Case Law Details
Global Calcium Private Limited Vs Assistant Commissioner (ST) (Madras High Court)
Introduction: In a recent judgment, the Hon’ble Madras High Court, in the case of Global Calcium (P.) Ltd. v. Assistant Commissioner, highlighted the necessity for Assessing Officers to thoroughly consider relevant aspects before issuing orders. The court remanded the case back to the Assessing Officer, setting a precedent for meticulous assessments. Madras High Court held that the Assessing Officer must consider the relevant aspects before passing any order. Therefore, the case was remanded back to the Assessing Officer.
Facts:
Global Calcium (P.) Ltd. (“the Petitioner”) was engaged in the business of supply of Bulk Drugs and Pharmaceutical Intermediaries. The Petitioner filed returns periodically. An audit was conducted of the Petitioner’s records, certain discrepancies were noticed and communicated by issuing notices. The Petitioner replied to these notices, including the show cause notice (“the SCN”) under Section 73 of the Tamil Nadu Goods and Services Tax Act, 2017 (“the TNGST Act”). Eventually, the three separate Assessment Orders (“the Impugned Orders”) were issued by the Assessing Officer (“the Respondent”) relating to financial years 2017-2018, 2018-2019, and 2019-2020 wherein three defects were dealt with:
1. suppression of purchases by not availing of available Input Tax Credit (“ITC”),
2. the payment of performance linked incentives to two persons who held office as whole-time directors of the company, and discrepancies relating to E-way bills.
3. Hence, aggrieved by the Impugned Orders, the Petitioner filed the present writ petition.
Issue:
Whether an Assessing Officer can pass an order without considering relevant aspects of the Petitioner?
Held:
The Hon’ble Madras High Court in Writ Petition No. 170 of 2024, held as under:
Observed that, the Respondent did not take into consideration the following points before passing the Impugned Order:
a. With respect to the first defect, the ITC was not claimed on account of ineligibility. By referring to discrepancies between the different returns, the proposed liability was partly confirmed and partly dropped.
b. With respect to the second defect, the Respondent examined the balance sheet, Form-16, and FORM 26AS. The expenditure incurred by the Petitioner towards remuneration and performance-based incentives would have been reflected in the profit and loss account of the Petitioner for the relevant financial years. The deduction of tax under Section 192 of the Income Tax Act, 1961 (“the IT Act”) was a material fact, but is not conclusive. Ultimately, the test is whether such remuneration was paid towards services provided as an employee of the company or whether services were provided under a contract for service for fees or other consideration.
c. Circular No. 140/10/2020-GST dated June 10, 2020 clarified that the part of the Director’s remuneration that is declared as ‘Salaries’ in the books of a company and subject to TDS under Section 192 of the IT Act is not taxable being consideration for services by an employee to the employer in the course of or in relation to his employment in terms of Schedule II of the Central Goods and Services Tax Act, 2017 (“the CGST Act”)
Held that, it is also possible that the Petitioner did not place on record all relevant documents. In these circumstances, the Impugned Orders were not sustainable and are hereby quashed. Further, the case was remanded back to the Petitioner. Hence, the writ petition was disposed of.
Our Comments:
Section 73 of the CGST Act, talks about “Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilized for any reason other than fraud or any willful misstatement or suppression of facts”. According to sub-section (1) of Section 73 of the CGST Act, mentions that where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded, or where ITC has been wrongly availed or utilized for any reason, other than the reason of fraud or any willful-misstatement or suppression of facts to evade tax, he shall serve notice on the person chargeable with tax which has not been so paid or which has been so short paid or to whom the refund has erroneously been made, or who has wrongly availed or utilized ITC, requiring him to show cause as to why he should not pay the amount specified in the notice along with interest payable thereon under Section 50 and a penalty is leviable under the provisions of the CGST Act.
Further, it is to be noted that the Assessing Officer can issue the notices only after considering all the facts presented by the Company. Without considering the same, the Assessing Officers should not issue any SCN under Section 73 of the CGST Act.
Furthermore, Directors’ remuneration is taxable only when consideration is paid by the Company, other than salary such as commission fees, sitting fees, etc. Just because in FORM 26AS the Directors’ remuneration is mentioned, the Assessing Officer without knowing that the said expenditure incurred by the Company is towards salary where TDS has been deducted under Section 192 of the IT Act, is not taxable being consideration for services by an employee to the employer in the course of or in relation to his employment in terms of Schedule II of the CGST Act.
Conclusion: The Madras High Court’s ruling in the Global Calcium case underscores the importance of Assessing Officers diligently considering all relevant aspects before passing orders. The decision provides relief to businesses facing GST assessments and sets a precedent for fair and meticulous evaluations. Companies are reminded of their right to present comprehensive documentation to support their claims during assessments.
FULL TEXT OF THE JUDGMENT/ORDER OF MADRAS HIGH COURT
In these three writ petitions, three separate assessment orders relating to financial years 2017-2018, 2018-2019 and 2019-2020 are challenged.
2. The petitioner is in the business of supply of Bulk Drugs and Pharmaceutical Intermediaries. As a registered person under GST laws, the petitioner filed returns periodically. Pursuant to an audit of the petitioner’s records, certain discrepancies were noticed and communicated by issuing notices. The petitioner replied to such notices, including the show cause notice under Section 73 of the TNGST Act. Eventually, the orders impugned in these writ petitions came to be issued.
3. In the orders impugned in these writ petitions, other than No.78 of 2024, three defects were dealt with. The first of those relates to suppression of purchases by not availing of available Input Tax Credit (ITC). The second issue, which is the principal issue, pertains to the payment of performance linked incentives to two persons who held office as whole time directors of the company. By the impugned orders, such performance linked incentive was held to be liable to GST. The third issue relates to discrepancies relating to E-way bills.
4. As regards the first defect relating to ITC, learned counsel for the petitioner submits that the purchases by the petitioner were duly reflected in the returns filed by the petitioner. To the extent indicated in the impugned orders, ITC was not claimed because the petitioner was not eligible to claim ITC in terms of Section 17(5) of the Tamil Nadu Goods and Services Tax Act, 2017. As regards the performance linked incentives to the directors, learned counsel submitted that such performance linked incentives were also paid to these whole time directors in their capacity as employees of the When payment is made to an employee, learned counsel submitted that it is part of the contract of service and such payments are not to tax under the GST regime as per Circular No.140/10/2020-GST dated 10.06.2020. In spite of placing this circular before the assessing officer and pointing out that TDS was deducted under Section 192 of the Income Tax Act, 1961 (the Income Tax Act) and not under Section 194-J thereof, learned counsel submits that the assessing officer disregarded such submissions. Therefore, he contends that the impugned orders are liable to be interfered with.
5. Mr.C.Harsha Raj, learned Additional Government Pleader, made submissions in response and to the contrary. By referring to the certificate issued by the Chartered Accountant of the petitioner, learned counsel pointed out that the said certificate demarcates the amounts paid towards salary and incentives as regards the two whole time directors for each of the relevant financial years. Since such demarcation has been made in the certificate, learned counsel submits that deduction of tax at source under Section 192 of the Income Tax Act is not conclusive with regard to whether such payment was for services provided as an employee or towards any other services provided by the said persons. He further submits that the onus is on the petitioner to place on record all relevant documents to convince the assessing officer that the petitioner is exempt from tax either in terms of Circular No. 140/10/2020-GST dated June 10, 2020 or otherwise.
6. As regards the first defect relating to ITC, the petitioner contended that ITC was not claimed on account of ineligibility. By referring to discrepancies as between the different returns, the proposed liability was partly confirmed and partly dropped.
7. With regard to the issue of directors’ remuneration, the impugned order, in relevant part, records as under:
“As regards the reply in respect of defect No.2: The verification of the balance sheet with the form 16 issued by the tax payers and the form 26AS and found no details are furnished to substantiate the claim of the tax payers and the remuneration paid the directors was examined with reference to notification No.13/2017 dated 28.06.2017 and as clarified in circular No.140/2020 and it is an incentive paid to the directors and so it is taxable under the TNGST Act 2017 and the reply is therefore rejected as not acceptable since the tax payers have not submitted any documentary evidence to prove their claim and the proposal is therefore confirmed. ”
The above extract discloses that the assessing officer examined the balance sheet, Form-16 and Form-26AS. The expenditure incurred by the petitioner towards remuneration and performance based incentives would have been reflected in the profit and loss account of the petitioner for the relevant financial years. The petitioner asserts that TDS was deducted under Section 192 and not Section 194-J of the Income Tax Act. The deduction of tax under Section 192 is a material fact, but is not conclusive. Ultimately, the test is whether such remuneration was paid towards services provided as an employee of the company or whether services were provided under a contract for service for fees or other consideration.
8. Circular No.140 dated 10.06.2020 clarifies this position by providing as under in clauses 5.1 to 5.3. thereof:
“5.1 Once, it has been ascertained whether a director, irrespective of name and designation, is an employee, it would be pertinent to examine whether all the activities performed by the director are in the course of employer-employee relation (i.e. a “contract of service”) or is there any element of “contract for service”. The issue has been deliberated by various courts and it has been held that a director who has also taken an employment in the company may be functioning in dual capacities, namely, one as a director of the company and the other on the basis of the contractual relationship of master and servant with the company, i.e. under a contract of service (employment) entered into with the company.
5.2 It is also pertinent to note that similar identification (to that in Para 5.1 above) and treatment of the Director’s remuneration is also present in the Income Tax Act, 1961 wherein the salaries paid to directors are subject to Tax Deducted at Source (‘TDS’) under Section 192 of the Income Tax Act, 1961 (‘IT Act’). However, in cases where the remuneration is in the nature of professional fees and not salary, the same is liable for deduction under Section 194J of the IT Act.
5.3 Accordingly, it is clarified that the part of Director’s remuneration which are declared as ‘Salaries’ in the books of a company and subjected to TDS under Section 192 of the IT Act, are not taxable being consideration for services by an employee to the employer in the course of or in relation to his employment in terms of Schedule II of the CGST Act, 2017.”
9. The orders impugned herein were not issued after taking the above relevant aspects into consideration. It is also possible that the petitioner did not place on record all relevant documents. In these circumstances, the impugned orders are not sustainable and are hereby quashed.
10. As a consequence, these matters are remanded for reconsideration by the assessing officer. The petitioner is granted leave to place on record any additional documents with regard to all issues dealt with in the impugned orders. Such documents shall be submitted within ten days from the date of receipt of a copy of this order. Upon receipt thereof, the respondent is directed to consider all materials on record, provide a reasonable opportunity to the petitioner and complete the reassessment n four weeks thereafter.
11. The writ petitions are disposed of on the above terms without any order as to costs. Consequently, connected Miscellaneous Petitions are closed.
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