amount on payment of interest @ 15% from the due date of payment, till the date of payment thereof. Accordingly intimation to the department now appears mandatory.)

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2016 (42) S.T.R. 6 (Kar.) C.C.E. & S.T. vs. Mangalore Refinery & Petrochemicals Ltd.

The Court is bound by an earlier decision of its co-ordinate Bench even if such decision was not challenged by Revenue due to its policy decision

Facts
Facts In a dispute relating to availment of CENVAT credit on certain services, the Respondent assessee relied on the earlier judgement of co-ordinate Bench of the Court which upheld the availability of credit. The department contended that since the amount involved in the said judgement was below the monetary ceiling prescribed, no appeal was filed against it. Therefore the said judgement has no value of precedence and the Court should decide the present dispute afresh.

Held
The Court rejected the argument of the department and held that a decision attains finality in absence of any challenge before higher Court. Reason for nonchallenging has no relevance and accordingly dismissed the appeal filed.

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[2016] 68 taxmann.com 180 (Madras HC) – Eveready Industries India Ltd. vs. CESTAT

Once refund is granted under section 11B, it cannot be said to be “erroneous refund” in terms of section 11A of Central Excise Act and recourse available for recovery of such refund is only by way of following procedure laid down in section 35E of the Act and not section 11A.

Facts
The final assessment was completed and refund was determined. The assessee filed application for refund but was granted refund under section 11B only for part of the amount. However, thereafter, by invoking section 11A of the Central Excise Act, 1944, the very same Assistant Commissioner, who sanctioned refund earlier, issued Show Cause Notice followed by order directing recovery of refund sanctioned. This order for recovery of refund was confirmed by Commissioner (Appeals) as well as the Tribunal. Before the High Court, it was contended that refund application is allowed under section 11B and department has not followed procedure laid down by section 35E (2) of Central Excise Act, 1944 therefore it is not open for department to take recourse u/s. 11A. The department contended that where there is erroneous refund, the same can always be recovered by initiating proceedings u/s. 11A without taking recourse to section 35E.

Held

The High Court held that a careful look at the scheme of sections 11A, 11B and 35E would show that an application for refund is not to be dealt with merely as an administrative act. Section 11B is a complete code in itself. Hence, power exercised u/s. 11B is that of an adjudicating authority and order passed is certainly one of adjudication. Therefore, it must be presumed that before according sanction for refund, an adjudicating authority had actually followed the procedure under section 11B and passed an order of adjudication. Section 11A(1) prescribes the procedure for recovery of any duty of excise, which is erroneously refunded. The power u/s. 35E is not actually to correct any error directly on the part of an adjudicating authority. This power is available only for directing the competent authority to take the matter to the Commissioner (Appeals).

Hon’ble High Court made reference to its own judgment in case of Madurai Power Corpn. vs. Dy. CCE 2008 (229) ELT 521, where Court had occasion to consider interplay between section 11A and section 35E of Central Excise Act, 1944. It held that no one can have a quarrel with the proposition that sections 35E and 11A operate in different fields and are invoked for different purposes. However if the department’s interpretation of section 11A is accepted, it would lead to a situation of recognizing power of recovery in a subordinate authority when refund is already granted by a superior authority after adjudication, which is obviously not the legislative intent. It was held that harmonious reading of provisions of sections 11A and 35E indicates that section 11A does not contemplate overriding section 35E. Hence once refund application is allowed u/s. 11B, such refund cannot be said to be erroneous refund in terms of section 11A (1). The recourse available for recovery of refund sanctioned in terms of section 11B is therefore to follow procedure laid down in section 35E and not section 11A.

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[2016] 68 taxmann.com 156 (Madras HC) – S. L. Lumax Ltd. vs. Commissioner of Central Excise, Chennai-IV Commissionerate

Benefit of CENVAT credit cannot be denied to assessee once the depreciation mistakenly claimed under income tax law on same duty component is given up by assessee. Tribunal cannot modify the Order-in-Original to the extent it is not appealed by the department before Commissioner (Appeals).

Facts
Appellant utilised MODVAT credit of duty paid on import of machinery in 1999 and also claimed depreciation in respect of same duty component in their income tax returns for that year and subsequent years. After detection of this mistake in 2002, all income tax returns were revised but for one year in which the time limit for filing of revised return had expired. Therefore, in the said year, a rectification application was made u/s. 154 of the Income Tax Act along with revised computation and depreciation claim was given up. Income Tax Department accepted the revised return for other years, but rejected the rectification application. The attempt of filing a rectification application was allowed by Commissioner Income Tax (Appeals) on 30/04/2005, but on further appeals by aggrieved parties, it failed upto the Supreme Court. In the proceedings under central excise law, show cause notice was issued denying claim of MODVAT credit. However, in the Order-in-Original, it was held that they would be eligible for credit after the date of acceptance of withdrawal of depreciation by the department i.e. filing of revised return or as the case may be date of order of Commissioner Income Tax (Appeals) accepting the claim for rectification application u/s. 154 (30/04/2005) and ordered recovery of credit accordingly. No appeal was preferred by the Excise Authorities against the said Order-in-Original. However, against the recovery of MODVAT credit, appellant filed the appeal. The appeal was allowed by Commissioner (Appeals), but department preferred an appeal before Tribunal. The Tribunal allowed the department’s appeal and restored the Order-in-Original and also modified the portion by which assessee was held as entitled to CENVAT credit from 30/04/2005. The Appellant preferred appeal before High Court raising a substantial question of law as to whether the Tribunal was justified in restoring Order-In-Original directing recovery of MODVAT credit by disregarding the admitted fact that claim for depreciation was given up under income tax law.

Held
Hon’ble High Court observed that the appellant started up with a claim for two benefits and ended up losing both the benefits. It is only after the detection by the department, an attempt was made to withdraw one of the two benefits. The mistake was explained on the ground that its head office and factory are located in different States. It was held that once the claim for depreciation under Income Tax Act was given up, the benefit of MODVAT credit cannot be denied. It further held that order of Tribunal modifying the Order-in-Original to the extent it allowed credit after 30/04/2005 is also not correct as the said order was not appealed against by the department before Commissioner (Appeals). As regards the year in which appellant gave up depreciation but lost legal battle with Income Tax Department, the Original Authority is directed to work out the amount of depreciation given up for the purpose of finding out the extent to which benefit is available.

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[2016] 68 taxmann.com 286 (Kerala HC) – Kanjirappilly Amusement Park & Hotels (P.) Ltd. vs. Union of India.

Removal of sub-clause (j) of section 66D i.e. Negative List resulting in levy of service tax on “access to amusement facilities and admission to entertainment events” does not amount to parliament encroaching upon Entry 62 of List II of Constitution.

Facts
The issue before the High Court was whether the removal of “admission and access to entertainment event and amusement facilities” [section 66D(j) of the Finance Act, 1994] from the Negative List of ‘Services’ by an amendment made by Finance Act 2015 and the consequent levy of service tax on such activity would result in the Union Parliament trenching upon the exclusive field assigned to the State, under Entry 62 List II of the Seventh Schedule of the Constitution of India. It was argued that resort to the residuary entry can be had only when it is found that the object of tax is not available in any of the other entries in List II and List III. Further there can be no service element found, since what the petitioners offer is amusement and entertainment and what the recipients get is also amusement and entertainment, which clearly is covered by Entry 62. Under Kerala Local Authorities Entertainments Tax Act, 1961 the levy of tax is with reference to the price for admission to any entertainment at the prescribed rates. The measure applicable to amusement parks is also provided based on the investment and area in which such park is situated at the rates fixed by the local authority within the range of rates provided in the table. Hence the activity is already taxed by the States. Further before legislative competence of the Parliament can be traced to the residuary entry, the legislative incompetence of the State Legislature has to be clearly established. The Petitioners broadly relied upon the following decisions:

a. Single Judge of this Court in Kerala Classified Hotels & Resorts Association vs. Union of India [2013] 35 taxmann.com 568 (Ker.), which was affirmed by a Division Bench in Union of India vs. Kerala Bar Hotels Association [2014] 51 taxmann.com 365 (Ker.).

b. Decision of the High Court of Madras in Mediaone Global Entertainment vs. Chief CCE [2013] 36 taxmann.com 57. The respondents sought dismissal of the writ petitions on the ground of “aspect theory” and there being two distinguishable aspects involved, one the services offered by the petitioners and the other the amusements and entertainments enjoyed by the entrants.

Held

The fact that admission/access to entertainment events and amusement facilities are included in the negative list itself is a pointer that the same partakes a service and the Parliament initially exempted it from the levy. When it is argued that the amusement and entertainment is offered, the corollary is that what is offered for amusement for a fee is essentially a service offered for consideration. There is also definitely an element of service in providing a facility, which would result in the enjoyment of an activity capable of being termed as an amusement or entertainment for a fee. Union Parliament therefore has the legislative competence to tax the aspect of service in an amusement park. The argument that the field being entirely occupied by Entry 62 List II, as the Entertainments Tax Act of the State provides a measure of tax based on the investment made and the area covered; which takes in the entire facilities offered and the same having been taxed by the State and therefore there could be no further tax levied on the service i.e. the provision of such facilities, was not accepted by the Court. Relying upon State of W.B. vs. Kesoram Industries Ltd. [2004] 10 SCC 201, the Court held that the Courts have been cautioned not to mix up the object of taxation and the measure employed. Further Relying upon All-India Federation of Tax Practitioners vs. Union of India [2007] 7 SCC 527 and Federation of Hotel & Restaurant Association of India vs. UOI [1989] 46 Taxman 47 (SC,) the Court held that the Supreme Court has time and again, after the Finance Act, 1994 came into force, upheld the tax levied on ‘services’ as being available to the Parliament under the residuary clause. In such circumstances, it cannot at all be said that the field is entirely covered by Entry 62 List II. Amusements are covered by Entry 62 List II and the aspect of ‘service’ involved when the facilities for amusement are offered for a price cannot be ignored. The Decision of Single Bench and Division Bench in the case of Kerala Classified Hotels & Resorts Association (supra) to the extent they dealt with constitutional validity of service tax on supply of food in restaurant by way of service in the context of Article 366(29A)(f) was distinguished on the ground that there is no question of a deeming provision being employed in the present case. Also the Court did not concur with Madras High Court to the extent it expressed a view in Mediaone Global Entertainment’s case (supra) that what is not taxable under section 66B is “tax on admission to entertainment events or access to amusement facilities”, the reason being, “tax on admission or entry of such events is covered in the State List, which is subjected to Entertainment Tax”. In this regard the Court held that Parliament is quite aware of their power. This is because even dehors inclusion in the Negative List the Parliament would not be able to trench upon the field specifically set apart for the States under List II. Therefore, the Negative List also did not refer to ‘amusement’ but tax on admission on entry of such events quite understanding the power to levy service tax on such facilities offered by one to another for a consideration. However, the High Court refrained from referring the matter to a Division Bench on the ground that the issue dealt with in the said case and in the instant cases is on different subjects and distinct transactions.

Note:
In Godfrey Philips India Ltd., the Apex Court held that luxuries is an activity of enjoyment. It further held that tax on luxury could only be levied on an activity and cannot be on goods or items of luxury. ‘Service’ also refers to “an activity”. In the present case also, the High Court expressed a view that ‘amusements’ refer to ‘activities’. However, apparently it did not examine the proposition as to whether, activities of amusement can be said to fall under Entry 62 List II, on the same reasoning as given by Supreme Court in Godfrey’s case, stating that no such ground was raised before it.

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[2016-TIOL-824-HC-MAD-ST] N Bala Baskar vs. Union of India and Others

I. High Court

The service receiver to whom the burden of tax is ultimately passed on is not entitled to challenge the levy as the liability is imposed on the service provider. Further in case of a joint development agreement, the land owner and the third parties avail of construction services from the builder.

Facts
The petitioner has entered into a joint development agreement with one of the Respondents for the property owned by him and his siblings for construction of a Residential Complex. 65% of the built up area is to be handed over to the petitioner against conveyance of 35% of undivided share of land. In terms of the agreement, the builder viz. one of the respondents issued a letter demanding service tax and VAT. A writ petition is filed challenging the payment of service tax on a mere exchange of property and the provisions of section 66B and 66E(b) of the Finance Act, 1994 and thereafter the prayer was modified to challenge only the circular No 151/2/2012 dated 10/02/2012 and the recommendations of the TRU dated 20/01/2016.

Held
The Hon. High Court held that the writ petition is not maintainable as the law makes the service provider liable to pay service tax and it is open for him to either pass on the burden or not. After having entered into an agreement for development and accepting the burden of service tax to the extent liable, the petitioner cannot now challenge the circulars imposing an obligation upon persons who have entered into such contracts. If the person to whom the burden is ultimately passed is allowed to challenge a levy, the same will lead to a disastrous consequence considering the number of consumers. Further it was also noted that the agreement for development gave rise to a bouquet of rights for the builder, one was construction of an area, a part of which could be sold to third parties along with undivided share of land. The petitioner did not stand on a different footing than those persons except that the consideration was paid in the form of undivided share of land and not by cash and therefore the petition was dismissed.

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“Glass wall” vis-à-vis Construction Contract

Introduction

Under Sales Tax Laws, there are certain
provisions whereby a dealer can discharge his tax liability by way of a
simple method, called ‘composition scheme’, instead of the regular
method of working out liability to pay tax. Such ‘composition scheme/s’
are normally designed for smooth sailing, particularly in relation to
works contracts.

However, sometimes a method, which looks simple
and easy, may become very heavy and burdensome, just because of its
interpretation. Dealer/s opting for compositions scheme/s have to be
very careful. One recent judgment on interpretation of a ‘construction
contract’ may be an example.

Construction Contract

Under
erstwhile Maharashtra Works Contract Act,1989, a composition scheme of
5% was announced for ‘Construction Contract/s’. In other words, if the
contract executed by the contractor was covered by a notified
construction contract, then the contractor could adopt this composition
scheme, attracting a composition rate of 5%.

Notification

The
relevant notification, notifying ‘construction contract’ under Works
Contract Act, was dated 8.3.2000, which is reproduced below for ready
reference:

“Notification No.WCA -25.00/C.R.-39/Taxation-1 dated the 8 th March,2000.

In
exercise of the powers conferred by sub-section (1) of Section 6A of
the Maharashtra Sales Tax on the Transfer of Property in Goods involved
in the Execution of Works Contracts (Re-enacted) Act, 1989 (Mah.XXXVI of
1989), the Government of Maharashtra hereby notifies the following
contracts to be the construction contracts for the purpose of
sub-section (1) of the said section 6A, namely: –

A. Contracts for construction of –

(1)
Building, (2) Roads, (3) Runways, (4) Bridges, Flyover bridges, Railway
overbridges, (5) Dams, (6) Tunnels, (7) Canals, (8) Barrages, (9)
diversions, (10) Rail tracks, (11) Causeways, Subways, Spillways, (12)
Water supply schemes, (13) Sewerage Works, (14) Drainage works, (15)
Swimming pools, (16) Water purification plants.

B. Any
contract incidental or ancillary to the contracts mentioned in paragraph
A above, if such contracts are awarded and executed before the
completion of the said contracts mentioned in A above.”

A look
at the above notification shows that two categories of transactions were
covered by above notification. One category was Part (A), which was
relating to main activity of construction, and, the other category i.e.
Part (B) covered incidental contracts to above main contract, subject to
the condition that they should be executed prior to completion of main
contract.

Controversy in case of Permasteelisa (India) Pvt. Ltd. (Sales Tax Reference No.55 of 2014 dated 6.5.2016) (BHC)

The facts leading to above judgment are noted by the Hon. High Court in para (4) of judgment as under:

“4
The Applicant is a Private Limited Company incorporated under the
Companies Act, 1956. It is also a registered dealer under the MVAT Act.
The Applicant is engaged in activity of fixation of glass walls. It is
the case of the Applicant that these glass walls also known as curtain
walls are used in the construction of modern buildings. These glass
walls are permanent walls and are constructed instead of usual brick
walls. In the modern age of architecture these glass walls have replaced
the traditional brick walls and many buildings are constructed and
developed using glass walls. If the glass walls are erected for a
building, then brick walls are not required as these glass walls have
all the characteristics of traditional brick walls as a result of which
there are modern high rise buildings and skyscrapers. In applying the
rates as applicable under the Work Contracts Act, the Applicant has
relied upon the Notification dated 8 March 2000 in terms of which
certain contracts specified therein are identified as construction
contract eligible for beneficial rate of tax. According to the
Applicant, the activities it undertakes are in respect of construction
contracts or contracts incidental or ancillary to the construction
contracts as set out in the Notification dated 8 March 2000 and it has
raised invoices and filed returns accordingly.”

Contention of dealer

As
the Maharashtra Sales Tax Appellate Tribunal, held that the activity
undertaken by the dealer did not fall within the said notification of
‘construction contract’, the dealer preferred a reference to Bombay High
Court and submitted that the glass walls are replacing traditional
bricks walls.

The arguments were two fold. One, it was a
contract for construction of building covered by Part A. In the
alternative, it was argued that it was covered by Part B as an
incidental contract. The meaning of ‘building’ in Development Control
Regulation for Greater Mumbai,1991 (DCR) was cited. Further literature
was submitted explaining the “glass walls” concept. On behalf of
department the submission was that the contract for glass walls was
neither a building construction contract nor incidental contract.

Observation of High Court

Hon. High Court referred to the contract terms for given transaction. In para 12 the Hon. High Court observed as under.

“12.
We are of the view that the contracts for construction of glass walls
executed by the Applicant would not constitute ‘contracts for
construction of buildings’ as mentioned in paragraph ‘A’ of the
Notification dated 8 March 2000 nor would they constitute contracts
incidental or ancillary to any contract as mentioned in paragraph ‘B’ of
the Notification dated 8 March 2000 issued under section 6A(I) of the
Works Contract Act and would not be covered by the said Notification. In
the judgment and order dated 9 July 2010 of the Tribunal in Second
Appeal No.106 of 2007, the case of the Applicant is interalia recorded.
In paragraph 3 it is stated as follows: “…

The work is carried out as under:

“i) Contract for structural glazing is entered into on completion of foundation and plinth.

ii) O n signing of the contracts intensive planning and designing is undertaken by Architect and Structural Engineers.

iii) A luminum, silicon and glass of the desired prescription is ordered.

iv) U pon completion of 5th Slab, structural glazing commences from the bottom i.e. first slab.

v) Structural glazing gets completed along with concrete construction.

vi) I nstead of convention brick wall, glass walls are used.

vii)
Structural glazing of the building is something without `brick walls’.
Instead of “brick wall” a “glass wall” is constructed.

It is
further recorded in paragraph 4 that in respect of the assessment, the
Applicant’s case was that it had undertaken the contract of fabrication
and erection of structural glazing works and the work of aluminum
glazing contract would qualify as a construction contract made for
building liable to composition rate of tax. Being aggrieved by the
Assessment Order passed by the Sales Tax Officer, the Applicant had
filed an Appeal before the Deputy Sales Tax Commissioner (Appeals) and
in the order dated 1 November 2006, the Commissioner of Sales Tax
(Appeals) has recorded that the Applicant contended that “he is a dealer
dealing in structural glazing aluminum cladding, doors and windows and
doors of buildings in Corporate Offices.”

After referring to
further judgments cited and an order of Advance Ruling in Karnataka on
the very same activity, in para 17 the Hon. High Court concluded its
decision as under:

“17 The fabricated structural glazings
prepared by the Applicant are transported to the site by the Applicant
and affixed on the exterior portion of the building, which building is
constructed by the building contractor who is a third party. There is no
dispute that Applicant is not a building contractor, in that, it is not
in the business of construction and erection of buildings. The activity
of affixing glass and erecting glass walls with aluminium frame work
requires an altogether different expertise, and is ordinarily
sub-contracted by the building contractor. The contention that some of
the walls in the building are not required to be constructed by laying
bricks and they are substituted by affixing the glass would not carry
the case of the Applicant further. We are also unable to accept the
contention that the work of the Applicant would be covered under the
term “incidental or ancillary activity to the construction of the
building” as that would have to have a direct nexus to the construction
of the building itself. Therefore, the alternative argument that the
contract would get covered by paragraph B of the said Notification which
includes incidental or ancillary contract to the contract of
construction also cannot be accepted. What meaning is to be attached to
the word “building” as mentioned in the Notification would have to be
determined considering the facts and circumstances of each case. In our
view, the reliance on the definition of ‘building’ in the Regulation
2(3)(11) of DCR is misplaced and would not assist the Applicant in any
manner. That definition is in the context and purposes of DCR and cannot
be imported and applied in the facts and circumstances of the present
case.”

The Hon. High Court has rejected the plea of the dealer about its contract being covered by category of Construction contract.

Conclusion

While
effecting the transaction, a dealer contemplates liability by making
reference to available provisions. The composition schemes are meant for
easy method of working of tax liability on works contracts. The dealer
may not be seeking any tax saving, but basically looks at an easy and
smooth method of working.

Under above circumstances, if the
dealer is caught in litigation in regard to interpretation litigation,
it may cost him heavily as the tax liability may exceed even his profit
margin.

It is pertinent to note that under present MVAT Act also
there is almost a similar notification for ‘construction contracts’.
Dealers will have to interpret its scope in terms of this judgment. It
may be suggested that the Government should clarify the scope of such
notifications in more specific terms so that dealers (contractors) can
compute their liability with certainty.

shailesh.kwebmaker

WITHDRAWAL OF AN APPEAL

Right of Appeal

It has been clearly laid down by the Apex Court from time to time that the right of appeal is a matter of substantive right and this right becomes vested in a party when the proceedings are first initiated, even before a decision is given in the matter. Such a right cannot be taken away except by express enactment or necessary intendment.

In this regard, some judicial considerations are as under :

In Janaradan Reddy vs. The State, AIR 1951 SC 124 and in Ganpat Rai vs. Agarwal Chamber of Commerce Ltd, AIR 1952 SC 409, Supreme Court upheld the principle that a right of appeal is not merely a matter of procedure but it is a matter of substantive right.
An intention to interfere with or to impair or imperil such a vested right cannot be presumed unless such intention is clearly manifested by express words or necessary implication [Hoosein Kasam Dada (India) Limited vs. State of Madhya Pradesh & Others (1983) 13 ELT 1277 (SC)].
At various instances different courts including the Apex Court has decided that if the right of appeal is vested and the assessee chooses not to exercise that right and later on files a special leave petition, then in such a case the authority may refuse to undertake the matter and reject the case and instruct the assessee to proceed only through the appeal route [Alembic Glass Industries Ltd. vs. UOI (1998) 97 ELT 28 (SC)]
Right of appeal is creature of the statute and can never be termed as an inherent right. Example of inherent right is filing a suit provided the same is not barred by limitation. Appeal right is conferred by the statute but one thing important here is that while conferring the right of appeal, the statute may impose certain restrictions such as limitation or pre – deposit of penalty or limiting the area of appeal to questions of law etc. Such limitations as specified in the statute shall be strictly followed [Raj Kumar Shivhare vs. Asstt. Director, Directorate of Enforcement (2010) 253 ELT 3 (SC)] ? R ight of appeal is a substantive right that is provided by the statute and it automatically vests in the aggrieved party. Therefore all the rights it carries with it that in itself means that such a right cannot be negated or taken away. [CCE & CU vs. Met India Ltd. (2010) 20 STR 560 (GUJ)]
Though right of appeal is statutory right under the Central Excise Act 1944 but it is not an absolute right and hence is bound by the provisions of section 35F. [Vibha Fluid Systems Engineering Pvt. Ltd. vs. UOI (2013) 287 ELT 29 (GUJ)]

The result of an appeal filed by an aggrieved person can be:

Affirmed: where the reviewing court agrees with the result of the lower court’s ruling(s) or
Reversed: Where the reviewing court disagrees with the result of the lower court’s rulings(s), and overturns their decision or
Remanded: where the reviewing court sends the case back to the lower court.

Can an appeal once filed be withdrawn?

Though, it is generally well settled that right of appeal by an aggrieved person is to be construed liberally, there is very limited clarity on the issue as to whether an appeal once filed by an aggrieved person can be withdrawn.

Neither the Central Excise Act 1944 / Customs Act, 1962 / Finance Act, 1994 nor the Rules made under therespective statutes nor the CEGAT (Procedure) Rules, 1982 contain any specific provision to permit an aggrieved person to withdraw his appeal, either with the permission of the appellate authority or without such permission. This issue becomes very important inasmuch appellate authorities are vested with powers of enhancement of demands and hence usually due caution is exercised by appellate authorities while entertaining such requests, from aggrieved persons.

One would wonder as to why an aggrieved person would want to withdraw an appeal after it is filed. Some examples / situations are given hereafter for ease of understanding:

a) Cases where there are mistakes apparent for record in an order passed by adjudicating authority / appellate authority against which an application for rectification is filed but the same is not disposed off. Hence, an appeal is filed, to protect the interest of the aggrieved person. Subsequent to the filing of appeal, relief is granted in rectification.

b) A services exporter has substantial unutilised CENVAT credit and is uncertain as to its utilisation against service tax payable on taxable services that may be provided in future. Hence, refund for unutilised CENVAT credit is applied for, which is rejected. In order to protect his interest, an appeal is filed. However, subsequent to the filing of appeal, the said services exporter has local transactions where service tax is payable. Issues arise in such cases as to whether an appeal filed can be withdrawn and service tax payable on local transactions be set off against unutilised CENVAT credit.

Some Judicial Considerations under Indirect Taxes

When this question came up in Mahindra Mills Ltd. vs. CCE (1987) 31 ELT 295 (Special Bench – New Delhi),] the Tribunal held that while the parties have no absolute right of withdrawal of the appeal, the request therefor was being allowed in the circumstances of that case.
When a similar request came from the appellant in another case (after considerable arguments had been heard for the appellant) a majority of the members held in the case of MRF Ltd vs. CCE (1987) 32 ELT 588 (Special Bench – New Delhi) that in the circumstances of that case the request for withdrawal must be declined, while the minority opinion was that it may be granted.
In a later decision in Jenson and Nicholson (India) Ltd. vs. CCE (1989) 41 ELT 665 (Special Bench – New Delhi), the Tribunal held that the powers of the Appellate Tribunal are similar to the powers of an Appellate Court in the Code of Civil Procedure. Hence the Tribunal has the right (though under no specified rule) to grant permission to the appellant to withdraw his appeal. [in this regard reliance was placed on Hukumchand Mills vs. IT Commissioner Bombay – AIR 1967 SC 455 and New India Life Assurance Co. Ltd. vs. IT Commissioner, Bombay – AIR 1958 Bombay 143].
The facts in Ramakrishnan Steel Industries Ltd. vs. Superintendent – (1993) 66 ELT 563 (MAD) were rather unusual. When the appeal by the department before the Tribunal was pending the department intimated the assessee that it had been decided to withdraw the appeal and directing the assessee to pay in accordance with the order of the Collector (Appeals) against which order the appeal to the Tribunal had been preferred by the department. The assessee duly complied and intimated the Tribunal also of the same and intimated they have no objection to the appeal being allowed to be withdrawn. But somehow the department had failed to intimate the Tribunal of its decision to withdraw the appeal. Hence, the Tribunal decided the appeal on merits by allowing the appeal of the department. The High Court set aside the order of the Tribunal holding that the decision to withdraw the appeal having been taken by the authority who had earlier ordered the filing of the appeal, the department was stopped from going back on the decision to withdraw when the assessee had, in pursuance of the communication, taken the necessary action to comply with the request therein about payment of duty.
In Ralson Carbon vs. CCE (1999) 108 ELT 608 (CEGAT – New Delhi) the Tribunal permitted withdrawal on the basis of declaration under Kar Vivad Samadhan Scheme (KVSS).

A peculiar situation arose for consideration in Shiv Herbal Research Lab. P. Ltd vs. CCE & CU (2002) 139 ELT 133 (Tri – Mumbai). In that said case the appellant intimated the Tribunal that they had filed a declaration under KVSS and the appeal may be treated as withdrawn. Accordingly the Tribunal permitted withdrawal of the appeal. Evidently the appeal was dismissed as withdrawn. Later the appellant applied for restoration of the appeal pointing out that “an order u/s. 90(4) of the Finance Act 1998 for full and final settlement under the KVSS has not been passed”. The Tribunal declined to restore the appeal though the factual situation of certificate u/s. 90(2) not having been issued does not appear to have been controverter or disbelieved.

Judicial Considerations under Income Tax
In respect of proceedings under the Income Tax Act, it was held by the Supreme Court, in CIT vs. Rai Bahadur Hardutroy Motilal Chamaria (1967) 66 ITR 433 (SC) that an appellant having once filed an appeal, cannot withdraw the same. In fact the Calcutta High Court held in Bhartia Steel and Engineering Co. P. Ltd. vs. ITO (1974) 97 ITR 154 (CAL) that even if the Tribunal had dismissed an appeal as withdrawn, the said order would be a nullity as having been passed without jurisdiction and the appeal will have to be treated as pending.

Conclusion

In the absence of specific provisions for withdrawal of an appeal under the Indirect Tax Laws (Service tax, Central Excise & Customs), practical issues / difficulties are faced by aggrieved persons, in particular. This issue needs to be addressed through amendments, in the Indirect Tax statutes / CESTAT (Procedures) Rules, 1982, as considered appropriate.

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