The 43rd GST Council Meeting held on May 28, 2021, led to a series of important fiscal and GST related decisions. With an aim to provide a level playing field to the domestic vis-a-vis foreign service providers qua the maintenance, repair, and overhaul (MRO) services in the shipping sector, the following recommendations were made by the Council (which have now been notified):

1. GST on MRO services in respect of ships/vessels reduced to 5% from erstwhile 18%
   W&B Comment: It is important to note that the position regarding input tax credit is unchanged and hence the industry shall enjoy dual benefit of tax reduction and input tax credit.
2. Place of Supply (“PoS”) for B2B supply of MRO Services in respect of ships/ vessels notified to be location of recipient of service [while the said services were earlier taxable basis the place of performance]W&B Comment: By this amendment, the Government has stipulated that for MRO services procured by foreign ships during transit in India i.e. the intervening period between arrival and departure, the PoS shall be the location of the recipient i.e. overseas location. Accordingly, such services shall be categorized as an “export of service”, and it shall be a “zero rated transaction” inviting no tax implications. Conversely, the MRO services which the Indian shipping companies would avail outside India, shall be considered as “import of service” and will now be exigible to IGST under reverse charge mechanism. In other words, IGST liability has been casted upon the Indian shipping lines in respect of services availed outside India i.e. non-taxable territory.It appears this recommendation has been made and effectuated without considering the below aspects:
   • Pertinently, under the erstwhile Service tax regime, the MRO services were always taxed basis the place of performance of such services. Now, the change in PoS of the said services under GST regime is de hors the erstwhile position and tax implications qua Indian shipping lines.
   • In terms of Section 13(3)(a) of the IGST Act, the PoS of services supplied in respect of goods which are required to be made physically available by the recipient of services to the supplier of services, is the place of performance of the said service. It is beyond doubt that repair and maintenance services qua goods can be provided only upon making such goods physically available. It is settled position that vessel qualifies as “goods” (both under GST and Customs law, separate rate of tax has been prescribed for vessel) and repair and maintenance services are rendered in respect of the vessel and not to the company owning such vessel. Therefore, in relation to MRO services where the goods i.e. “vessel” are made physically available, the PoS should be the place of performance of the said service.
   • The repair and maintenance services provided in respect of any other category of goods eg: plant and machinery, are continued to be classifiable under performance-based services. Hence, the differential treatment now afforded to the MRO services qua “vessels” is irrational and unconstitutional.
   • In the context of erstwhile Service Tax regime, the Hon’ble Gujarat High Court in Sal Steel Ltd. [2020-TIOL-163-HC-AHM-ST] inter alia held that “there is no power conferred upon the Central Government to make any Rules or Notifications for extraterritorial events; or in other words, for services rendered and consumed beyond the “taxable territory” i.e. beyond India.” Therefore, in relation to MRO services availed outside India, the Indian shipping companies cannot be legally mandated to discharge IGST as it will amount to taxing an extraterritorial event.
   • The Indian shipping industry effectuating maritime transports accounts for 70% of India’s trading in value terms and entails larger significance than the budding MRO sector. This puts the domestic shipping companies to a disadvantageous position as compared to the foreign shipping lines, besides being made accountable to a potentially huge tax outgo.

   In view of the above infirmities, this issue deserves to be adequately represented before the GST Council for its reconsideration so as to avoid imminent tax uncertainties and litigations.

Governments bring in policy initiatives with an inherent strong developmental agenda aimed at transforming underdeveloped regions thereby accelerating the pace of growth to foster employment, community progress and financial participation.

In the year 2002, as a subset of the New Industrial Policy of the Union Government, certain Notifications (which can be designated as “Original Notifications”¹) were issued under Section 5A of the Central Excise Act, 1944 (“CEA”) qua Jammu and Kashmir, North-East and Kutch (Gujarat) regions. By virtue of these Original Notifications, a manufacturing unit (new units and/or existing units which undertook substantial expansion) located in the specified areas producing prescribed goods was entitled to claim refund of the 100% Central Excise Duty paid through cash after utilizing the eligible CENVAT Credit.

In 2008, the Central Government amended the Original Notifications, and the “Subsequent Notifications”^2, provided that the exemption by way of refund would be the amount equivalent to the duty payable on value addition carried out by the unit, which value addition is computed as a prescribed percentage of the total duty payable on the enlisted goods manufactured in such unit. The Subsequent Notifications further provided that a special rate for value addition may be fixed where the actual value addition is more than that prescribed in the Original Notification.

Aggrieved by the changing policy infrastructure regarding excise levy coupled with convoluted refund mechanisms which raised apprehensions regarding stark reduction in the entitlement of refunds, the assessees across India moved to several judicial forums to bring an end to the regulatory confusion. The various affected assessees filed Writ Petitions before the High Courts of Gujarat, Sikkim and Guwahati under Article 226 of the Constitution of India, challenging the constitutionality and validity of the Subsequent Notifications, primarily on the basis of the doctrine of promissory estoppel. The respective High Courts (“HC”) allowed the Writs and quashed the Subsequent Notifications to the effect of invalidating the reduction in the quantum of refund and reinstating the Original Notifications. However, in the Department’s Special Leave Petitions against these HC orders, the Hon’ble Supreme Court (“SC”) vide its common order dated 22.04.2020 in VVF Ltd. [2020 SCC OnLine SC 378] (“VVF”)upheld the constitutional validityof theSubsequent Notifications as against the promissory estoppel of the Original Notification in consideration of public interest and the revenue interest; designating such Subsequent Notifications as “clarificatory” in nature and as a valid extension of the Original Notifications.

Certain other assessees adopted the appellate route and preferred appeals before the Customs Excise and Service Tax Appellate Tribunal (“CESTAT”) against the rejection of 100% refund by the jurisdictional adjudicating authorities. The CESTAT decided some of the matters in favour of the aggrieved assessees thereby granting 100% refund of Basic Excise Duty (“BED”) along with Education Cess (“ED Cess”) and the Secondary & Higher Education Cess (“SHE Cess”) in line with the prevalent legal position at the time i.e. the judgement of the SC in SRD Nutrients Pvt. Ltd. [(2018) 1 SCC 105] (“SRD”). This SRD judgment was held per incuriam in Unicorn Industries [(2020) 3 SCC 492] (“Unicorn”) thereby re-opening the gamut of questions pertaining to the refund entitlement of the assessees.

The issuance and legality of SCNs
As an aftereffect of this newly established judicial perspective attained from VVF and Unicorn, the tax department proactively began issuing self-serving Show Cause Notices (“SCNs”) to demand so called “erroneously granted refunds” from the assesses under Section 11A of the CEA in cases where: (i) any refund amount was granted in excess of the prescribed value addition norm as per the Subsequent Notifications, and (ii) refund of ED Cess and SHE Cess was granted pursuant to the SRD judgement. These SCNs appear to be without jurisdiction, unconstitutional and bad in law on many counts, few of which are mentioned below:

1. In order to issue SCN under Section 11A, refund should be considered as “erroneously refunded”. In various cases, the CESTAT Orders wherever passed, which remain unmodified and unvaried absent any reversal by higher judicial forum, are enforceable in its entirety and have attained finality. Consequent to the orders of the CESTAT / any other judicial forum (SC or HC), the refund claims sanctioned (whether fully or partly) have also attained finality absent any challenge before the appellate authority. Given this, the refunds sought to be recovered by the SCNs cannot be said to be “erroneous” for the purpose of invoking Section 11A of the CEA, and to this extent, the SCNs can be said to have been issued without jurisdiction.
2. The Department exercising power under Section 11A of the CEA is required to arrive at finding that the earlier orders granting refund (whether fully or partly) were contrary to the law and therefore, “erroneous” and thus the same are required to be reopened or recovered by invoking the powers under Section 11A.³ Curiously, most of the SCNs have no whisper on this aspect, rather the recovery is sought merely on the basis of VVF and Unicorn.
3. In cases where the refund orders have been passed and the Department has not challenged such orders, these SCNs now essentially seek to initiate a parallel proceeding and reopen an issue without first seeking appellate remedy from appropriate judicial forums.⁴ Thus, these SCNs are issued without following due process of law and contrary to Articles 14, 19(1)(g), 265 and 300A of the Constitution of India.
4. Qua refund of ED Cess and SHE Cess, a change of law subsequently by the SC in Unicorn would not make an action taken earlier by quasi-judicial authority in terms of law as it stood then, to be held to be erroneous so as to enable the Departmental Officer to invoke powers under Section 11A of the CEA.5

5. The SC decision in VVF was rendered in relation to peculiar circumstances in the Kutch and North-East region and the pronouncement was issued in public interest as many assesses were indulging in unscrupulous activities and availing unwarranted refund. However, in respect of the Jammu region, no study showcasing wrongful activities by the assesses has been conducted nor has any case visibly been reported in the public domain signalling any illegal activity so far. It must not be lost sight that the validity and constitutionality of the Subsequent Notifications qua Jammu region is still sub-judice before the SC in certain appeals⁶ filed by the tax authorities, and any recovery of refund from the Jammu based assesses is pre-mature.

Basis the above aspects, the SCNs having been issued in arbitrary supersession of earlier refund orders and basis the one-sided application of the VVF and Unicorn judgments may be challenged by filing Writ Petitions before the jurisdictional High Courts under Article 226 of the Constitution of India. It is needless to mention that the issue of alternate remedy will have to be addressed appropriately, on the basis that Writ Petitions are maintainable where the order or proceedings are purported to be wholly without jurisdiction and/or wrongful usurpation of power is alleged.⁷

Fixation of special rates for the eligible assesses
The Department has made no efforts to cater to the unresolved issue of special rate fixation pursuant to the Subsequent Notifications. The VVF judgment has been selectively appreciated by the SCNs in ignorance of the fact that the Subsequent Notifications (which have been upheld in totality by the SC in VVF) allowed the assessees to apply for a special rate of refund where the actual value addition made was more than the deemed value addition. Aggrieved assessees are still awaiting a well-founded fixation of special rate by the tax department corresponding to the actual value addition made by them and hence are unfairly subjected to disproportionate refund reversal orders. The partial application of the VVF judgment by the department is illegitimate and, the eligible assesses should be allowed to have the special rates fixed subject to the conditions prescribed in the Subsequent Notifications.

Date from which interest is to be computed
The next unsettling question is: since when does the interest meter start ticking in the event of recovery to be made by the SCNs? As per Section 11AA read with Section 11A of the CEA, interest is calculated from the date on which the duty becomes due up to the date of actual payment. However, the aggrieved stakeholders are unclear as to whether the interest on repayment of earlier granted refunds will be computed from:

1. the date of grant of the said full or partial refund to the assessees? or,
2. the date of reversal of the appellate orders wherever passed by CESTAT? or,
3. the date of decision of the SC in case of VVF and Unicorn?

While the manufacturers have no certain answer regarding the duration from which the interest demanded in the SCNs shall be calculated, the businesses may explore the option of repaying the demand amount (i.e. BED, ED Cess and SHE Cess) under protest without extinguishing their legal remedies against the claim in order to arrest the rising interest liability.

Central Excise Conundrum in the times of GST
It has been four years since the ambitious launch of Goods and Services Tax in 2017, however the erstwhile unresolved Central Excise implications in the area based exemption debacle as discussed above has caused complete dismay and disarray for the involved stakeholders throwing their financial stability off-guard. While the industries are striving with the ongoing COVID-19 pandemic and compliances under the GST laws, the hasty and legally unsound actions of the taxmen in seeking recovery of earlier granted refunds along with interest have further adversely impacted the aggrieved industry members. On a pan-India level, a broad-based timely resolution is urgently needed to save precious judicial time and resources of business communities who are already distressed due to the pandemic.

Since the present issue involves different jurisdictions and authorities at various levels, a circular / direction by the Central Board of Indirect Taxes and Customs (CBIC) clarifying the stance of the Revenue Department and actions to be adopted by the field formations qua different set of assesses basis their previous proceedings, will be instrumental in alleviating the uncertainty faced.

DISCLAIMER: The views and opinions expressed in this article are those of the author alone. This article is for general informational purposes only and should not be construed as legal advice or be a substitute for legal counsel on any subject matter. No reader should act or rely on any information contained in this article, without first seeking appropriate legal or other professional advice.

1. Notification No. 56/2002-CE dated 14.11.2002 was issued for Jammu Region. Similar notifications were issued for North-East and Kutch regions.
2. Notification Nos. 19/2008-CE dated 27.03.2008 and 34/2008-CE dated 10.06.2008 were issued for Jammu Region. Similar notifications were issued for North-East and Kutch regions.
3. Tripura Ispat [2021-TIOL-146-HC-TRIPURA-CX], Topcem India [2021-VIL-217-GAU-CE]
4. Design Auto Systems Ltd. vs. Commissioner of C.Ex. & Cus., Indore [2004 (170) ELT 269 (MP)] and TVS Motor Company Ltd. vs. Commissioner of C.Ex. & S.T. Mysore [2017 (5) GSTL 85 (Tri. Bang.)]
5. State of Haryana vs. Free Wheels (India) Limited [1997 SCC Online P&H 1849]
6. Diary No. 7076/2020 in case of Sun Pharma Ltd. along with Diary No. 12047/2020 in case of Nitin Enterprise and Diary No. 6428 of 2020 in case of J&K Cement Corporation
7. Whirlpool Corporation vs. Registrar of Trade Marks, Mumbai & Ors. [(1998) 8 SCC 1]

Union finance minister Nirmala Sitharaman will chair the first Goods and Services Tax (GST) Council meet of this financial year on Friday. From compensation to states to tax waivers on various medicines, medical devices, and health services amid the second wave of the coronavirus pandemic — a host of issues will be discussed at the 43rd GST Council meet, according to reports. This will be the first GST meet after a gap of seven months.

Here are the key things to expect from 43rd GST meet on Friday

1) GST Compensation to the states

The GST Council is expected to discuss the compensation shortfall to the states amid the coronavirus pandemic. The shortfall in GST compensation payable to states in the current fiscal has been estimated at Rs 2.69 lakh crore. Several states want an extension of the GST compensation beyond July 2022 as economic uncertainty continues, according to ANI reports.

“This comes in the backdrop of a lot of states raising the issue of non-convening of the meeting for almost two quarters. With the revenue expected to decline due to the lockdown and second wave of the ongoing pandemic, the mode of compensation for states for the shortfall is expected to take centre stage. Even last time, there was a lot of confrontation between the States and the Centre on this subject and it finally got resolved. This time as well it is expected to be no different," Divakar Vijayasarathy, founder and managing partner, DVS Advisors LLP

2) GST on medical devices and health services

The second wave of COVID-19 pandemic severely hit the country. Amid this, several states asked the reduction of GST rates on essential COVID-19 supplies. Rajasthan, Punjab, Chhattisgarh, Tamil Nadu, Maharashtra, Jharkhand, Kerala and West Bengal devised a joint strategy to press for a zero tax rate on COVID essentials, PTI reported.

Earlier this month, finance minister explained that how exempting COVID vaccines, medicines and oxygen concentrators from GST ambit will negatively impact the prices.

“Earlier, finance minister has highlighted that if full GST exemption is given qua COVID related items, the domestic manufacturers would not be able to offset their input taxes and would pass them on to the end consumers by increasing the sale prices. Given this situation, the GST Council may deliberate on keeping COVID-related medicines and equipment under the ‘zero-rated supply’ so as to allow seamless flow of input tax credits. The aforesaid will require amendment in IGST Act to the extent of expanding the definition of zero rated supply," said Prateek Bansal, Associate Partner, White & Brief Advocates and Solicitors.

“Further, the Council can be expected to either exempt or allow input tax credit qua COVID-related expenditures (viz. medical equipment and vaccination drives) incurred by the businesses for the welfare of employees or their families," Bansal added.

3) Multiple GST rate-slabs

The rationalization of multiple GST rate slabs has been a long-standing demand of the industry. Some experts believe that the GST Council may look at ways to rationalize the GST rates and reduce the number of slabs in Friday’s meet.

4) Extension of GST filing deadlines

Earlier in May, the finance ministry had extended timelines of various GST compliance for March and April considering the ongoing coronavirus pandemic. As several states announced local lockdowns till the end of this month, the GST Council is likely to announce another set of extension for May and June. “As a measure of temporary relief, the GST Council is expected to reduce the interest rate applicable on delay in payment of tax; undo or reduce the penalty imposed in case of default in the furnishing of returns, and extend the limitation period for filing of the refund claims with retrospective effect," said Gunjan Mishra, Partner, L&L Partners.

In a bid to boost the sales affected by the COVID-19 pandemic, the GST council might also consider lowering of present rate of 28 per cent on two-wheelers. Further, the Council might also provide an option of availing input tax credit to certain sectors (such as hospitality, real estate, etc.) which have been worst hit by the ongoing pandemic.

In the wake of severe Covid-19 pandemic, the Central Board of Direct Taxes (CBDT) has decided to extend timelines of various tax compliance dates on Saturday. “In view of the adverse circumstances arising due to the severe Covid-19 pandemic and also in view of the several requests received from taxpayers, tax consultants & other stakeholders from across the country, requesting that various compliance dates may be relaxed, the Government has extended certain timelines today," the ministry of finance said in a statement.

The move is aimed at mitigating “the difficulties being faced by various stakeholders," it further added. The “relaxations are the latest among the recent initiatives taken by the government to ease compliances to be made by the taxpayers with the aim to grant respite during these difficult times," it mentioned in a notification.

“It’s a welcome move to extend the timeline of various tax compliances as the country is struggling with severe second wave of coronavirus," said Sumit Mangal, Partner, L&L Partners.

Under section 119 of the Income-tax Act, 1961, CBDT has provided the following relaxations: 

1) The filing of belated return under sub-section (4) and revised return under sub-section (5) of Section 139 of the Income Tax Act, for Assessment Year 2020-21, which was required to be filed on or before March 31, 2021, may be filed on or before May 31, 2021, CBDT said in a statement.

2) Individuals can file Appeal to Commissioner (Appeals) under Chapter XX of the Income Tax Act within “the time provided under that Section or by May 31, 2021, whichever is later," CBDT said. The last date of filing under that Section was set at April 1, 2021.

3) “Objections to Dispute Resolution Panel (DRP) under Section 144C of the Act, for which the last date of filing under that Section is April 1, 2021 or thereafter, may be filed within the time provided under that Section or by May 31, 2021, whichever is later," the ministry added.

4) Income-tax return in response to notice under Section 148 of the Act may be filed within the time allowed under that notice or by May 31, 2021, it said.

5) “Payment of tax deducted under Section 194-IA, Section 194-IB and Section 194M of the Act, and filing of challan-cum-statement for such tax deducted, which are required to be paid and furnished by April 30, 2021(respectively) under Rule 30 of the Income-tax Rules, 1962, may be paid and furnished on or before May 31, 2021," the notification stated.

6) “Statement in Form No. 61, containing particulars of declarations received in Form No.60, which is due to be furnished on or before April 30, 2021, may be furnished on or before May 31, 2021," it also said.

“While time limit to file appeal to Commissioner (Appeals) has been extended to May 31, the time to pay tax demand pursuant to final assessment order has not been specifically extended," Sumit Mangal added.

The finance ministry earlier relaxed the timeline for payments under the Direct Tax Vivad se Vishwas Act, 2020 (without an additional amount) till June 30, 2021. Launched in 2020, the Direct Tax ‘Vivad se Vishwas’ Act aims to reduce pending income tax litigation, generate timely revenue for the government.

“The extension of deadlines under the Income Tax Act appears to be in line with the Supreme Court Order dated 27.04.2021. Similar extension of timelines for compliance under the GST law is also the need of the hour as the businesses are striving every month to make tax payments and file returns," said Prateek Bansal, Associate Partner, White & Brief Advocates & Solicitors.