The 53rd GST Council Meeting addressed several pivotal issues concerning the Goods and Services Tax (GST) regime, aiming to streamline processes and provide clearer guidelines. One significant clarification that emerged from the meeting pertains to the valuation of the supply of import of services by a related person when the recipient is eligible for a full input tax credit. This clarification is expected to simplify compliance and provide much-needed certainty to businesses engaged in cross-border transactions within related entities.
In the context of GST, the valuation of goods and services is crucial for determining the tax liability. However, complexities arise when dealing with related party transactions, especially in cross-border services, where the value declared on the invoice may not always reflect the true market value. The issue becomes more intricate when the recipient of such services is eligible for a full input tax credit (ITC). In such cases, the concern shifts from the actual payment of tax to the accurate declaration of the value of services.
GST authorities have been issuing notices under Section 150 of the CGST Act to companies for discrepancies in input tax credit claims, prompting scrutiny of annual returns against monthly filings. Although businesses clarified that some notices lack verification, imposing undue compliance burdens the officials maintained that mismatches cannot be overlooked.
Moreover, there have been concerns against some registered persons, seeking tax on a reverse charge basis for certain activities performed by their related persons based outside India. These activities are being considered as import of services despite no consideration being involved. There has been a long-standing demand that the same treatment that is given to domestic related parties or distinct persons, as clarified in Circular No. 199/11/2023-GST dated 17.07.2023, should also be given to a foreign entity providing services to its related party in India, particularly when the recipient in India is eligible for full ITC. Vide the Circular No. 199/11/2023-GST dated 17.07.2023, only the inter-state transactions between the distinct persons under Section 25 of the CGST Act. The Circular had clarified that the value of supply of services between the head office and brand office should be determined as per the open market value under Rule 28(1), and in cases where full input tax credit is available to the Branch officer, the value declared in the invoice by the head officer is deemed to be the open market value. However, there remained ambiguity regarding services provided to an Indian branch office from their foreign head office.
The Council recommended clarification that in cases where a foreign affiliate provides services to a related domestic entity, and the domestic entity is eligible for full input tax credit, the value of such services declared in the invoice by the related domestic entity may be deemed as the open market value. This recommendation aligns with the second proviso to rule 28(1) of the Central Goods and Services Tax (CGST) Rules, which deals with the valuation of transactions between related persons. for instance, a foreign affiliate provides IT services to its related domestic entity in India. The domestic entity declares the value of these services as ₹10,00,000 on the invoice. Hence, the declared value of ₹10,00,000 is deemed to be the open market value. The domestic entity pays GST on ₹10,00,000 and claims the same as input tax credit, resulting in no net tax liability.
Council further recommended that when the related domestic entity issues no invoice for services provided by the foreign affiliate these services' value may be declared as Nil. For instance, when a foreign affiliate provides consultancy services to its related domestic entity in India and no invoice is issued by the domestic entity for these services then the value of these services is deemed to be Nil. The domestic entity pays no GST on this transaction and no input tax credit is claimed.
In line with the GST Council recommendations, the CBIC vide the clarificatory Circular No.210/4/2024-GST dated 26.06.2024 clarified that earlier Circular No. 199/11/2023-GST dated 17.07.2023 regarding the supplies of services between distinct persons in cases where full ITC is available to the recipient, is equally applicable for the import of services between related persons.
This clarification has several important implications for businesses and tax authorities:
The clarification regarding the valuation of the supply of import of services by a related person where the recipient is eligible for full input tax credit marks a significant step towards simplifying GST compliance for related party transactions. By deeming the declared or Nil value as the open market value, the GST Council and the clarificatory Circular No.210/4/2024-GST dated 26.08.2024 has provided businesses with a clear and pragmatic approach to valuation. This reduces the administrative burden and aligns with international best practices, fostering a more business-friendly environment in India. Additionally, it will also be beneficial for the taxpayers who may have missed out on issuing invoices on service imports from foreign related parties. Going forward as well the companies may review the position on taxability and valuation towards import of services from foreign affiliates considering these clarifications.. As businesses adapt to these clarified rules, they can look forward to greater certainty, reduced disputes, and a more streamlined compliance process under the GST regime.
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To acknowledge the long-standing demand of the stakeholders of the real estate industry, the Goods and Services Tax (GST) Council, in its 53rd meeting, exempted statutory collections made by the Real Estate Regulatory Authority (RERA) from GST, clarifying that they fall within the scope of entry 4 of No.12/2017-CTR dated 28.06.2017. This decision has far-reaching implications for the real estate industry, regulatory bodies, and homebuyers.
Entry 4 of Notification No. 12/2017-Central Tax (Rate) dated June 28, 2017, provides an exemption to services provided by the Central Government, State Government, Union territory, or local authority where the consideration for such services does not exceed Rs. 5,000. RERA, a regulatory authority established under the Real Estate (Regulation and Development) Act, 2016, collects fees and charges from real estate developers and agents. These collections are statutory in nature, meaning they are mandated by law and not in the form of commercial transactions.
The GST Council's decision to exempt these statutory collections acknowledges RERA's role as a regulatory body, rather than a commercial entity. This exemption aligns with the broader intent of the GST framework to exclude statutory payments from the purview of GST, thereby preventing additional tax burdens on regulated entities.
Notification No. 13/2017- Central Tax (Rate) dated 28.06.2017, Entry 5, provides that where the services have been provided by the government bodies to a business entity, the recipient (business entity) is liable to pay GST under Reverse Charge Mechanism (RCM). Pursuant to this notification, the department initiated the recovery of GST on services like approvals and licenses provided to body corporates, including the license fees for availing benefit under government schemes like Advance Authorisation and Export Promotion for Capital Goods (EPCG). These demands also extend to the real estate industry where the developers are mandatorily required to obtain various approvals and permissions from local bodies in relation to construction of real estate projects and are required to pay the statutory fees for the same. Notices have been issued by the Directorate General of Goods and Services Tax Intelligence (DGGI) for recovery of GST under RCM on these charges paid by developer to the local government entities.
The nature of these fees is similar to the statutory collections by RERA. However, the exemption of GST on the statutory collections by RERA paid by the corporate bodies creates an unreasonable classification by creating a different class without any reasonable nexus. While this move by the GST Council is commendable, it highlights differential treatment of different statutory fees by government bodies. The creation of this unreasonable difference of category of class for other statutory fees collected by the government bodies from the business entities thus leads to violation of Article 14 of the Constitution of India.
This recent exemption of GST on statutory collections by RERA might set a precedent for other sectors and regulatory authorities to seek a similar exemption, as other statutory levies, such as license fees for telecom spectrum, mining activities, and operating casinos, remain subject to GST. It will be interesting here to see if the other taxpayers will take inspiration from the RERA exemption and dispute their demand on the similar grounds in their own cases. But, ultimately one may expect that the dockets of the Courts would be increased in case of GST demands on other statutory fees / charges.
The exemption of statutory collections made by RERA from GST, as announced in the 53rd GST Council Meeting, is a significant development for the real estate sector. It reduces the compliance burden on developers, encourages regulatory compliance, and promotes a more transparent and accountable industry. Homebuyers stand to benefit from potential cost savings and a more robust regulatory environment.
While the decision is a positive step, it requires careful implementation and monitoring to realise its intended benefits fully. The GST Council's move aligns with the broader goal of fostering a transparent and efficient real estate sector, ultimately contributing to the growth and development of the industry.
By exempting RERA collections from GST, the GST Council has demonstrated its commitment to supporting regulatory bodies and promoting fair practices in the real estate sector. This decision paves the way for a more streamlined and efficient regulatory framework, benefiting all stakeholders involved. In light of this exemption, future relaxation for municipal and other taxes is anticipated that will further ease the Real Estate sector.
The 53rd GST Council Meeting introduced a noteworthy recommendation: the insertion of Section 11A in the Central Goods and Services Tax (CGST) Act. This new section aims to grant the government the power to regularize instances of non-levy or short-levy of GST due to prevailing general trade practices. This development has significant implications for businesses, regulatory authorities, and the overall GST framework in India.
There were multiple instances where certain taxpayers, following prevalent trade practices, failed to pay or underpay GST on specific supplies, such as corporate guarantees, online gaming, and employee secondment. As a result, GST authorities have responded by issuing bulk notices to recover taxes in the past leading to widespread litigation. It was a pleading of various industries including the insurance and other industries that while a new valuation mechanism or changes in the levy rate resolves certain issues going forward, the “as-is, where-is” basis is necessary for the past periods as the new tax position ought to be applied prospectively given that the differential tax cannot now be recovered from the customers. As the GST is a destination-based tax, and non-passing of the tax burden to the ultimate consumer would be contrary to the fundamental principle of GST law.
While the GST Council has time and again recommended regularising demands for the past periods on “as-is, where-is” basis, there was no legal mechanism provided in the CGST Act for such approach. It was thus essential to provide legal sanctity to the “as-is, where-is” basis in the GST law, which is in line with the pari materia provisions such as Section 11C of the erstwhile Central Excise Act, 1944 and Section 151A of the Customs Act, 1962.
However, the exclusion of online gaming from the purview of this legislation, leaves room for the community to pursue legal actions on the ground of the arbitrary and discriminatory classification, arguing it violates the right to equality under Article 14 of the Constitution of India.
Section 11A is designed to provide a legal mechanism for addressing situations where GST was either not levied or short-levied due to established trade practices. Based on the GST Council's recommendations, the proposed section empowers the government to make decisions that regularize such instances.
The recommendation to insert Section 11A in the CGST Act marks a significant step towards a more pragmatic and business-friendly GST regime. The provision addresses a critical gap in the current framework by granting the government the power to regularize non-levy or short-levy of GST due to general trade practices. It offers relief to businesses, reduces litigation, and promotes voluntary compliance, all while ensuring that the government can still collect due revenue.
As the GST Council moves forward with this recommendation, it is essential to establish clear guidelines and procedures for implementing Section 11A. The government can ensure that the provision achieves its intended objectives and contributes to a more stable, transparent, and efficient GST ecosystem in India.
This new provision underscores the GST Council's commitment to continually refining and improving the GST framework, aligning it with the practical realities of the business environment. With careful implementation and monitoring, Section 11A has the potential to significantly enhance the overall effectiveness and fairness of the GST regime.
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The CGST Act mandates that after the issue of demand notice, recovery proceedings should be initiated by the proper officer if an assessee fails to pay the due amount within three months from the date of the order as it is so interpreted from the act. In exceptional cases, to protect revenue interests, the proper officer may recover the dues in less than three months, for reasons to be recorded in writing. If the assessee does not pay within this period or within three months, the proper officer may proceed with recovery under Section 79(1) of the CGST Act.
CBIC had observed instances where some field formations initiated recovery before the three-month period without the necessary written justification. To ensure uniform implementation of the law, the Board clarified that, according to Circular No. 3/3/2017-GST dated July 5, 2017, the jurisdictional Deputy or Assistant Commissioner of Central Tax is responsible for recovery under Section 79 of the Act. For early recovery, the Deputy or Assistant Commissioner must place the matter before the jurisdictional Principal Commissioner/Commissioner of Central Tax with reasons. The Principal Commissioner/Commissioner must then record written reasons for requiring early payment and issue directions accordingly, considering the taxable person’s financial health and business status. These directions should not be issued mechanically but only when necessary to safeguard revenue interests due to specific circumstances based on credible evidence. This is in line with the board’s intention to balance the interests of revenue with the ease of doing business
W&B Comments: There have been various cases where the GST authorities have initiated recovery even before the completion of the three month period for filing of statutory appeal. The amount confirmed vide the order only become due and payable after demand is crystallised. Therefore, this circular will be helpful for the cases where the department has arbitrarily initiated recovery proceedings in pursuance of the demand order before giving statutory period of three months.
The Constitutional validity of GST provisions Section 16(2)(c) and Section 16(4) was challenged by the petitioner before the Hon’ble High Court of Kerala in the present case.
The High Court observed that Input Tax Credit (ITC) is in the nature of a benefit or concession extended to the dealer under the statutory scheme. It is no absolute right, even if it is held to be an entitlement it is subject to the restrictions u/s 16(2) & 16(4). Keeping in mind the conditions to determine constitutionality of taxing provisions, it was held by the Hon’ble Kerala High Court that Section 16(2) & 16(4) of the CGST act are not unconstitutional. The interpretation of the provisions was elucidated with the help of various cases wherein it was held that Section 16(1) is an enabling provision to claim benefit under ITC, but such benefit is not an absolute right and is subject to fulfilment of conditions provided under Section 16(2) & 16(4). Section 16(2) provides a non-obstante clause preventing unregistered persons from claiming benefit of the scheme subject to conditions, it was held that this is a restrictive and not an enabling provision, as such a non-obstante clause preceding a restrictive provision doesn’t exclude application of other restrictive provisions on the matter as they are confirmatory and non-contradictory. As such the temporal limitation under Section 16(4) is applicable to Section 16(2) despite the non-obstante clause due to it being non-contradictory. Hon’ble High Court held that the conditions are necessary to impose on the scheme in the interest of revenue and budgetary management.
W&B Comments: Many taxpayers were issued notices demanding reversal of ITC claimed beyond the time limit prescribed under Section 16(4) of the CGST Act and various petitions were filed across the various High Courts[1] on the issue. The validity of Section 16(4) is pending before the Hon’ble Supreme Court and in the case of Shanti Motors vs. Union of India[2] the Court has issued notice to the Revenue. In regards to this, the 53rd GST Council Meeting also has recommended to extend the time limit for availing ITC pertaining to FY 2017-18 to FY 2020-21 to November 30, 2021 retrospectively w.e.f. July 1, 2017. Therefore the present judgment and GST council recommendation in regards to a retrospective amendment to allow ITC is a welcome step.
[1] Jain Brothers [2023 (12) TMI 829]; BBA Infrastructure [2023 (12) TMI 835]; Gobinda Construction [2023 (9) TMI 902]
[2] (2024) 19 Centax 214 (S.C.)
The appellant was served with a notice under Section 73(1) of CGST Act on 29.09.2023. The last date for reply was fixed at 30.10.2023 for which the appellant sought extension of time while the date of personal hearing was given as 12.10.2023, eventually after further extension reply was filed on 15.11.2023 but personal hearing was not given and order challenged before the Learned Single Bench were passed on 29.12.2023.
The Learned Division Bench of Hon’ble Chhattisgarh High Court held that the mandate of the law is that upon demand notice time must be provided for reply from the assessee after which he may be given an opportunity to be heard in a personal hearing before passing appropriate order. It is not the scheme of the act to give personal hearing first and then seek reply to the notice, the reply must be sought first and subsequently an opportunity to be heard must be given. As such the procedure adopted in this case was held to be wrong and violative of the principles of natural justice of the appellant.
The Hon’ble High Court held that where a statute contains a mandate of hearing the principles of natural justice automatically apply upon such a procedure and that administrative authorities must be mindful of them while exercising their statutory power. As such the order passed by the Joint Commissioner of State Tax was set aside as it amounted to defeat the rules of natural justice and the object of the legislation and the appellant provided the opportunity to appear for personal hearing before the authority.
W&B Comments: The judgement by Hon’ble Chhattisgarh High Court underscores fundamental principles of natural justice in administrative proceedings under them GST laws[1]. It emphasizes on procedural fairness by providing an opportunity for the appellant to respond to a notice under Section 73(1) before scheduling a personal hearing.
[1] Dharampal Satyapal Ltd. v. CCE, (2015) 8 SCC 519; Umanath Pandey v. State of UP [2009] 12 SCC 40-43; Ridge v. Baldwin, (1963) 2 All ER 66.
The Hon’ble Delhi High Court in present case dealt with the question that whether physical filing done post limitation period would bar the appeal on such grounds of the actual online filing was conducted within the limitation period.
The petitioner challenged the order by the Commissioner of Central Tax Appeals, dismissing the appeal against the original order on the grounds of being time-barred. The deadline for filing an appeal therefore under Section 107(1) of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as “the Act”), was 03.08.2023. The appeal was recorded as filed on 25.09.2023, which was more than a month late. Commissioner Appeals held that only a delay of up to one month could be condoned by the power vested under him according to Section 107(4) of the Act if sufficient cause was shown. It was noted that the petitioner had initially filed the appeal online on the GST Portal on 02.09.2023, and the date recorded in the impugned order, is when the petitioner physically submitted the appeal following the online submission. It is undisputed that the appeal must be filed online first, followed by the submission of a physical copy to the department and the date of filing is considered the date of initial online submission, provided the appellant complies with other legal requirements.
Since the appeal was filed online 02.09.2023, the delay did not exceed one month, the Hon’ble Delhi High Court held that Commissioner Appeals had the authority to consider the application for condonation of delay. Consequently, the order was set aside, and the matter was remitted back to the Commissioner Appeals to be considered on merits.
W&B Comments: The Hon’ble High Court clarified that taxpayers must adhere strictly to prescribed time limit of 3 months while filing a statutory appeal under Section 107(1). However, it was also affirmed that the date of online filing of appeal on the GST Portal constitutes the official date of appeal initiation and not the date of physical submission. This interpretation of the section safeguards the taxpayers right to seek condonation of delay for reasons deemed sufficient under Section 107(4) of the Act.
When running a business, priorities typically revolve around market expansion, customer service, team strength, leadership, and legal protection. Facing investigative agencies like the Enforcement Directorate (ED), the Directorate General of GST Intelligence (DGGI), and the Income Tax Department (ITD) is unlikely to be on your radar. However, if such a scenario arises, questions about preparation, legal implications, and subsequent investigations become pertinent. Imagine one day, the ED showed up to investigate financial irregularities in your business under the Prevention of Money Laundering Act, 2002 (PMLA) and Foreign Exchange Management Act, 1999 (FEMA). After this, the DGGI shows up to investigate offences under the Goods and Services Tax (GST), followed by the Income Tax Department to investigate tax evasion. While this may seem distant, it's a reality for many businesses. This discussion aims to equip you with the knowledge and readiness to navigate these challenges confidently.
ED is a statutory body empowered under the Central Vigilance Commission Act, 2003 to investigate money laundering offences and violations of foreign exchange laws. The ED operates within the jurisdiction or limits of the PMLA, FEMA, Fugitive Economic Offenders Act, 2018 (FEOA), Foreign Exchange Regulation Act, 1973 (FERA) and Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974 (COFEPOSA).
In recent times, raids conducted by ED as part of the investigation process or collection of evidence have shown a higher possibility of investigations by other agencies like DGGI and the ITD. There have been several instances in the news wherein once a business is raided by the ED, an investigation by the ITD and/or DGGI follows next. This shows that the ED raids do not always conclude with a final report, rather investigations are initiated by other departments based on the information discovered by ED. This leads to the expansion of the scope of the initial raid. This series of investigations is chiefly a result of the sharing of data between these agencies. Various investigation agencies are legally authorized to share the relevant data to facilitate the investigation into financial crimes through an inter-agency collaborative approach, which leads to their involvement in the dispute.
According to Section 66(1)(ii) of the PMLA read with relevant notifications, ED officers are authorized to provide information available to notified agencies when necessary for the fulfilment of their functions under the relevant statute. The Central Board of Direct Taxes (CBDT), which frames policy for the ITD, vide Order dated 21.07.2020 allowed the ITD to share PAN and bank account details of any entity with investigative and intelligence agencies, including the ED and DGGI, under the integrated counter-terrorism platform NATGRID. On a similar line, the Central Board of Indirect Taxes & Customs (CBIC) vide Notification dated 07.07.2023 expanded the scope of PMLA by including the Goods and Services Tax Network (GSTN) in the specified list of agencies that are required to share information with the ED. These law enforcement agencies/regulatory bodies collaborate to ensure compliance with laws and effective prosecution of offenders. It cannot be lost sight of that all these multiple raids and investigation proceedings by different agencies can be parallel or at different times.
It cannot be ruled out that if one of the agencies has given a clean chit, the others cannot charge on the same subject matter if their investigation leads to appropriate evidence. This leads to a situation where one particular act is considered as an offence when viewed from both ED’s as well as DGGI / ITD’s lens. Therefore, a person can be subjected to arrest and custody by different agencies at the same time.
As regards GST, there are certain actions which involve business transactions undertaken either to avoid paying the legitimate amount of tax or, to claim wrongful input tax credit (ITC), which can be investigated by DGGI. However, when these transactions are undertaken cross-border and/or involve siphoning off the money especially if the funds are circulated through shell companies or overseas entities, such offences then fall within the purview of ED. In this situation, such transactions may attract investigation by both agencies (i.e. ED and DGGI) due to their overlapping nature. An illustrative list of such transactions is hereunder:
Similarly, activities such as concealing income/assets abroad or engaging in fraudulent cross-border transactions, fall within the jurisdiction of both the ITD and the ED due to their implications for tax evasion, money laundering, or violation of foreign exchange regulations. During the investigation, when the ED identifies such violations, it shares data with the ITD resulting in simultaneous proceedings by these agencies thereby expanding the scope of the original scrutiny. Below are a few instances which may attract parallel actions by ED and the ITD:
In case of overlapping of offences falling within the jurisdiction of more than one investigative agency, a situation may arise when a person who is already arrested by one agency for a violation or allegation of an offence, can further be arrested by another agency for an offence falling under the jurisdiction of that other agency. Hence, it is possible in some instances that one person can be arrested by more than one investigative agency for violation of overlapping offences falling within the jurisdiction of these agencies. For instance, recently the Delhi High Court has remanded BRS leader K. Kavitha to the custody of CBI for her alleged involvement in a corruption case related to an alleged Delhi liquor policy scam. She was earlier arrested by ED for alleged money laundering in the excise policy scam and hence, was already in judicial custody when CBI arrested her.
There have been numerous instances wherein businesses were bombarded with different investigations after ED raids. In 2022, the ED conducted raids on various offices of the M/s DSL Dharampal Satyapal Group, owners of 'Rajnigandha' pan masala and 'Catch' spices, over allegations of money laundering and tax evasion. During the investigation, ED found alleged diversion of funds to offshore entities in tax havens (tax evasion), and bogus ITC under the GST laws. The ED's investigation led to the ITD and DGGI initiating parallel investigations into the group's financial irregularities.
In another instance, ED conducted raids on Xiaomi, Oppo, and Vivo offices in India qua alleged tax evasion, transfer pricing, and violation of FEMA regulations and subsequently, the ITD and DGGI also joined the bandwagon.
Global commodities trader ‘Trafigura’ came under ED scrutiny for a Transfer pricing violation. Trafigura is alleged to have companies in Tax havens and moving money to those companies helped it avoid taxes. Earlier, the company was investigated by the ITD.
Recently in 2023, troubled British news broadcaster BBC came under ED scrutiny for alleged foreign exchange violations. ED came into the picture after the ITD’s survey of the BBC Delhi office revealed several discrepancies and inconsistencies in transfer pricing documentation.
These trends of investigations reveal expanded jurisdiction of ED concerning certain offenses. For instance, above mentioned cases of Xiomi, Trafigura, and BBC highlight the instances of transfer pricing violations that were being investigated by ED. In a nutshell, due to the overlapping of certain offenses between PMLA, FEMA, Income Tax, and GST, the simultaneous proceedings by different agencies appear to be inevitable.
Standard Operating Procedures (SOPs) may be put in place defining the roles and responsibilities of different teams/verticals in case of sudden investigation, to ensure smooth coordination and submission of correct information to the investigating agencies. Training may be imparted to the employees in respect of maintaining confidentiality, protecting sensitive information, and safeguarding legal rights during questioning/investigations. Regular audits and health check-ups are another way to mitigate the risk of potential inquiry. Besides mitigating litigious positions, a business review would also assist in adopting tax-efficient structures.
The Petitioner, Sterlite Power Transmission Limited, has challenged the imposition of GST on the activity of providing a corporate guarantee to a subsidiary company by the holding company on the premise that it does not fall within the ambit of supply of services.
Under Service Tax regime, corporate guarantees faced no taxes if no consideration was involved. It was also a view that corporate guarantees were akin to actionable claims and fell under Schedule III of the CGST Act, 2017 therefore it neither constituted the supply of goods nor services and accordingly not liable to GST. There was a lack of clarity on specific valuation mechanism in cases when a holding company provided a corporate guarantee to a subsidiary without receiving any consideration.
Based on the recommendation of the 52nd GST Council meeting, by Notification No. 52/2023-Central Tax dated 26.10.2023, Rule 28 of the Central Goods & Service Tax Act, 2017 was amended providing new valuation provision for corporate guarantees provided on behalf of a related person. CBIC has also issued Circular No. 204/16/2023-GST, dated 27-10-2023 clarifying that the activity of providing corporate guarantee to the bank/financial institutions for providing credit facility to the other company, where both the companies are related, is to be treated as supply of service. In case where no consideration is involved then also it is to be treated as a taxable supply of service as per provisions of Schedule I of CGST Act.
The petitioner has challenged the Circular, arguing that corporate guarantee is in the nature of a contingent contract which is not enforceable till the guarantee is enforced by the entity to which the guarantee is provided. The value of enforcement is not dependent on the value of the guarantee, and it is only where the guarantee is enforced that the issue of service may arise, if at all and as such fixing a value at 1% of the corporate guarantee provided would put onerous burden on the entity providing the corporate guarantee.
The Hon’ble Delhi High Court has issued a notice in the matter and directed that no coercive action should be taken against the petition where a final assessment is passed, or demand is created.
W&B Comments: The decision by the Hon’ble Delhi High Court to entertain the writ petition offers hope for clarity on GST implications for corporate guarantees. This could offer much-needed guidance, particularly after the ambiguity following the Supreme Court's ruling on non- applicability of service tax on corporate guarantee in the Edelweiss Financial Services Limited case. Despite the recent circular's attempt to address these issues, uncertainties persist regarding the timing and valuation of supplies.
The Hon’ble Madras High Court in the case of Southern Engineering Services v. Deputy State Tax Officer allowed the writ petition and set aside the assessment order thereby holding that, the assessment order is liable to be quashed in case where Petitioner incorrectly reported turnover in GSTR-1 but correctly in GSTR-3B.
Southern Engineering Services supplied services to an SEZ unit without charging any GST as the said supply was zero rated supply. The Petitioner incorrectly reported the turnover under the column taxable value in Form GSTR-1 but corrected the mistake by reporting is as zero-rated supply in Form GSTR-3B. However, the Department passed the assessment order against the Petitioner.
The Hon’ble Madras High Court held that, as per the invoice placed on the record by the Petitioner, the supply was made to the SEZ unit and therefore, the said supply would fall within the purview of zero-rated supply and the error in return was at the time of introduction of GST.
The court quashed the assessment order while observing that the Petitioner is entitled to an opportunity for hearing as per the facts and circumstances of the case.
W&B Comments: Despite the availability of an alternative remedy of appeal to the Petitioner, the Hon'ble High Court chose to entertain the present case and remanded it for reconsideration and emphasized on the necessity of providing the taxpayer with a personal hearing opportunity. This ruling is relevant as it establishes a precedent wherein if the violation of principles of natural justice is raised, the alternative remedy may be bypassed, allowing the High Court to address the concerns of the aggrieved taxpayer.
The Madras High Court in Vardhan Infraastructure vs. Central Board of Indirect Taxes held that Centre Authority cannot initiate proceedings against taxpayers assigned to State Authority and vice versa in the absence of cross-empowerment notification.
The Petitioner had argued that Central authorities had initiated the proceedings even though petitioner was assigned to state authorities for all the administrative purposes. In few other cases, State authorities had initiated the investigation but taxpayer was assigned to center authorities. While challenging the jurisdiction of the authorities to conduct the proceedings, the petitioner had contended that there is no cross-empowerment enabled in the GST law in absence of the notification [except refund processing notification] To contend it, petitioner referred to GST Council meeting minutes [9th and 22nd GST Council meeting], circular for division of taxpayer in the manner in which it was decided to be distributed between the Centre and State. Support was also drawn from Section 3 and 4 of CGST and SGST Act to say that the powers assigned to Board or Commissioner are linear and not cross-empowered as was structured under the Model GST law.
Appreciating the arguments taken by the petitioner, the hon'ble Court held that there is no notification in place under Section 6 to cross-empower the authorities to initiate or pursue the proceedings against the Petitioner who is not assigned to it. The hon’ble High Court issued the directions to jurisdictional authorities to pursue the appropriate investigation in case of assigned taxpayers and the limitation period will exclude the period of writ proceedings.
W&B Comments: The Hon’ble Madras High Court has clearly stated that in the absence of a notification under Section 6(1), authorities lack the cross-empowerment to initiate proceedings against a taxpayer who hasn’t been assigned. However, in a previous judgment (Kuppan Gounder P.G. Natarajan vs. Directorate General of GST Intelligence, New Delhi [2022 (58) G.S.T.L. 292 (Mad.)]), the same court emphasized the distinction between "proceeding" and "inquiry," as Section 6(2) qualified by the words “subject-matter” indicates an adjudication process/proceeding on the same cause of action and for the same dispute, which may be proceedings relating to assessment, audit, demands and recovery and offences and penalties etc. Such proceedings are subsequent to inquiry. Therefore, the proper officer may proceed with a parallel proceeding under Section 70 in any inquiry even when any proceeding on the same subject-matter had already been initiated by a proper officer under the State Act.
The Bombay High Court in the case of Shantanu Sanjay Hundekari vs. Union of India ruled that penalties could not be imposed on the employee, as they were neither taxable nor registered.
The petitioner, acting as a taxation manager for a shipping company, was authorized via power of attorney for specific GST matters. Allegations arose during investigations regarding the company's improper utilization and distribution of input tax credit, resulting in a significant demand cum show cause notice. This notice also targeted the petitioner for potential penalties alleging the benefit retention or causing such offences. The petitioner argued that they did not fall under the taxable or registered category according to GST laws, and thus should not be implicated in benefiting from such actions.
Appreciating the petitioner's arguments, the court concluded that penalties under Section 122(1A) of CGST Act could not be applied to the employee, as they neither violated the provisions outlined in Section 122(1) nor retained any benefit. This provision applies exclusively to taxable or registered individuals, which the employee was not.
W&B Comments: Section 122(1) applies to taxable persons, and this extends to subsequent application of Section 122(1A) to taxable persons as well. The Hon’ble Bombay High reaffirmed that Section 122 is invoked particularly when the offence is committed by the individual for personal gain, not because of the position they hold. Invoking Section 137 pertaining to criminal proceedings, in a show cause notice under Section 74 for adjudication renders such proceedings out of jurisdiction.
The Madras High Court in Tokyo Zairyo (India) Pvt Ltd vs Assistant Commissioner set aside the order disregarding petitioner's reply as an unauthorised.
The Petitioner had challenged the assessment order which had disregarded the petitioner’s reply. After the completion of the audit, a show cause notice was issued, to which the petitioner responded well within time. However, the tax authorities passed an assessment order, prompting the petitioner to challenge it on the grounds of their disregarded reply. The petitioner had highlighted the disregard of the petitioner’s reply, labeling it as unauthorized solely because of the petitioner’s inability to attend the scheduled personal hearing. The department’s argument against it was that the petitioner had failed to produce certain essential documents, leading to the confirmation of the tax demand.
The Hon’ble High Court observed that the order specifically mentioned the rejection of the petitioner’s reply as unauthorized due to the absence of the petitioner during the personal hearing which raised question regarding the validity of such categorization and the subsequent disregard of the petitioner’s contentions. Consequently, the court set aside the order and remanded the matter for reconsideration, emphasizing the necessity of providing a reasonable opportunity to the petitioner, including a personal hearing.
W&B Comments: The Hon’ble Madras High Court observed that the assessment Order passed under Section 73/74 of CGST Act, had failed to comply with Sub-section 9 o of the provision. As the assessment order was passed without any consideration of representation (reply) made by the petitioner, it is not a well sounded order as it does not comply with the law well as the principles of natural justice.
In the case of M/s Samsung India Electronics Pvt Ltd v State of U.P and Others, the hon’ble Allahabad High Court addressed the petitioner's refund claim for unutilized Input Tax Credit (ITC) of CGST, SGST, and IGST paid on various inputs and input services.
The petitioner, M/s Samsung India Electronics Pvt Ltd, exported IT services to its overseas holding company, M/s Samsung Electronics Company Limited, Korea. They filed refund claims for unutilized ITC of CGST, SGST, and IGST paid on inputs and input services from April to June 2019, which was partially sanctioned. Subsequently, they applied for refunds for July to September 2019 and October to December 2019. The Department issued deficiency memos and show cause notices, alleging rejection of refunds for these periods. After replies and hearings, the Department partially allowed the refunds but rejected a portion, arguing certain goods were capital goods, not inputs. The petitioner appealed, leading to the present petitions before the Allahabad High Court.
The Hon’ble Allahabad High Court, while quashing the Order, held that while the principle of res judicata does not apply to taxation matters, tax authorities must maintain a consistent approach when faced with similar factual and legal circumstances. The court emphasized the importance of uniform treatment, as taxpayers have a legitimate expectation of fairness and equity from the tax authorities and deviations from this principle undermines the credibility of their actions.
The court also noted that withholding refund claims arbitrarily, despite past precedents and unchanged circumstances, is unfair. While drawing a distinction between capital goods and inputs, the hon’ble court affirmed that that the Petitioner’s case is not subject to capitalization.
The court stressed that show cause notices must clearly outline specific allegations, and the department cannot exceed their scope without violating natural justice. Any action beyond the show cause notice's confines was deemed void ab initio and unsustainable. The court found the impugned orders erroneous and allowed the writ petitions, with consequential reliefs to follow.
W&B Comments: It is a settled position of law that the Department cannot adopt a contradictory stance or inconsistent approach when dealing with the same facts and legal background. Altering their position would imply that their prior stance was incorrect. Therefore, tax authorities are required to adhere to uniform treatment when faced with similar factual and legal circumstances.
Before GST there used to be multiple taxation systems prevalent in the country. Tax rates used to vary from state to state, further complicating the taxation regime. The implementation of the GST regime in India is one of the major reforms aimed at simplifying the complicated tax system and making one tax applicable throughout the country under the ‘One nation, one Tax’ initiative. However, the real estate industry, which is a key player in the Indian economy, encountered several obstacles after the implementation of GST. Real estate contributes 6-7% of the total GDP of the country. The GST rates for real estate are 5% for residential properties and 18% for commercial properties. Developers under input tax credit (ITC) under the GST system, claim a tax credit for the GST they have paid on goods and services. This ultimately results in lower prices of the construction which ultimately results in lower property prices.
Two main aspects of GST applicability in real estate are the goods aspect i.e. applicable GST on various construction materials and the services aspect i.e. the activity of construction itself. Result of both these aspects is the final cost of the property. The total GST applicable is calculated by adding the SGST (state GST) and CGST (central GST), thus 18% GST = 9% SGST + 9% CGST. 12% GST = 6% SGST + 6% CGST and so on. Different rates are applicable on different construction materials like Building bricks 5%, Roofing tiles 5%, Marble/Granite blocks 12%, Portland/Slag Cement 28% etc. Construction services also feature different taxes like Under construction properties under Credit Linked Subsidy Scheme 8%, Under construction properties (excluding those under Credit Linked Subsidy Scheme) 12%, Composite supply of works contract for affordable housing 12%, Works Contract (other than govt. bodies) 18% etc.
Registration and stamp duty are still applicable to real estate even post GST implementation. These charges are different in different states and may also vary from part to another part within the same state itself. These stamp duty and registration charges are applicable to both constructed and under construction properties, while GST is only applicable to under construction properties.
TDR is when the owner of the land transfers the development rights of land to the Developer to construct the building. In return, the Landowner either takes money or a part of constructed property. This arrangement between the landowner and the developer is being treated as ‘service’ to attract GST. This has again left the developers in dollema since GST is not applicable on immovable properties and land here is immovable property. The definition attached to General Clauses Act, 1897 provides that “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. TDR is a benefit arising out of the land and hence it is an immovable property.
FSI is actually a permission granted by the concerned authority for undertaking construction on any land, with a view that the construction does not exert weight on ground beyond a specific limit. FSI is the maximum permissible limit on a land on which a structure can be built. FSI permission is sought by the developers from the concerned authorities i.e. local municipal authorities. GST is levied on the grant of FSI by the authorities since the permission is treated as a ‘service’. This GST cost is in addition to the fees paid to these authorities to obtain permission. Sometimes permission is to be obtained from multiple authorities leading to increased financial burden on developers.
It is a mechanism wherein the developers can claim the amount of GST paid on goods and services. If a property or part of property is constructed for the sole purpose of undertaking commercial activities, then GST paid out of the revenue generated and ITC is not allowed on the procurement cost of construction goods. Hence, the landowners who construct shops on their land or part of land for the purpose of business activities like shops, salons, hotels, guest houses, theaters etc. will have to pay GST on the revenue generated out of such activity. They will not be allowed to claim their amount as ITC. This matter was decided by the Orissa High Court in the case of M/S Safari Retreats Private Limited [2019 (25) G.S.T.L. 341 in favour of thePetitioner is engaged in carrying on business activity of constructing shopping malls for the purpose of letting out. The petitioners in this case were engaged in construction of shopping malls for the purpose of letting out to different customers. They were not allowed to claim ITC by the Revenue on construction material and consultancy services on the ground of section 17 (5) (d) of the CGST Act (Non availability of ITC on goods or services for construction of immovable property other than Plant & Machinery). Court held that Section 17 (5) (d) of the CGST Act has to be interpreted in continuity of the transaction since rent income is arising out of the property which is constructed after paying GST on different items. If ITC is denied on a building meant and intended to be ‘let out’, it would amount to treating the transaction as identical to a building meant and intended to be ‘sold’ which is contrary to the basic principles of classification of subject matter of tax levy and, therefore, violative of Article 14 of the Constitution. By relying on the judgment of Eicher Motors Ltd. and another versus Union of India and others, (1999) 2 SCC 361, court held that the credit is intended to give benefit to the assessee, this is the very intent of credit.
Therefore, if the Petitioner is being made to pay GST on the rental income arising out of the land on which he had paid GST already, he is eligible to claim input tax credit on the GST.
Certain tax benefits and exemptions were enjoyed by the real estate sector under the pre-GST regime. However, post GST implementation, most real estate transactions came under the GST net, which increased the tax burden of developers and buyers. The property prices thus went up. Additionally, real estate players had to get accustomed to the new GST compliance requirements like filing the returns at regular intervals, maintaining detailed records, and keeping up with severe time deadlines. This created additional administrative burden and compliance costs for developers, particularly for the small players who did not have the resources and the expertise.
Certain positive parts of the GST regime ultimately cause negative impacts. For instance, one of the key benefits of GST is that a person or entity can claim input tax credits (ITC) on various inputs used in construction. However, it is very challenging to avail these credits because of the complex nature of projects and the involvement of multiple stakeholders, such as contractors, suppliers, and service providers. Each of these stakeholders charges GST on their supplies, and the developer is eligible to claim ITC on the GST paid to them. However, getting proper tax invoices with GST details from all the parties is difficult because of the multiple levels of sub-contracting involved. Real estate projects usually comprise residential as well as commercial units each of which attract different ITC rules under GST. Handling of the land-related costs such as stamp duty and registration charges under GST brings in complexities and differing interpretations on the applicability of ITC. Failure of the suppliers or contractors to comply with the GST requirements, such as non-payment of taxes or issues with invoicing, can result in no ITC being granted to the developer, making the matter even more complicated.
Moreover, the tax authorities lately have been constantly putting scrutiny on various real estate developers over non-compliance of the GST. They are being summoned and show cause notice have been issued. A leading developer in Mumbai has been served multiple show cause notices for non-payment of GST on certain transactions and incorrect availing of input tax credits.
The implementation of GST has given rise to a set of new issues entertained by consumer forums. In a landmark case, Homebuyers filed complaints against developers for not passing on GST benefits. As a consequence, the National Consumer Disputes Redressal Commission (NCDRC) directed the real estate company to refund the excess GST collected from homebuyers, along with interest.
Although GST is not levied on the immovable property but even after the completion of property till Occupation Certificate (OC) is received, GST will be levied because it will be considered as ‘Construction Services’.
The redevelopment of cooperative housing societies (CHS) have been tangled in a complex web of issues related to GST giving rise to legal disputes. There have been several appeals made to the finance ministry to streamline the tax mechanism and provide clarity for stakeholders. CHS are societies wherein members collectively transfer their development rights to a redeveloper who undertakes construction and delivers new flat in exchange for the old one. The redeveloper takes permission for the additional Floor Space Index (FSI) to construct additional flats for sale. With this he recovers money which enables him to offer new flats to the original members without cost. GST is being levied to CHS at 18% which will be applicable to the sale of flats after acquiring project completion certificate. This will not only make the construction cost expensive but will be transferred ultimately to the buyers. Thai will affect the entire real estate market because the prices of affordable housing will go up.
Difficulties faced by this sector have made it apparent that GST reforms are required. Hence, the GST structure should be simplified considering different types of work involved in the real estate sector. Real estate sector should be consulted to understand the challenges they face and the possible outcomes that can ease the process for them. GST reforms must ensure that the process of claiming ITC is simplified at each stage. It must be understood that the real estate sector requires efficient flow of financial resources to undertake its business. When these finances are stuck, it causes severe difficulties. When GST is charged, a large amount of money is stuck which is to be claimed via ITC. Sometimes the amount of GST paid is more than the tax which the company would have paid. The complexities of ITC makes it challenging to claim this money back. Hence, the GST regime should be amended to achieve the purpose for which it has been implemented i.e. simplification of tax structure and reduced burden on businesses and consumers.
Main intent behind the introduction of GST in Real Estate was to make housing affordable by crediting back the tax (GST) paid by the developers by disallowing tax burden to be transferred on the ultimate customers. However, in scenarios where different GST rates are applied to different items and types of construction activities along with no return of tax via ITC leaves developers in a vulnerable situation to either bear the tax burden themselves and suffer loss or transfer it to customers and make housing non affordable. Real estate sector is filled with complexities due to different projects and involvement of multiple stakeholders. Hence, availing benefits of the post GST regime remains a challenge for many developers in real estate sectors.
Effective collaboration between the government, industry bodies, stakeholders, consumer forums, and judiciary remains critical to addressing the challenges and unleashing the full potential of the sector towards making a meaningful contribution to the nation's economic progress. The sector should be consulted while framing policies which will be applicable to them. A detailed analysis of the type of work undertaken, parties involved in each stage, challenges faced by the sector etc should be done and incorporated in policies. GST was introduced for the simplification of the earlier complex tax structure which is a welcome step, some of the provisions of the GST can be amended to effectively apply to specific sectors like Real Estate where the scenario is different from other businesses.
Business dynamics around the globe have undergone a radical transformation in the contemporary commerce space, largely propelled by the forces of globalisation. As markets evolve, aligning services and products with global standards becomes imperative.
This shift necessitates a comprehensive understanding of international trade, taxation, and legal frameworks that govern cross-border transactions. Businesses must navigate a complex web of regulations to thrive internationally.
Let’s look at some key legal perspectives that serve as navigational tools for businesses venturing into the global arena.
Understanding local tax regulations in target countries is paramount for businesses with global aspirations. Local nuances can significantly impact financial outcomes. Double taxation treaties emerge as crucial instruments to prevent being taxed on the same income in multiple jurisdictions, offering a strategic advantage for cross-border enterprises.
To optimise tax efficiency, businesses should explore incentives and exemptions provided by different countries. Compliance with transfer pricing rules ensures fairness in pricing between international entities, avoiding potential conflicts. Implementing proper accounting practices for cross-border transactions is foundational for financial transparency and regulatory compliance.
Familiarising yourself with international trade agreements and treaties, such as Free Trade Agreements (FTA), is fundamental. Compliance with import/export regulations and customs requirements is essential for seamless cross-border transactions. Understanding tariff structures and duty rates for products in each market is critical to financial planning and pricing strategies.
To avoid legal pitfalls, businesses must comply with trade restrictions, sanctions, and embargoes imposed by various countries. Staying updated on changes in international trade policies, akin to India’s Foreign Trade Policy (FTP), allows for agile adjustments in business strategies to align with evolving regulatory landscapes.
Choosing an appropriate legal structure for global operations is a strategic decision. Options such as subsidiaries, branches, or joint ventures require careful consideration. Compliance with corporate governance and reporting standards in each jurisdiction is imperative to maintain credibility and adhere to legal obligations. Understanding the legal implications of operating in different countries ensures a solid legal foundation.
Maintaining accurate and detailed records of international transactions is not just a best practice; it is a legal necessity for tax and compliance purposes. Contracts and agreements should be meticulously crafted to align with local laws, minimising the risk of legal disputes.
Assessing political, economic, and regulatory risks in target markets is integral to crafting a robust global strategy. Developing risk mitigation strategies, including securing insurance coverage for global operations, is vital to safeguard against unforeseen challenges.
Leveraging technology for efficient international financial management and compliance tracking is indispensable. Investing in systems that facilitate adherence to diverse regulatory frameworks empowers businesses to navigate complex legal landscapes. Integrating AI tools and relevant models enhances accuracy and efficiency in compliance processes.
Engaging local professionals, such as tax advisors, legal counsel, and consultants, provides invaluable insights into specific country nuances. Local expertise is instrumental in deciphering complex regulations, ensuring compliance, and mitigating risks effectively.
In conclusion, as businesses traverse the global landscape, a keen awareness of legal perspectives on taxation and trade laws becomes the cornerstone of success. By adopting a proactive approach to understanding and integrating these legal nuances, businesses position themselves for compliance and seizing opportunities, establishing resilient frameworks, and fostering sustainable growth in the dynamic global arena.
You can also read the full article on -https://inc42.com/resources/cross-border-business-mastery-navigating-legal-and-tax-complexities/
Five years ago, the GST regime implemented a unified tax system in India. Yet the experience of the industry players is a shade different. Businesses witnessed roadblocks in cohesive implementation of the provisions and faced issues typically arising from a dis-jointed regulatory system. While concerns during the implementation of a unified law are natural irrespective of jurisdiction, its continued prevalence indicates a need for increased emphasis on the smooth execution of appropriate regulations.
Recently, the Honourable Supreme Court (“the Court”) was once again faced with a double taxation case; this time, relating to the levy of GST on ocean freight charged on imported goods. In the case of Union of India vs Mohit Minerals Pvt Ltd (“Mohit Minerals”)[1], the primary issue dealt with by the Court was whether the government can charge Integrated GST (“IGST”) on ocean freight paid by the foreign seller to a foreign shipping line on a reverse charge mechanism in India.
The Court held the tax levy on ocean freight based on Reverse Charge Mechanism (“RCM”) violative of the principle of composite supply.[2] A supply of goods and services is considered to be composite when it involves two or more goods and services. However, only a natural bundling of goods and services in the course of business can be deemed to be a composite supply. In the instant case, the supply of sea transportation service and the imported goods on board can be classified as a composite supply since the said services are naturally bundled in the due course of business involving a CIF contract.
The matter was initially brought before a Division Bench of the Gujarat High Court in which the counsel for Mohit Minerals highlighted the erroneous IGST levy on ocean freight under Notification No. 01/2017-ST[3] although it had already paid the 5% tax on the reverse charge mechanism on ocean freight service as per Notification No. 8/2017[4].
After due appreciation of arguments advanced and evidence filed by the parties, the bench set aside the added IGST liability imposed on Mohit Minerals and also held the said notifications ultra vires the provisions of the IGST Act, 2017.[5]
Aggrieved by this decision, the Union of India filed a Special Leave Petition before the Supreme Court, under Article 136 of the Constitution of India, challenging the constitutionality of certain notifications of the Central Government. The Court deliberated upon the same and addressed larger issues of composite supply and cooperative federalism.
The transaction involved three parties; the seller and the shipping line located in a non-taxable jurisdiction, and an Indian importer. It was carried out in two main phases:
Phase 1: Between foreign exporter and Mohit Minerals (Indian importer)
The Indian importer is liable to pay IGST on the transaction value of goods (inclusive of freight and insurance) under S. 5(1) of IGST Act read with S. 3(7) & 3(8) of the Customs Tariff Act.
Phase 2: Between the foreign exporter and the shipping line
Based on the principle of composite supply under S. 2(30) of the CGST Act[6], the tax liability on the same under S. 8 of the said Act[7] will be applicable only on the ‘principal supply’. Therefore, in the instant case, the tax can be levied on the service of supply of goods (transportation service will be considered a part of the same in a CIF contract).
Union of India: It claimed that the two phases of the transaction i.e., the contract between the foreign shipping line and the foreign exporter are distinct and independent of the contract between the foreign exporter and the Indian importer. Further, it argued that the levy of IGST on ocean freight while also charging tax on a CIF value basis cannot be construed as double taxation as they are from independent transactions.
Mohit Minerals: It argued that the two phases cannot be deemed as separate transactions and that Notification No. 10/2017 cannot be sustained under Section 5(4) of the IGST Act[8] which provides that integrated tax on supplies made by an unregistered supplier to a registered person shall be paid by such person on an RCM basis as a recipient of the supply.
Supreme Court’s ruling: The concept of composite supply was introduced to prevent dissection of various elements of transactions and double taxation. In the instant case, the shipping service forms a part of the supply of goods since the contract between the parties was on a CIF basis. It upheld Gujarat High Court’s order and held that levying IGST on ocean freight will be violative of the concept of composite supply. Where an Indian importer is liable to pay IGST on composite supply in a CIF contract, a separate levy for the ‘supply of services’ by shipping line would be a violation of Section 8 of the CGST Act.
The subject-matter transaction is a CIF contract which constitutes an inter-state supply which can be subject to IGST where the importer would be the recipient of the shipping service under Notification No. 10/2017. The said notification read with Notification No. 8/2017[9] prescribes 5% IGST on ocean freight which is calculated as 10% of the CIF value.
Union of India: It claimed that the said notifications do not refer to Section 5 of the IGST Act, however, it is settled law that once a power is available to grant or identify the taxable person, taxable event, rate and measure, non-reference of the source of power will not vitiate its exercise and application in the instant case.
Mohit Minerals: It contended that the said notification is ultra vires the IGST Act. It claimed that since the power to issue the said notification flows from Section 5(3), IGST Act, the Government can only specify the categories of goods and services on which it intends to levy tax on an RCM basis.
Supreme Court’s ruling: Upholding the Gujarat High Court judgement, the Court explained that along with the power to specify goods and services, the Government also has the power to specify a class of registered persons as a recipient of the supply. Therefore, the said notifications cannot be invalidated due to alleged failure to identify a taxable person and on a charge of excessive delegation while prescribing 10% of CIF value as taxable value.
The Government has, in the spirit of cooperative federalism, replaced multiple central and state tax laws with GST laws to promote ease of doing business in India. With the same objective under the 101st Constitutional Amendment Act, 2016, the GST Council is formulated with central and state representation.
The Supreme Court held that the Government, while exercising its rule-making powers under the law, is bound by the GST Council recommendations. Nevertheless, the said recommendations made under Article 279A (4) cannot be said to be binding on the legislature’s power to enact primary legislation.
The Court finally upheld the Gujarat High Court’s judgement stating that the impugned notifications are liable to be struck down since IGST is already paid on the ocean freight that makes a part of the value of imported goods. It explained that the Government cannot seek payment of additional taxes from an importer beyond the contract between the foreign shipping line and foreign exporter. A separate levy on the Indian importer for the ‘supply of services’ by the shipping line would violate Section 8 of the CGST Act.
The issue of double taxation on ocean freight for importing goods on a CIF basis is problematic in terms of liquidity. However, because of the Court’s ruling, importers can now claim a refund of IGST paid towards ocean freight from the exchequer provided they have not claimed any input tax credit. This judgement is a gesture welcomed by importers and affected taxpayers considering the decrease of cash burden in the backdrop of an economic market predicted to experience a slowdown in the upcoming years.[10] Affected entities are likely to make judicious use of this window of opportunity to review, audit and amend their tax filings to claim benefits.
[1] Union of India vs Mohit Minerals Pvt Ltd, AIR 2018 SC 5318.
[2] Section 2(30) read with Section 8 of the Central Goods and Services Tax Act, 2017.
[3] Notification No. 01/2017-ST, dated 12 January 2017.
[4] Notification No.8/2017- Integrated Tax (Rate) dated 28 June 2017.
[5] Mohit Minerals Pvt LTd v. Union of India & Anr, C/SCA/726/2018.
[6] Section 2(30), Central Goods and Services Tax Act, 2017, “composite supply” means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply.
[7] Section 8, CGST Act, Tax liability on composite and mixed supplies, The tax liability on a composite or a mixed supply shall be determined in the following manner, namely:—
[8] Section 5(4), IGST Act, Levy and collection of tax, The integrated 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 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.
[9] Notification No.8/2017- Integrated Tax (Rate) dated 28 June 2017.
[10] “Prospects of an economic rebound in India are firming up as GDT is set to expand by 9.4% in FY 2021-22 and reverting to 8.1% in FY 2022-23, before moderating to 5.5% in FY 2023-24.”, OECD Economic Outook, Volume 2021 Issue 2.
The Customs, Excise and Service Tax Appellate Tribunal (“CESTAT”)’s Kolkata Bench vide order dated August 27, 2021, in the matter of M/s. RNB Carbides & Ferro Alloys Private Limited has decisively upheld refund entitlements to the assessees against the claim of recovery by the revenue department of “erroneous refunds” and has provided useful clarifications regarding the point of sale of goods and inclusion of freight charges in the assessable value of goods for the purposes of excise duty calculation.
The assessees were engaged in the manufacture and sale of Ferro Alloys, Ferro Silicon and Ferro Slag and its factory units were located within the State of Meghalaya which enjoyed the benefit of Central Excise duty exemptions under Notification No. 32/99-CE dated 08.07.1999 (“Original Notification”), which was later amended by certain Subsequent Notification. The Original Notification operated by way of refund, where under the assessee first paid the central excise duty leviable and thereafter received refund. In this case, the assesee had self-assessed the duty on clearances, paid the applicable excise duty and then filed the refund claims. The said refund claims were processed and granted but subsequently, the assessee’s books of accounts were scrutinized upon which the revenue department objected to the inclusion of freight charges in the assessable value of goods.
It was the revenue department’s case that the assessee had overvalued its products by including freight charges which ought not to have been included under Section 4(1) of the Central Excise Act, 1944 read with Rule 5 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 (“Rules”). Several Show Cause Notices were issued against the assessees for recovering the alleged excess refunds. Further, numerous rounds of cross-litigation followed whereby the revenue department claimed that the assessee had suppressed the fact that outward freight was included in the assessable value and that it had also “mis-declared the Place of Removal leading to over valuation of assessable value for claiming excess refund.” The revenue department relied on the CESTAT’s earlier judgment in Montage Enterprises Pvt. Ltd.4 and Aditya Birla Chemicals India Ltd 5.
The assesee in turn, inter alia, contended that the relevant contracts/purchase orders for sale of finished products stipulated FOR destination prices and that the act of sale occurred at the buyers’ premises and therefore, duty had been paid correctly considering the value of goods inclusive of transportation charges up to the buyers’ premises. The assessee relied on the Supreme Court judgement passed in Roofit Industries Limited and Ispat Industries Limited .
Reliance was also placed on Circular No. 1065/4/2018-CX dated 08.06.2018, which stated that in case of a contract providing FOR sale, assessable value had to be determined by including all costs up to the point of sale, which in this case was the buyers’ premises. The assessee also contended that even if the transportation charges were not includible for the purpose of Central Excise valuation, the Department was bound to refund the duty paid thereon.
The central issues that came before CESTAT was:
The CESTAT acknowledged that the contracts/ purchase orders in the instant case were ‘door delivery’ at all-inclusive prices and noted that the purchasers reserved the right to inspection and to not accept the goods if found to be sub-par and that the assessee thereby bore the intermittent risk of loss and/or damages. The CESTAT further examined the definition of “sale” under Section 2(h) of the Central Excise Act, 1944 (“Act”) and noted that under the Act, sale takes place only upon transfer of the possession of the goods by the manufacturer to the buyer which occurred at the buyers’ premises in the present case and therefore rejected the revenue department’s claim that place of removal / point of sale cannot be buyer’s place.
Hence, it was concluded that the invocation of Rule 5 by the revenue department was misplaced because the said Rule applied to cases only where goods were sold at the place of removal but were to be delivered elsewhere, which was inapplicable in this case. Further, CESTAT observed that the assessee’s case fell within the purview of the exception to the aforesaid Rule 5 and that in light of Rule 7 read with Rule 11, the assessable value of the goods was the price charged by the assessee at the place of sale indicating that all charges up to the place of sale are includible, including freight.
The CESTAT upheld the precedential value of Roofit Industries Limited and dismissed the revenue department’s claim regarding the recovery of amount already refunded by considering it as an “erroneous refund” under Section 11A of the Act and stated that the refund already sanctioned by relying on the judicial legal precedents as well as the clarifications issued by the Central Excise Board cannot be termed as “erroneous” as further confirmed in Gauhati High Court’s Judgement in the case of Topcem India vs. Union of India 2021 (376) ELT 573.
Further, the CESTAT confirmed the assessee’s contentions that even if the assessee had paid higher Central Excise duty than was leviable, the Department was not at liberty to retain any part of such excess amount collected as duty because it can retain only those sums which represent the actual duty leviable under a statute and therefore, any excess amount collected as duty ought to be refunded. Reiterating its own observations in Aditya Birla Chemicals, CESTAT highlighted that “..the duty amount paid legally as well as the amount legally not payable but paid, both were entitled for refund if the refund claim was filed as per law.” In light of the above contentions, the appeals filed by the revenue department were dismissed and since the issue was decided on merits, the limitation aspect was also not considered.
This judgement has far-reaching effects on the refund rights of the concerned assessees who were hitherto affected by ultra vires show cause notices issued by the revenue department. Stakeholders can consider undertaking normal litigation route (adjudication and appellate) or, the writ route to challenge these arbitrary demand notices seeking to recover allegedly granted “erroneous” refund under Section 11A.
For any queries, please contact:
VINEET NAGLA
Partner
Head – Taxation
vineet.nagla@whiteandbrief.com
PRATEEK BANSAL
Associate Partner
prateek.bansal@whiteandbrief.com
The Gauhati High Court (“HC”) vide its judgement dated August 12, 2021, in the matter of M/s Jyothy Labs Ltd. has decisively answered question regarding eligibility of concerned taxpayers to requisition fixation of special rate of refund in respect of manufactured goods in the aftermath of the Supreme Court’s VVF judgement.
The petitioner M/s Jyothy Labs Ltd. had established a manufacturing unit within the Northeastern Region. As per the Northeastern Industrial Policy, the petitioner was earlier entitled to an exemption to excise duty vide the Original Notification (Notification No.32/99-CE dated 18.07.1999) which was later curtailed by the Subsequent Notification (notification No. 31/2008-CE dated 10.06.2008) thereby diminishing the refund entitlement while allowing the assesses to have a special rate fixed depending on value addition in each case. The Subsequent Notification was thereafter challenged by the petitioner, resulting into a High Court order in its favor.
To denote finality, the Hon’ble Supreme Court (“SC”) vide its common order dated 22.04.2020 in VVF Ltd (“VVF”) upheld the constitutional validity of the Subsequent Notifications based on public interest and revenue interest. The SC inter alia held that pending refund applications for related cases are to be decided as per the Subsequent Notifications.
In the aforesaid background, the petitioner in the current case had to finetune its refund entitlements in line with the Subsequent Notification. It is the petitioner’s case that under the Subsequent Notifications, the manufacturer is given the option to apply to the jurisdictional Commissioner of Central Excise for fixation of a special rate representing the actual value addition in respect of eligible goods manufactured. Also, the time provided for filing such application for fixing of the special rate is provided thereunder as 30th September of that given financial year, but the petitioners argued that due to the unsettled legal position, they were unable to request for a special rate of refund and hence should presently not be barred considering inadvertent circumstances.
Therefore, post the VVF Judgement, the petitioner submitted an application on 18.05.2020 before the Commissioner of Central Excise and GST, Guwahati making a request for fixation of a special rate. As the applications of the petitioner were not entertained and the department invoked the attachment of some properties of the petitioner, the petitioner approached the Gauhati HC by way of a Writ Petition. The petitioner contended that the requirement of requesting for fixation of a special rate in respect of the value addition to the manufactured goods had arisen only after the VVF judgment of the Supreme Court and that the dominant purpose of the Subsequent Notification was intended to bestow a legal right on the assessee to opt for special rate.
The central issues that came before the Gauhati HC were:
1. Whether under the Subsequent Notification, the manufacturers have an option to not avail the rates contained in the notifications and whether they have a legal right to request the authorities for fixation of a special rate as per the actual value additions to the manufactured goods?
2. Whether such applications requesting for fixation of a special rate are to be made within 30th September of the given financial year as prescribed under the Subsequent Notification, and hence are now time barred?
The HC took note that once the occasion had again arisen for the petitioner to seek for fixation of a special rate, the application for such request was made immediately. It was therefore held that the petitioner cannot be prevented from claiming its legal right for fixation of a special rate as the timeline provisions were merely incorporated to streamline the process.
The HC also observed that even if there would have been an earlier determination of such special rate, the same would have remained ineffective and un-implementable till SC had finally decided the issue and further the relevance of such determination would again be dependent on the outcome of the appeal that was pending before SC.
Further, the HC noted that the respondent GST Department did not raise any apprehensions on the ground that such applications had to be submitted prior to 30th September of the given financial year. Thus, the HC stated that on the principle of constructive res-judicata, the ground for rejecting such application because it was not submitted within prescribed timeline was not available to the respondent authorities. The HC thus directed the Principal Commissioner, GST, Guwahati to consider the application of the petitioner seeking for fixation of a special rate of refund based on the actual value addition to the manufactured goods during the given financial year and decide the same as per law and on merits.
While the VVF judgment directed the revenue department to dispose pending refund applications as per the Subsequent Notifications, it is critical to note that the applications seeking fixation of special rate for many affected assessees were not pending in cases where the assessees had not filed the said applications.
In this situation, the Gauhati HC judgement is a welcome step reinforcing the right of the assessees to claim special rate of excise refund based on actual value addition. It shall be highly beneficial for not just North-Eastern assessees but affected stakeholders in other regions as well (Kutch and Jammu) where the applications for fixation of special rate of refund may be preferred. It is imperative that the impacted assessees move swiftly to file application with the jurisdictional authorities within a reasonable time to avail the legally upheld benefit of special rate of refund for their manufactured goods.
For any queries, please contact:
VINEET NAGLA
Partner
Head – Taxation
vineet.nagla@whiteandbrief.com
PRATEEK BANSAL
Associate Partner
Taxation
prateek.bansal@whiteandbrief.com