The Perpetual journey of Long Standing Controversy of Section 9(4) read with Section 74(1) of CGST Act, 2017

The Perpetual journey of Long Standing Controversy of Section 9(4) read with Section 74(1) of CGST Act, 2017

GST Law will simplify the Indirect tax mechanism and hence the taxpayer will not be fastened with unnecessary litigation processes” – with this unanimous beacon of hope we embarked to a journey of new taxation system in 2017. It is undisputed fact that GST Law subsumed various other laws making the system less painstaking, but considering the controversy of Section 9(4) the fact that “taxpayer will not be fastened with unnecessary litigation processes under GST” may be a conjecture. This article covers the history of amendments in Section 9(4), the issues arising out such amendments. The action taken by GST Department for violation of Section 9(4) and the remedy available to taxpayers to safeguard their interest. We will also prove that though Section 9(4) was deferred and suspended by yet the taxpayer may not be completely relived from the implication of Section 9(4).

To all those are already aware about the series of amendment in Section 9(4) of CGST Act, 2017 may directly go through the Para ‘Effects of significant changes in Section 9(4) & Action taken by GST Department for such violation‘  and for those who are not completely aware about the history may go through the whole article.

1. Summary of What is Section 9(3) and Section 9(4) of CGST Act, 2017

To justify this article and for the sake of convenience in understanding the mechanism in toto, it is important to have basic understanding about Section 9(3) and Section 9(4) of CGST Act, 2017. Section 9(3) and 9(4) basically cast the liability of GST on taxpayers on Reverse charge mechanism. Reverse charge mechanism is a mechanism under which receiver/recipient of goods/services is liable to pay tax. In layman terms, a taxpayer is liable to pay GST tax on expense/purchase bill. Basically, Section 9(3) of CGST Act, 2017 cast RCM liability on the nature of supply and/or supplier and Section 9(4), cast RCM liability on registered person for supply of good or services from unregistered person.

2. History of Amendments in Section 9(4) through various notifications

In nutshell, Section 9(4) of CGST Act, 2017 prescribed that liability of GST under RCM is to be paid by the registered person in case of supply of goods or services from unregistered person. Therefore, the business trade with unregistered stops if a registered person has to pay tax on such purchase/expenses. Since this provisions are harsh and it takes time for the industry to practically implement it, the Section has been deferred and suspended from time to time by the Government. Let’s quickly look into the date wise history of Section 9(4) along with the relevant notification as under: –

Period Before the applicability of GST Act i.e. Before 01 July 2017: –

Provision of Section 9(4) of the CGST Act, 2017 was proposed to be enacted wherein all the purchase of goods or services from unregistered person will be liable to tax under RCM. There was hue and cry in the industry for the applicability of such harsh RCM provisions. Therefore, notification no. 8/2017 dated 28^th June 2017 was made applicable.

28^th June 2017 – notification no. 8/2017 dated 28^th June 2017 applicable with effect from 01^st July 2017: –

All transactions with unregistered dealers taxed under RCM if the limit of inward supply from unregistered dealers exceeds Rs 5000 Per day. Therefore it the value of supply of goods or services exceeds five thousand Rupees per day to a Registered. Then registered person was liable to pay RCM on such inward supplies.

13^th October 2017 – Notification no. 38/2017 applicable with effect from 13^th October 2017: –

By virtue of above mentioned notification the provision of Section 9(4) was deferred till 31^st day of March 2018 i.e RCM was not applicable in case of inward supplies of good or services from unregistered dealers, irrespective of limit till 31^st March 2018.

23th March 2018 – Notification no. 10/2018 applicability of notification is not relevant

By virtue of above mentioned notification the provision of Section 9(4) was further deferred till 30^th June 2018 i.e RCM was not applicable in case of inward supplies of good or services from unregistered dealers, irrespective of limit till 30^th June 2018.

29^th June 2018 – Notification no. 12/2018 applicability of notification is not relevant

By virtue of above mentioned notification the provision of Section 9(4) was further deferred till 30^th September 2018 i.e RCM was not applicable in case of inward supplies of good or services from unregistered dealers, irrespective of limit till 30^th September 2018.

06^th August 2018 – Notification no. 22/2018 applicability of notification is not relevant

By virtue of above mentioned notification the provision of Section 9(4) was further deferred till 30^th September 2019 i.e RCM was not applicable in case of inward supplies of good or services from unregistered dealers, irrespective of limit till 30^th September 2019.

29^th August 2018 – CGST Amendment Act, 2018 was passed – amendment to Section 9(4) was made – but the applicability of same was not prescribed.

The basic purpose of this amendment is to specify the class of person or nature supplies received from unregistered person will be taxable under RCM GST i.e. all supplies from unregistered dealers will not be taxable under RCM but Government may prescribe the nature of supplies or class of person procuring such supplies for taxability.

29^th January, 2019 – Notification no. 1/2019  & 2/2019 dated 29^th January, 2019 applicable w.e.f 01^st February, 2019

By virtue of above Notification no. 1/2019 – notification 8/2017 was rescind. Therefore, all the previous discuss about RCM payable were withdrawn.

By virtue of above notification 2/2019 – New Provision i.e the Amendment in Section 9(4) was made applicable. However, the nature of supplies and the class of person was not Prescribed.

29^th March, 2019 – Notification no. 7/2019 applicable with effect from 01^st April 2019

By virtue of above notification RCM Provision was made applicable if Promoter i.e. Real Estate developer purchase prescribed goods from unregistered dealer for real estate project. We are not into the details of such notification at this juncture.

3. Effects of significant changes in Section 9(4) & Action taken by GST Department for such violation: –

1. RCM for Purchase from unregistered dealers for the period from 01.07.2017 to 12.10.2017 will be taxable under section 9(4) of CGST Act, 2017. Therefore, taxpayers were liable to pay tax on reverse for purchase from unregistered dealers during the period 01^stJuly 2017 to 12^th October, 2017 if the limit of inward supply from unregistered dealers exceeds Rs 5000 Per day.

2. Since there was so much confusion for the applicability of Section 9(4) and the provisions were harsh for the small and medium sized taxpayers to implement, many of them have not paid the tax liability on such transaction for purchase from unregistered dealers.

3. GST Audit is being conducted for various entities by GST department and also GST Proceeding are initiated for various entities. The Department is particularly verifying the compliance of Section 9(4) for the period from 01^stJuly 2017 to 12^th October 2017. If non-compliance of Section 9(4) is noted by the department then Section 74(1) is invoked by the department. By invoking Section 74(1) of CGST Act, 2017 the taxpayer is liable to the maximum penalty of 100% of tax amount. Therefore, the taxpayer is exposed to the risk of 100% Penalty of tax amount for violation of Section 9(4) for the period from 01^st July, 2017 to 12^th October 2017.

4. Before we discuss the remedy available to taxpayer for Section 74(1) of CGST Act, 2017 it is import to understand Section 74(1) therefore the said section is reproduced as under: –

(1) Where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded or where input tax credit has been wrongly availed or utilised by reason of fraud, or any wilful-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 utilised input tax credit, 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 equivalent to the tax specified in the notice.

(2) The proper officer shall issue the notice under sub-section (1) at least six months prior to the time limit specified in sub-section (10) for issuance of order.

(3) Where a notice has been issued for any period under sub-section (1), the proper officer may serve a statement, containing the details of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised for such periods other than those covered under sub-section (1), on the person chargeable with tax.

(4) The service of statement under sub-section (3) shall be deemed to be service of notice under sub-section (1) of section 73, subject to the condition that the grounds relied upon in the said statement, except the ground of fraud, or any wilful-misstatement or suppression of facts to evade tax, for periods other than those covered under sub-section (1) are the same as are mentioned in the earlier notice.

(5) The person chargeable with tax may, before service of notice under sub-section (1), pay the amount of tax along with interest payable under section 50 and a penalty equivalent to fifteen per cent. of such tax on the basis of his own ascertainment of such tax or the tax as ascertained by the proper officer and inform the proper officer in writing of such payment.

(6) The proper officer, on receipt of such information, shall not serve any notice under sub-section (1), in respect of the tax so paid or any penalty payable under the provisions of this Act or the rules made thereunder.

(7) Where the proper officer is of the opinion that the amount paid under sub-section (5) falls short of the amount actually payable, he shall proceed to issue the notice as provided for in sub-section (1) in respect of such amount which falls short of the amount actually payable.

(8) Where any person chargeable with tax under sub-section (1) pays the said tax along with interest payable under section 50 and a penalty equivalent to twenty-five per cent. of such tax within thirty days of issue of the notice, all proceedings in respect of the said notice shall be deemed to be concluded.

(9) The proper officer shall, after considering the representation, if any, made by the person chargeable with tax, determine the amount of tax, interest and penalty due from such person and issue an order.

(10) The proper officer shall issue the order under sub-section (9) within a period of five years from the due date for furnishing of annual return for the financial year to which the tax not paid or short paid or input tax credit wrongly availed or utilised relates to or within five years from the date of erroneous refund.

(11) Where any person served with an order issued under sub-section (9) pays the tax along with interest payable thereon under section 50 and a penalty equivalent to fifty per cent. of such tax within thirty days of communication of the order, all proceedings in respect of the said notice shall be deemed to be concluded.

Explanation 1.—For the purposes of section 73 and this section,—

(i) the expression “all proceedings in respect of the said notice” shall not include proceedings under section 132;

(ii) where the notice under the same proceedings is issued to the main person liable to pay tax and some other persons, and such proceedings against the main person have been concluded under section 73 or section 74, the proceedings against all the persons liable to pay penalty under sections 122, 125, 129 and 130 are deemed to be concluded.

Explanation 2.––For the purposes of this Act, the expression “suppression” shall mean non-declaration of facts or information which a taxable person is required to declare in the return, statement, report or any other document furnished under this Act or the rules made thereunder, or failure to furnish any information on being asked for, in writing, by the proper officer.

5. Basically Section 74(1) of CGST Act, 2017 covers the situations where in the tax is short paid, not paid, Credit wrongly availed or utilised or erroneously refund with the intent to evade the payment of Tax by way of fraud, collusion or wilful misstatement.

6. Show cause notices are being issued by the GST Department for violation of Section 9(4) by invoking Section 74(1) of CGST Act, 2017 wherein maximum penalty of 100% amount of tax can be charged. Further Section 74(1) provides for the reduced penalty, the details of which are as under: –

• • 15% Penalty of Tax amount – If Tax, interest and penalty is paid before the issue of Show cause notice
  • 25% Penalty of Tax amount – If Tax, interest and penalty is paid within 30 days of issue of show cause notice. Generally, the taxpayer is also required to reply to show cause notice issued within 30 to the relevant officer
  • 50% Penalty of Tax amount – If Tax, interest and penalty is paid within 30 days from the communication of order
  • In any other case – 100% Penalty of Tax amount is charged

4. Remedy available to Tax payers in case of violation of Section 9(4) r.w Section 74(1) of CGST Act, 2017

Now the question is what should taxpayer do if Department has invoked Section 74(1) for non-compliance of Section 9(4). Following question may arise: –

• Should taxpayer pay the tax along with interest before the issue of Show cause notice and take the remedy available under Section 74(1) for reduced penalty?

Or

• Should the taxpayer go ahead and defend his case before various authorities of GST? – The risk here is if the tax payer will lose the case then he is exposed to 100% Penalty risk.

According to my personal opinion – the tax payer is not liable to pay penalty under Section 74(1) of CGST Act, 2017. The taxpayer may take the ground of : –

• Revenue neutrality and/or
• question of interpretation of Law and
• a bona fide belief for no liability of tax

to get remedy. It is to be noted that for such scenario – the taxpayer is advise to assess the cost of litigation vis-à-vis the tax, interest and penalty involved and thereby take decision because such cases reach to the level of justice before Tribunal. Hence, the journey of litigation may be long. Alternatively, department may issue the direction to the officers for directly giving relief to taxpayers from Section 74(1) of CGST Act, 2017.

Section 74(1) of CGST Act, 2017 is similar to Section 78 of Finance Act, 1994 and Section 11A of Central Excise Act, 1944 & Section 28 of Customs Act, 1962. Considering the Principle elicited by various courts and bench for such similar case in the previous law, the tax payer may take the ground of such cases to safeguard themselves from the harsh action being taken by the department.

Ground 1: – Revenue Neutrality

There are plethora of Judgements; that Section 78 of Finance Act, 1994 cannot be invoked in the case of Revenue neutrality. Consequential tax liability on account of Section 9(4) is also revenue neutral for Government because the moment taxpayers pay the tax under RCM, he or she is eligible to take the credit of such tax paid and hence the ground of revenue neutrality is a strong position of taxpayer. I am highlighting certain judgement given by various authorities in favour of assesse for revenue neutral matters: –

• Decision given by Hon’ble CESTAT, Mumbai Bench in case of Cadbury India Limited V. Commissioner of Service Tax, Mumbai dated January 11, 2017; the relevant para of the said decision “In the instant case appellant has already paid entire tax liability along with interest, hence, the provisions of section 73(3) gets attracted in instant case. Looking at the case from yet another angle, the entire exercise of demand of tax on reverse charge is a revenue neutral situation. Undoubtedly the appellant could have availed the CENVAT credit of the service tax paid under reverse charge mechanism, which would mean that there may be no intention on the part of the appellant not to discharge the service tax liability on the amount paid as royalty and technical know-how fees. Revenue neutrality is a defense that could be claimed for non-imposition of penalty”

• Decision given by Hon’ble CESTAT, Ahmedabad Bench in case of Endeka Ceramics India P. Ltd dated December 20, 2012; the relevant para of the said decision “Obviously show-cause notice has been issued invoking suppression of facts and therefore we have to see whether in the facts and circumstances of this case suppression of fact or mis-declaration could be alleged. Obviously the Assistant Commissioner had visited the unit before the commercial operations had started and advised them to pay which was readily accepted. This coupled with the fact that appellants did not have qualified staff and they paid the Service tax after the amounts were paid by them for the services received from time to time discharged the liability in full which is not in dispute would show that extended period could not have been invoked in this case. Moreover entire duty liability was discharged by July, 2008, which is less than nine months from the visit of the officer which would again show that the payment was made promptly without any delay. Having regard to these facts and having regard to the fact that appellant was eligible for Cenvat credit, we find that this was a case where provisions of Section 73(3) was applicable and no show-cause notice should have been issued. Further we also find that this is a case where appellants have been able to show reasonable cause for non payment of the tax even if it is assumed that there was delay in payment in view of the revenue-neutral situation and lack of availability of qualified staff. In view of the above, we find that the penalty imposed on the appellant cannot be sustained and has to be set aside”

• Decision given by Hon’ble CESTAT, Chandigarh Bench in case of Fermanta Biotech Limited V. Commissioner of Central Excise, Chandigarh dated May 4, 2016; the relevant para of the said decision “find that in this case the appellant is receiving services from foreign based commissions agent located outside India and the appellant was required to pay services under reverse charges mechanism. It is not a case where the appellant is providing some service and required to pay service tax thereon. In that circumstances, benefit of doubt goes in favour of the appellant, therefore, the charges of suppression of facts cannot be alleged on the appellant. In that circumstances, provisions of section 73(3) of the Finance Act, 1994 are attracted to the facts of this, therefore, no show cause notice was required to be issued to the appellant. In these circumstances, penalty imposed on the appellant under Section 78 of the Finance Act, 1994 is set aside”

• Decision given by Hon’ble CESTAT, Ahmedabad Bench in case of Kanchan International Limited V. Commissioner of Central Excise, Daman dated March 20, 2013; the relevant para of the said decision “I find that appellant’s contention as to the revenue neutrality is on a strong wicket, inasmuch as it is undisputed that the appellant is manufacturing the final products on which excise duty liability is discharged. The appellant can avail the Cenvat credit on the amount of service tax paid by him under reverse charge mechanism. I find that the revenue neutrality is a strong ground which can be taken for setting aside the imposition of penalty. I find that the appellant has made out a case for setting aside the penalty imposed under Section 78 on the ground of revenue neutrality and accordingly I set aside the penalties imposed by the lower authorities under Section 78 on tax liability of Rs. 45,286/-“

• Similar decisions has been given in case by CESTAT Bench, Bangalore in case of Mangal Industries Limited V. Commissioner of Central Excise, Customs & Service Tax, Tirupati dated December 24, 2014; by CESTAT Chennai Bench in case of RKN & Co. (Branch) V. Commissioner of Central Excise Madurai dated August 24, 2012; SRF Ltd. V. Commissioner of Central Excise, Chennai dated March 13, 2007; by Thai Airways International Public Co. Ltd. V. Commissioner (Adjn) Central Excise, Delhi. Each of such judgement elicit the Principle that in case of Revenue neutral transaction Section 74(1) of CGST Act, 2017 cannot be invoked.

Ground 2: – Bonafide belief of not liability

The taxpayer may take the ground that the year in which epoch-making concept of GST was implemented across the country. India was in threshold of new taxation system. It’s a universal concept that new things get time to settle; and the new law and taxation system is no exception to that universal fact. Further 9(4) of CGST Act, 2017 is in long standing controversy, the government itself has kept section 9(4) in abeyance till date from inception. Various notifications i.e 8 notifications and a amendment in section itself was done by Government for Section 9(4) and therefore charging 100% penalty under section 74(1) to a businessman for the violation of section 9(4) is impractical. To conclude that the tax payer has malice in his mind with the intent to evade the payment of tax is a mere conjecture and surmise. The Taxpayer may take the reliance of following decisions given by various authorities: –

Decision of Hon’ble CESTAT Mumbai in case of Sanghavi Land Developers Pvt Ltd. V. CCGST Mumabi East dated 21^st February, 2019 wherein it held that: –

“In the present matter, the Appellants were under a bona fide belief that they were not liable to pay Service Tax for construction services. The conduct of the appellant of prompt payment of Service Tax immediately after gaining knowledge about its liability to pay Service Tax, is sufficient reason to believe that the appellant did not have an intention to evade the payment of Service Tax. Therefore, considering the overall facts and circumstances of the case, while upholding the interest liability u/s.75 ibid, I find that Section 80 ibid can be invoked for waiver of penalty imposed on the appellant. Accordingly, I waive the penalty imposed on the appellant under Section 78, invoking the provisions of Section 80 of the Finance Act, 1994. The appeal is disposed of accordingly”

Further reliance is placed on Decision given by Delhi High Court in case of Bharat Hotels Limited V. Commissioner, Central Excise (Adjudication) dated 29.11.2017 – there relevant para is as under: –

“……….The absence of any material disclosing intent to evade payment of service tax by the appellant is evident by the fact that it promptly made all the payments pertaining to service tax liability with respect to Mandap Keeper Service and Management, Maintenance and Repair Service as soon as the appellant became aware of the same (during the enquiry) and continued to pay service tax thereafter. The authorities are unanimous that to invoke

the extended period under cognate provisions (such as Section 11A of the Excise Act or Section 28A of the Customs Act) the burden is cast upon it to prove suppression of fact. The Revenue has not been able to prove an intention on the part of the appellant to evade tax by suppression of material facts. In fact, it is clear that the appellant did not have any such intention and was acting under bonafide beliefs. For these reasons, it is held that the revenue cannot invoke the proviso to Section 73(1)”

Therefore, reproduce the extract of Para from the judgement given by CESTAT, Mumbai in case of Rohan Builders (India) Private Limited Vs. CCE & ST, Pune I as under: –

the basic purpose of audit is to find out irregularity which might not have gone to the notice of the assessee and advise them for prompt discharge of tax liability and the same is a participatory process. In such a situation, it cannot be said that there was any intention to suppress tax liability by the appellant since it has subjected its accounts statement to the scrutiny of the audit party. It has been held by the Hon’ble Apex Court in the case of Uniworth Textiles Ltd. (2013) TIOL 13, though pronounced in ST/85691, 85689/2018 reference to Section 28 of the Customs Act. It was held in the said judgment –

“The conclusion that mere non-payment of duties is equivalent to collusion or wilful misstatement or suppression of facts is, in our opinion, untenable. If that were to be true, we fail to understand which form of non-payment would amount to ordinary default? Construing mere non-payment as any of the three categories contemplated by the proviso would leave no situation for which, a limitation period of six months may apply. In our opinion, the main body of the Section, in fact, contemplates ordinary default in payment of duties and leaves cases of collusion or wilful misstatement or suppression of facts, a smaller, specific and more serious niche, to the proviso. Therefore, something more must be shown to construe the acts of the appellant as fit for the applicability of the proviso.”

Judgement given by Punjab High Court in case of M/s Grasim Bhiwani Textile Limited (Unit Bhiwani Textile Mills) BTM Road, Birla Colony, Bhiwani Vs. Commissioner Central Excise Commissionerate, SCO No.6, Sector 1, Rohtak dated 15.05.2018 wherein it is held that: –

“Next question to be considered is imposition of penalty. Interestingly, it is stated in the show cause notice that the same is issued invoking the extended period of limitation. As per records, the department has come to know about wrongful availment of credit and informed the appellants the same on 09.08.2007. The show cause notice is dated 24.01.2008 for which in our view is within the period of limitation. We do not find any ground necessary for invoking the extended period of limitation. Be that as it may, the contention of the appellant that there was no suppression of facts or willful mis-statement is not without force. On 04.07.2006, the appellants have written letter explaining the manner of availing the credit of inputs, capital goods and input service. Further, when the department called for to furnish the details regarding availment of credit, the appellants had furnished the same. On such score, we hold that the respondents have miserably failed to establish suppression or mis-statement with intention to evade payment of duty on the part of the appellants. Pursuant to the above reason, we are of the considered view that the imposition of penalty is unwarranted”. Further we place our reliance on decision given by Hon’ble supreme court in case of Pushpam Pharmaceuticals Company Vs Collector of Central Excise wherein it is held that “4… The meaning of the word both in law and even otherwise is well known. In normal understanding it is not different that what is explained in various dictionaries unless of course the context in which it has been used indicates otherwise. A perusal of the proviso indicates that it has been used in company of such strong words as fraud, collusion or willful default. In fact it is the mildest expression used in the proviso. Yet the surroundings in which it has been used it has to be construed strictly. It does not mean any omission. The act must be deliberate. In taxation, it can have only one meaning that the correct information was not disclosed deliberately to escape from payment of duty.”

Similar view has been held in case by Hon’ble Supreme court in case of Union Of India vs M/S Rajasthan Spinning & Weaving dated 12 May, 2009; in case of Mahadev Logistics, Vs Customs and Central Excise Settlement Commission by Chhattisgarh High Court.

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The above mentioned views are personal. The taxpayer is required to tax Professional advice in the matter of litigation. No decision shall be taken on the basis of above mentioned information. The author assumes no liability for the decision taken based on above mentioned information. For any queries the author can be reach at info@fibota.com or keval@sonechaandamlani.com