In previous part of this article, we discussed issue of denial of ITC to recipient for the fault of supplier.
I also gave list of the topics that I wish to cover in this series. The list is as under
1. Denial of input tax credit to recipient and recovery from him if supplier fails to pay tax to Government. ( section 16)
2. Some issues on blocked credit under section 17(5).
3. Is it appropriate to deny renovation of cancellation of registration saying that the taxpayer has wrongly availed ITC under section 30?
4. Can powers given under Rule 86A be exercised in all situations and electronic credit ledger of a taxpayer be blocked for a period exceeding one year?
5. Is it compulsory to provide personal hearing to the taxpayer if adverse order is to be passed?
6. Is there any limitation on exercise of powers of provisional attachment of assets under section 83?
7. If tax is wrongly paid and refund for the same is applied, will time limit given under section 54 be applicable?
8. If taxpayer has made pre deposit under section 107(6), can recovery proceedings be continued against him?
9. In which situations proceedings under section 129 be initiated and in which cases we can say that the use of section 129 is not appropriate.
10. Can assessment of non filers of return be made on any basis deem appropriate by GST officer under section 62?
As we have discussed first point in previous part, let us understand the provisions from issue number 2
2. Some issues on blocked credit under section 17(5)
It is interesting to discuss the issues of blocked credit under section 17(5). The rationale of section 17(5) is that even if all the provisions of section 16 are fulfilled, credit of supplies mentioned under section 17(5) shall not be available to taxpayer. This is based on the concept of “ Parliamentary wisdom”, which means that parliament has wisdom to draft law in a manner in which it is drafted. Questions are raised as to the constitutional validity of section 17(5). It is believed by some that it violates Article 14 of the constitution which gives “equality before law” as fundamental right.
However, as held by Supreme Court, before court can hold that a provision is in violation of Article 14 of the constitution, it needs to satisfy itself whether the provision discriminates taxpayers or it only creates a classification. In case, it is only a classification of taxpayers and due to some understandable reason, credit for some supplies are blocked under section 17(5), then we cannot say that the provision violates Articles 14 of the constitution. It should be left to the wisdom of parliament whether or not to allow Input tax credit in some cases.
Having discussed the constitutional aspect of the provision of section 17(5), I need to accept that there are many areas in section 17(5), which can invite litigations. We will discuss some of the areas of this section where court rulings are available.
Blocked credit in respect of works contract service and other goods and services used for construction of immovable property.
We need to discuss clause (c) and (d) of section 17(5) together to understand this denial of ITC under section 17(5). They are reproduced below-
(c) works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service;
(d) goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.
Explanation.––For the purposes of clauses (c) and (d), the expression “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property.
For clause c let us understand the meaning of “works contract”.
As per section 2 (119) of CGST Act “works contract” means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract.
It is important to note that a contract can be a works contract only when it is in relation to an immovable property. Tax paid on input service of work contract is allowed only when it is used as input service for further outward supply of works contract. So here the input and output service should be of the same category ( I.e both should be works contract service) to be eligible to get input tax credit.
Instead of taking service of works contract, it is also possible that a person himself purchases goods and services separately and constructs immovable property on his own. Here also clause (d) blocks input tax credit. For example, a person purchases goods for construction of his factory building, in this situation ITC of the goods purchased or services received for construction of the factory building shall not be available.
There are certain common points that we need to discuss-
1. Meaning of Immovable property
The credit which is blocked here is for construction of immovable property. Here the question arises as to what is called immovable property? The phrase “immovable property” has not been defined under GST Act.
Section 3(26) of the General Clause Act, 1847 defines immovable property as
“Immovable property shall include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth”.
Hence the test for any property to be classified in to immovable property is its permanent fastening or attachment to earth. What is the meaning of permanently attached to earth? Supreme Court has held that if a property cannot be removed from its place without causing substantial damage to it then it is considered as immovable property.
Let’s take an example of lift being installed in a building. Whether it will be plant and machinery or immovable property? A lift permanently installed to building becomes integral part of the building (immovable property).
2. Meaning of construction
Explanation to these clauses mentions that expression “construction” includes re-construction, renovation, additions or alterations or repairs to the extent of capitalisation, to the said immovable property. Here the treatment of the expense in the books of accounts becomes important. If expense is capitalised to the immovable property than the credit is blocked, but if the expense is charged off to profit and loss accounts then the credit is not blocked. For example Mr. A carries out repair of his factory building and this expense is not capitalised by him in his books of accounts but has been charged off to profit and loss account. In this situation he can take ITC of tax paid by him on goods or services used for such repair.
It shall not be out of place to mention that as per Accounting standards any repairs or improvement expenditure incurred after the asset is ready to use can be capitalised on the asset only if such expenditure results into increase in the capacity of the asset. If this condition is not fulfilled then the expense should be charged off to profit and loss account.
3. Meaning of plant and machinery
As per explanation to section 17(5), the expression “plant and machinery” means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes—
i) Land, building or any other civil structures;
ii) Telecommunication towers; and
iii) Pipelines laid outside the factory premises.
From the explanation, readers can observe that the plant and machinery when fixed to earth does not lose input tax credit. The foundation or structural support for fixing the machinery to earth will also be included in plant and machinery and shall be eligible for input tax credit. Further, telecommunication towers and pipelines laid outside the factory premises are also excluded from the definition of plant and machinery and ITC on them shall be blocked.
Though the issue is pending before honourable Supreme Court, it is relevant here to discuss Orissa High Court Judgement in case of Safari Retreats Private Limited Vs Chief Commissioner of Central Goods & Service tax. In this case, the petitioner Safari Retreats Pvt Ltd was in the business of construction of Malls. As argued by the petitioner, after completion of the construction of Malls, shops and showrooms of the mall were given on rent. Petitioner needs to pay GST on the Rents collected but due to provisions of section 17(5)(d), it cannot get ITC of the goods and/or services used for construction of the mall. The argument of the petitioner was had he constructed the mall for selling the same then he would have been eligible for ITC, but as the mall is used for being let out, section 17(5)(d), does not allow the petitioner to take ITC. Hence, such provision is discriminatory as being arbitrary, unreasonable and violative article 14 of the constitution.
Orissa high court accepted contention of the petitioner that he is at huge loss due to non availment of ITC on construction of Mall. To allow him the ITC, honourable high court used “ Doctrine of Reading Down”. In my previous article, I explained the concept of “ reading down” used by courts.
In Delhi Transport Corporation v. DTC Mazdoor Congress AIR 1991 SC 101, a Constitution Bench of the Supreme Court explained in which cases the doctrine of reading down of statutes be used to save their constitutionality. It Held as under-
“The doctrine of reading down or of recasting the statute can be applied in limited situations. It is essentially used, firstly, for saving a statute from being struck down on account of its unconstitutionality. It is an extension of the principle that when two interpretations are possible–one rendering it constitutional and the other making it unconstitutional, the former should be preferred. The unconstitutionality may spring from either the incompetence of the legislature to enact the statute or from its violation of any of the provisions of the Constitution. The second situation which summons its aid is where the provisions of the statute are vague and ambiguous and it is possible to gather the intention of the legislature from the object of the statute, the context in which the provision occurs and the purpose for which it is made. However, when the provision is cast in a definite and unambiguous language and its intention is clear, it is not permissible either to mend or bend it even if such recasting is in accord with good reason and conscience. In such circumstances, it is not possible for the Court to remake the statute. Its only duty is to strike it down and leave it to the legislature if it so desires, to amend it. If the remaking of the statute by the courts is to lead to its distortion that course is to be scrupulously avoided.
The doctrine can never be called into play where the statute requires extensive additions and deletions.The Courts, though, have no power to amend the law by process of interpretation, but do have power to mend it so as to be in conformity with the intendment of the legislature. Doctrine of reading down is one of the principles of interpretation of statute in that process. But when the offending language used by the legislature is clear, precise and unambiguous, violating the relevant provisions in the constitution, resort cannot be had to the doctrine of reading down to blow life into the void law to save it from unconstitutionality or to confer jurisdiction on the legislature.”
Readers can understand from above noting of constitutional bench of honourable Supreme Court that the doctrine of Reading Down is used by courts to save a provision from being struck down where there is a serious challenge to its constitutionality. Court will prefer giving it such an interpretation that it cannot be interpreted as being violative of constitution. However, where the language of a provision is absolutely clear and there is no room of different interpretation, then court will have no option to give it a different interpretation. In this situation if the clear interpretation of the provision is against the vires of the constitution then court will have only one option left, which is to strike it down.
In case of Safari Retreats Private Limited Vs Chief Commissioner of Central Goods & Service tax, Orissa High Court rejected the narrow interpretation that the ITC cannot be allowed on supplies received for construction when the mall is let out. It allowed the petitioner to avail such ITC. However, Orissa High Court refused to strike down the provision.
Here, a question still remains whether “Doctrine of Reading Down” be used in case of section 17(5)(d) considering the ratio laid down by constitutional bench of Supreme Court in case of Delhi Transport Corporation v. DTC Mazdoor Congress AIR 1991 SC 101? Isn’t the language of section 17(5)(d) absolutely clear leaving no room for reading down? This question shall be answered by honourable Supreme Court in the times to come.
Blocked credit for Goods lost, stolen, destroyed, written off or disposed of by way of gift or free sample.
Section 17(5)(h), blocks credit in respect of goods lost, stolen, destroyed, written off or disposed of by way of gift or free sample. Similar concept was also existing in erstwhile Cenvat Credit Rules, 2004.
For example, A Ltd. purchased 100 units at Rs. 10 per unit from B Ltd. GST Rate being 18%. Out of these 100 units it gave 30 units as free sample to its customer C Ltd.
A Ltd. is required to reverse ITC of following amount:-
Units = 30
* Price = 10
330 * GST Rate 18%= 54
ITC of Rs. 54 needs to be reversed.
Above mentioned provisions are applicable to free samples and gifts. However, there might be a sales promotion scheme like buy one get one free. For example, buy one toothpaste and get a toothbrush free. In this situation, it is wrong to apply provisions of blocked credit and to conclude that the toothbrush is supplied free. In fact, the toothbrush is not supplied free but its price is included in the price of toothpaste. Hence, it can be considered as a mixed or composite supply and there is no need to reverse ITC on such transaction. Same view is expressed in Circular No. 92/11/2019-GST dated 07th March, 2019.
Recently an interesting judgement has been given by Madras High Court in case of M/S. ARS STEELS & ALLOY INTERNATIONAL PVT. LTD. VERSUS THE STATE TAX OFFICER, GROUP – I, INSPECTION, INTELLIGENCE – I, CHENNAI (2021 (6) TMI 957 ). In this case a question was asked whether loss arising due to manufacturing process shall be covered under section 17(5)(h)?. Court held that the loss that is occasioned by the process of manufacture cannot be equated to any of the instances covered by section 17(5)(h)
Madras high Court relied on the Judgement In the case of M/S. RUPA & CO. LIMITED, TIRUPUR VERSUS THE CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL, THE COMMISSIONER OF CENTRAL EXCISE [2015 (9) TMI 293 – MADRAS HIGH COURT], In that case, a certain amount of input had been utilised by the assessee, whereas the input in the finished product was marginally less. The department proceeded to reverse the cenvat credit on the difference between the original quantity of input and the input in the finished product.
In the words of Madras High Court “The reversal of ITC involving Section 17(5)(h) by the Revenue, in cases of loss by consumption of input which is inherent to manufacturing loss is misconceived, as such loss is not contemplated or covered by the situations adumbrated under Section 17(5)(h).”
Analysis of some of the other questions with latest judgements shall be taken in Part-3…