Advance Ruling Under GST and Implications of Recent Orders

Article explains about Advance Ruling Under GST, Authority for Advance Ruling (AAR), Constitution of Authority for Advance Ruling under GST, Constitution of Appellate Authority for Advance Ruling (AAAR) under GST, Scope of Advance Rulings under GST, Qualification and appointment of members of the Authority for Advance Ruling, Applicability of Advance Ruling, Time period of Validity / void of Advance Ruling, Rectification of Advance Ruling, Void of Advance Ruling under certain circumstances, Brief of Advance Ruling Orders and its implications,Taxability of Services Supplies to SEZ Unit / Developer of SEZ, Taxability of Supply of services from Corporate offices to its branch offices, Taxability of Supply of Services by the Government Authority, Whether GST is applicable on Liquidated Damages and Whether tax on imports ocean freight is payable?

1. Introduction to Advance Ruling Under GST

The advance ruling means decision passed by the Advance Ruling Authority or the Appellate Authority on question of law with regard to classification, valuation and tax rate in relation to the supply of goods or services or both. The Order of AAR helps the applicant or taxpayers to take correct decision to discharge their tax liability. The advance ruling is a primary dispute resolution mechanism constituted under the provisions of Goods and Services Tax Act, State Goods and Services Act and Union Territory Goods and Services Act; it has been set up as legal body in the every States / Union territory.

2. Authority for Advance Ruling (AAR)

Section 96 of CGST Act, 2017 has prescribed, the Authority for advance ruling constituted under the provisions of a State Goods and Services Tax Act or Union Territory Goods and Services Tax Act shall be deemed to be the Authority for advance ruling in respect of that State or Union territory. It is clearly implies that each State or Union territory having one Authority for Advance Ruling.

3. Constitution of Authority for Advance Ruling under GST

Thus, the constitution of authority for advance Ruling is consisting of –

(i) one member from amongst the officers of Central tax and;

(ii) one member from amongst the officers State tax or Union territory tax.

It is ample clear that dual authorities (one from Central tax and one from State tax or Union territory) shall be seated in one place and participated in the decision making process to pass rulings to mitigate litigation / issues on GST.

4. Constitution of Appellate Authority for Advance Ruling (AAAR) under GST

Section 99 of the CGST Act, 2017 has specified the provisions of the Appellate Authority for Advance Ruling constituted under the provisions of a State Goods and Services Tax Act or a Union Territory Goods and Services Tax Act shall be deemed to be the Appellate Authority in respect of that State or Union territory. Similarly, the appellate for Advance Ruling is consisting of-

(i) the chief commissioner of tax as designated by the Board and ;

(ii) the Commissioner of State tax or Union territory tax having jurisdiction over the applicant.

It is also implies that dual authorities shall be seated in one place and participated in the decision making process to pass order for litigation / issues on GST appealed against order of Advance Ruling Authority.

5. Scope of Advance Rulings under GST

Section 97 (2) of the CGST Act, 2017 has specified scope of Advance Ruling on which the applicant sought appeal in respect of –

(i) Classification of any goods or services or both;

(ii) Applicability of a notification issued under the provisions of this Act;

(iii) Determination of time and value of supply of goods or services or both;

(iv) Admissibility of input tax credit of tax paid or deemed to have been paid;

(v) Determination of the liability to pay tax on any goods or services or both;

(vi) Whether applicant is required to be registered;

(vii) Whether any particular thing done by the applicant with respect to any goods or services or both amounts to or results in a supply of goods or services or both, within the meaning of that term.

6. Qualification and appointment of members of the Authority for Advance Ruling

The Central Government and the State Government shall appoint an officer having the experience of not less than 3 years in the rank of Joint Commissioner as member of the Authority for Advance Ruling.

7. Applicability of Advance Ruling:

An advance ruling pronounced by AAR or AAAR shall be binding only on the applicant and on the concerned officer or the jurisdictional officer in respect of the applicant. This clearly means that an advance ruling is not applicable to similarly place other taxable persons in that State. It is only limited to the person who has applied for an advance ruling. (Section 103 of the CGST Act, 2017)

8. Time period of Validity / void of Advance Ruling:

There is no specific fixed time period for advance ruling validity; it has been provided that advance ruling shall be binding till the period when the law, facts or circumstances supporting the original advance ruling have not changed.

However, an advance ruling shall be held to be ab initio void if the AAR or AAAR finds that the advance ruling was obtained by the applicant by fraud or suppression of material facts or misrepresentation of facts. An order declaring advance ruling to be void can be passed only after hearing the applicant. (Section 104 of the CGST Act, 2017)

9. Rectification of Advance Ruling:

The law gives power to AAR and AAAR to amend their order to amend any order passed by them under section 98 or section 101 of the CGST / SGAT Act,2017, so as to rectify any error apparent on the face of the record, if such error is noticed by the Authority or the Appellate Authority on its own accord, or is brought to its notice by the concerned officer, the jurisdictional officer, the applicant or the appellant within a period of six months from the date of the order. Such mistake may be noticed by the authority on its own accord or may be brought to its notice by the applicant or the jurisdictional CGST / SGST officer. If a rectification has the effect of enhancing the tax liability or reducing the quantum of input tax credit, the applicant must be heard before the order is passed. (Section 102 of the GST Act, 2017)

10. Void of Advance Ruling under certain circumstances:

If the Appellate Authority finds that advance ruling pronounced by them and has been obtained by the applicant or the appellant by fraud or suppression of material facts or misrepresentation of facts, it may, by order, declare such ruling to be void ab-initio. Before declaring such ruling an opportunity of being heard in person shall be given to the applicant or the appellant. (Section 104 of the GST Act, 2017)

11. Brief of Advance Ruling Orders and its implications:

The brief of important Advance Ruling orders have been passed by the AARs of the various States are summarized as under:

i. Taxability of Services Supplies to SEZ Unit / Developer of SEZ :

In the case of the applicant M/s Gogte Infrastructure Development Corporation Limited, Ruling No.KAR ADRG 2/ 2018, dated 21-3-2018– reported in 2018 (13) G.S.T.L. 114 (A.A.R.- GST).

Question of law – “Whether the Hotel accommodation & restaurant services provided by them, within premises of Hotel, to employees and guests of SEZ units, be treated as supply of goods and services to SEZ units in Karnataka or not?”

Rulings of AAR: It is held that the Hotel accommodation and restaurant services being provided by the applicant, within the premises of the Hotel, to the employees and guests of SEZ units, cannot be treated as supply of goods and services to SEZ units in Karnataka and hence the intra- State supply and are taxable accordingly.

The cited order of advance Ruling Authority is contradictory to statutory provisions of CGST Act, SEZ Act and SEZ Rule, may be challengeable and arguable before the Higher Court of Law. The said order of AAR is purely based on limited observations and impractical interpretation of law / statues, which is injustice to SEZ unit / developer and will create litigation in the Country.

In view of the AAR order, CBIC has issued clarificatory circular No. 48/22/2018-GST, dated 14.6.2018– 2018[(13) G.S.T.L.153 (C58)] to overcome the illegal discrepancy has been created by AAR Order and Clarified that supplies of goods or services or both to SEZ units / Developer to be tread as inter-State and Zero-rated supply as per section 16 of the IGST Act.2017.

ii. Taxability of Supply of services from Corporate offices to its branch offices :

Authority for Advance Rulings, Karnataka in In RE: M/s Columbia Asia Hospitals Private Limited (AAR- KAR ADRG 15/2018 dated July 27, 2018) reported in 2018(8) TMI 876..

Issue involved: Whether the activities performed by the employees at the corporate office in the course units located in the other states as well i.e. distinct persons as per Section 25(4) of the CGST Act, 2017 shall be treated as supply as per Entry 2 of Schedule 1 of the CGST Act to attract GST or it shall not be treated as supply of services as per Entry 1 of Schedule III of the CGST Act, 2017?

AAR Rulings: The activities performed by the employees at the corporate office in the course of or in relation to employment such as accounting, other administrative and IT system maintenance for the units located in the other states as well i.e. distinct persons as per Section 25(4) of the CGST Act shall be treated as supply as per Entry 2 Schedule I of the CGST Act, 2017.

The above AAR Rulings will create litigations in the cases where corporate offices rendering services to branch offices, which is contrary to earlier provision of Service Tax, wherein service tax was not applicable in case of intra-entity services and was exempted under section 66B of the Finance Act, 1994.

iii. Taxability of Supply of Services by the Government Authority :

Authority for Advance Rulings, Maharashtra In RE: Reliance Infrastructure Ltd. (AAR-11/2017/B-14-Mumbai, dated 21-3-2018) reported in 2018 (13) G.S.T.L.449 (A.A.R.-GST),

Applicant Seeking advance ruling in respect of the following:

• Whether reinstatement charges paid to Municipal Authorities would be liable to GST?
• Whether access charges paid to Municipal Authorities would be liable to GST?

Contention of the applicant: The activity restoration of roads (works contract services) provided by the Municipal Authorities satisfy condition I of Notification No.12/2017-Central Tax (Rate), dated 28-6-2017, also satisfy the condition II as local authority and satisfy condition III, Services by way of any activity in relation to any function entrusted to a Municipality under Article 243 W of the Constitution of India are exempt from levy of GST.

Rulings of AAR: The activity carried by Municipality does not qualify as construction work but only restores patches dug out by applicant and the said activity is not covered under Article 243W of the Constitution of India. Therefore, in any case no exemption available on supply of services by Government to business entities.

The above cited Ruling is very unfortunate and may be settled by the higher appellate authorities. But by this order the field formations may get opportunity to raise objection and collect illegally taxes on sovereign work perform by the Municipal Authorities across the country.

iv. Whether GST is applicable on Liquidated Damages?

 In re M/s. Maharashtra State Power Generation Co. Ltd (AAR Maharashtra), Appeal Number : NO. GST-ARA- 15/2017-18/B-30, Date of  order 08/05/2018, reported in 2018(13) G.S.T.L.177 (A.A.R.-GST),

Contention of the Applicant:

The Applicant contended that the contract entered into with the contractor gives the nature of services, the value of services and the time frame within which the services are required to be completed. The contractor undertaking the supply of service is aware of the fact that in case the services are not completed within the stipulated period, the value of contract will reduce. Since the recovery of liquidated Damages is a part of the contract. Accordingly, the value of the main supply reduces to the extent of Liquidated Damages deducted by the applicant. The payment of liquidated damages was part of the main supply and was for the purpose of re-determination of the consideration of the main supply thereby tax is not payable on liquidated damages.

AAR Rulings:

AAR has held that in terms of agreement with contractors, GST would be applicable on the Liquidated Damages. The scheduled entry No. 35 of the Notification No.11/2017-Central / State Tax (Rate) [as mended from time to time] for taxable services would cover levy of liquidated damages under HSN Code 9997 chargeable @ 18% (9% + 9%). The Authority has chosen not to follow the judgments rendered in this regard under Service Tax regime.

It may be pointed out that in common parlance and also in the light of the provisions contained in Sections 73 & 74 of the Indian Contract Act, 1872, ‘liquidated damages’ is treated as compensation and not as consideration. It is, therefore, high time that the Government should clarify the issue regarding taxability of liquidated damages under GST Act.

v. Whether tax on imports ocean freight is payable?

In re Bahl Paper Mills Ltd. (AAR Uttarakhand); Advance Ruling No. 03/2018-19; Dated-04/05/2018

Contention of the Applicant: Ocean Freight Component suffers duty twice; first instance suffers IGST @ 5% in the form of Import of Services under Reverse Charge for payment IGST on ocean freight as services and second time suffers IGST as component of Customs Duty, as IGST is levied on Ocean freight as part of CIF value of imported goods. This is clear case of “Double Taxation”, one time IGST is payable as element of Customs duty as goods and second time as IGST is liable to pay on import of services.

AAR Rulings: It is held that vide Notification No.8/2017-Integrtaed Tax (Rate), dated 28-6-2017 andNotification No.10/2017-Integrtaed Tax (Rate), 28-6-2017an importer is required to pay IGST on the ocean freight. Therefore, even if the importer has already paid IGST on CIF value imported goods, he is still required to pay IGST on ocean freight.

Therefore, it is clear of a case where an importer is being penalized to pay tax twice due to lacuna in Tax law. There is no provision to tax something as goods and as services, which is unconstitutional and beyond the scope of the GST law / Customs law and litigations will be increased instead of minimization.

12. Conclusion

To sum up, the provision of Advance Ruling has been framed by the GST law maker to minimize the litigation in the GST regime. The authority of Advance Ruling shall be deemed to be a civil court and any proceeding before the Authority to be deemed to be judicial proceedings. The order pass by the Advance Ruling Authority is binding upon the applicant and jurisdictional authority only but not applicable to any other taxpayers. The Advance Ruling Authority is certainly one of the useful dispute resolution mechanisms to settle dispute between tax payers and department. The present system of Advance Rulings orders is dissimilar and narrow scope of applicability in the GST regime. The real benefits of Advance Rulings would be available to the taxpayers with the implementation of centralize Advance Ruling Authority for the whole Nation then only AAR order will reduces the quantum of litigation in the country.