Analysis of The Applicability of The Cost of The Diesel, Engine oil, And Filters In The Light of The Karnataka Aar Ruling on 30.07.2021
Case Name: In re Goodwill Auto’s (GST AAR Karnataka)
Appeal Number : Advance Ruling No. KAR ADRG 44/2021
Date of Judgement/Order: 30/07/2021
THIS ADVANCE RULING IS COMPLETELY FLAWED
1. ANALYSIS OF THE APPLICABILITY OF THE COST OF THE DIESEL, ENGINE OIL, AND FILTERS
1.1. In the GST Law,
1.1.1. If the Parties are UNRELATED (as defined in the GST Law),
1.2. THE TRANSACTION VALUE, i.e., the value given in the Customer’s W.O./P.O., shall be accepted AS THE PRICE (TAXABLE VALUE), IF,
1.3. Such PRICE mentioned in the W.O./P.O. IS THE SOLE CONSIDERATION for the TRANSACTION.
2. This takes us to the elaborate, INCLUSIVE definition of the term “CONSIDERATION” given in the GST Law.
2.1. . It says that –
“consideration” in relation to the supply of goods or services or both includes-
(a) any payment made or to be made,
(b) whether in money or otherwise, in respect of,
(c) the supply of goods or services or both,
(d) whether by the recipient or
(e) by any other person
2.2. Thus, as per the above-given definition of the term CONSIDERATION, the amounts paid by the RECIPIENT gets into the Consideration to the Contract, because—
2.2.1. The amounts for the fuel, engine oil, and filters ARE PAID TO THE SELLERS OF THESE, IN RELATION TO THE CONTRACT.
2.2.2. These amounts paid by LIC to Goodwill Autos, by way of reimbursement of the cost of these goods, thus become an INTEGRAL COMPONENT of the Contract.
2.2.3. As a consequence—
2.2.4. The PRICE agreed to in the W.O. CEASES to be the SOLE CONSIDERATION for the Contract, and so,
2.2.5. The TRANSACTION VALUE IN THE W.O. DOES NOT REPRESENT the SOLE CONSIDERATION for the transaction.
2.3. The amounts paid by LIC for the fuel, engine oil, and the filters THUS get added to the PRICE,
2.4. the definition of Consideration DOES NOT SAY that such amounts must be paid only to the Supplier (maybe as a reimbursement, if the supplier were to buy these himself under the Contract), and
2.5. SO, THE AMOUNTS PAID BY LIC TO Goodwill Autos for THE FUEL, OIL & FILTER SUPPLIERS BECOME TAXABLE UNDER GST IN OUR HANDS AS THE SUPPLIER.
3. One may contend that the petroleum products are outside the SCOPE of GST.
4. We can find the answer to this in favour of the REVENUE in the Ruling of 21.07.2021 by the Karnataka Advance Ruling Authority (AAR) in the case of hire of a DG SET by one Goodwill Auto Co to L.I.C.
4.2. In this ruling, the AAR decided that—
4.2.1.1. For taxation under GST, only the Valuation Provisions under this Law shall apply, and
4.2.1.2. The diesel and oil supplied by LIC.
4.3. Goodwill Autos was asked to pay 18% GST (CGST—9%+SGST—9% on the COST of the diesel and Oil supplied by LIC.
5. The Karnataka Authority for Advance Ruling (KAAR) noted that the contract entered between the Applicant and the recipient is—
5.1. for the hiring of DG Set and
5.2. is a comprehensive contract, with
5.3. the consideration having a fixed component and a variable component.
5.4. The fixed component is the monthly fixed rent charged in the invoice for the DG Set and
5.5. the variable charge is the charge for the diesel used.
5.6. In this significant order, the Karnataka bench of Authority for Advance Ruling (AAR) has ruled that the cost of the diesel incurred for running diesel generator (DG) sets in the course of providing DG rental service is nothing but additional consideration for the supply of DG sets on rent as per section 15 of the CGST/KGST Act and hence attracts 18 percent GST (CGST @9 percent and KGST @ 9 percent).
5.7. “In the instant case reimbursement of diesel cost incurred for running DG Set by the recipient of service are incidental expenses and is a part of the consideration as per section 2(31) of the CGST/KGST Act, as “consideration” in relation to the supply of goods or services or both.”
6. RULING: “The cost of the diesel incurred for running DG Set in the course of providing DG Rental Service is nothing but additional consideration for the supply of DG Set on rent as per section 15 of the CGST/KGST Act and hence attracts CGST @9% and KGST @ 9%. Tags: AAR Rulings, Advance Ruling, goods and services tax, GST.”
7. MY ASSESSMENT
7.1. All the AAR Rulings, done by the GST Department Commissioners, shall naturally be mostly in favour of the REVENUE.
7.2. I did not find any AAR Ruling on this by other States. Hence this Ruling shall be the LAW throughout the country.
7.3. Even if the same question is raised for advance ruling in other states, the AARs there shall simply COPY-PASTE this Ruling of the Karnataka AAR.
7.4. The AARs do not have High Court Judges presiding, hearing and giving Rulings.
7.5. In this case this Ruling imposes artificial ENCUMBRANCES on the FREEDOM of the parties to structure the Contracts as they want, within the framework of Law.
7.6. Since the GST Appellate Tribunals ARE NOT YET FUNCTIONAL, we will not be able to TEST the legality of this Ruling in a GST Tribunal, which is equivalent to the High Courts, and specialize in GST Law cases.
8. THIS RULING NEEDS TO BE TESTED ON TWO QUESTIONS
8.1. Does the Ruling not militate against the FUNDAMENTAL RIGHT guaranteed under Article 19 (g) of our Constitution, which says–
8.1.1.Article 19 (1) (g)–All citizens shall have the right to practise any profession or to carry on any occupation, trade, or business.
8.1.2. Will the powers of the State to impose restrictions on this freedom in public interest given in Article 19(6), which says—
(6) “Nothing in sub-clause (g) of the said clause shall affect the operation of any existing law in so far as it imposes, or prevent the State from making any law imposing, in the interests of the general public, reasonable restrictions on the exercise of the right conferred by the said sub-clause”, affirm this Ruling, and
8.2. Does this Ruling violate the supreme law laid down in Article 265 of the Constitution, which says—
8.2.1. Article 265. “Taxes not to be imposed save by authority of law.No tax shall be levied or collected except by authority of law.”
8.3. The GST Acts do not have the power to levy tax on PETROLEUM PRODUCTS, which have not been included as taxable under these Acts.
8.4. Due to the unflinching opposition by all the States, petroleum products are subject to tax under the respective State VAT Laws.
8.5. Therefore—
8.5.1. Is this Ruling NOT ultra vires of the GST Law? , and
8.5.2. Since the fuel, oil, and filters have already suffered tax under the Karnataka VAT Act, can the same goods be TAXED TWICE?
10.6. In the absence of the GST Tribunals, we can only move the jurisdictional High Court to raise these questions through a WRIT under Article 226 of the Constitution, but ONLY AFTER WE SECURE THE CAUSE OF ACTION through an adverse Advance Ruling from the jurisdictional AAR, if we have a similar contract on hand.
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