Is Rule 89(4)(c) ‘ultra-vires’ to provisions of GST law and ‘unconstitutional’?
Yes, the Hon’ble Karnataka High Court in M/s Tonbo Imaging India Pvt Ltd v. Union of India [W.P.C No. 13185 of 2020] (T-RES) dated February 16, 2023] has held that Rule 89 (4)(c) of the Central Goods and Service Tax Rules, 2017 (CGST Rules) which restricts the exports made without payment of tax (i.e., under Letter of Undertaking model (LUT Model)) to 1.5 times value of like goods supplied domestically is unconstitutional and ultra vires of the provisions of the GST law.
Author’s Comments:
The Hon’ble Karnataka High Court has correctly struck down Rule 89(4)(C) of CGST Rules, 2017 as amended vide notification no. 16/2020- central tax dated 23/03/2020 for being ultra vires the provisions of section 16 of IGST Act, 2017 & Section 54 of CGST Act, 2017 read with section 164 of CGST Act,2017 being violative of Articles 14 and 19(1)(g) of the constitution. Additionally, the provision is arbitrary, unreasonable & vague. This is a big relief for the exporters claiming refunds for those who export via the LUT model and do not supply domestically special purpose or customized products. It would be interesting to note how the courts will respond to another draconian rule i.e.
Rule 96(10) of the CGST Rules,2017.
The government is yet to clear its stand on striking down Rule 89(4)(C) and its future recourse.
Page Contents
- Is the order passed by the Proper officer for the cancellation of GST registration without the due opportunity, arbitrary?
- Can the registration be canceled on the ground that the taxpayer was nonexistent at its place of business?
- Is the Allegation of availing of Fake Credit a ground for rejecting the Refund applications unless it is established?
- Where the errors committed are inadvertent, is the rectification of returns allowed?
- Is the attachment of Bank Accounts, a draconian Step?
- Does the Professional services provided to an overseas entity, amount to intermediary services?
- Are the Liquidated damages liable to GST?
- Can the GST on intermediary services be levied under CGST Act, 2017 and Maharashtra GST Act, 2017?
- Reimbursable expenses to be included in the taxable value of the Service?
- A Procedural lapse cannot be the basis to deny a Service Tax refund, defeating the object of SEZ: CESTAT
- Can the Central Government by way of notification, withdraw the exemption that was earlier available to a distinct class?
- Supply of pre-packaged and Labelled Rice up to 25 Kgs, to the factory of the exporter attracts 5% GST: Haryana AAR
- Does the transaction of Transfer/Sale of one of the independent running business divisions attracts GST?
Is the order passed by the Proper officer for the cancellation of GST registration without the due opportunity, arbitrary?
Yes, the Hon’ble Karnataka High Court in the matter of UMMER FAROOQ V. SUPERINTENDENT OF CENTRAL TAX [WRIT PETITION NO. 4985 OF 2023] (T-RES) dated March 30, 2023, has held that the cancellation of GST registration was without the due opportunity and was arbitrary. The Petitioner was allowed only four days to produce documents and the Order of cancellation of GST registration was passed before Petitioner could furnish his bank documents and other records to demonstrate that all his transactions were supported by proper invoices, e-way bills, and bank records, therefore the due opportunity to show cause against the cancellation of GST registration was denied to the petitioner.
The court directed the petitioner to file returns within a period of four weeks from the date of receipt of a certified copy, and if the returns are filed accordingly, the respondent shall pass suitable orders for the revocation of cancellation within a period of two weeks.
Can the registration be canceled on the ground that the taxpayer was nonexistent at its place of business?
No, The Hon’ble Delhi High Court in the matter of Ajay Kumar Jindal V. Superintendent, Ward 71 Central Goods and Services Tax, [W.P.(C) NO. 258 OF 2023] dated March 23, 2023, has set aside the order for cancellation of registration Where material on record indicates that the petitioner was carrying on its business from its principal place of business in Delhi and had shifted it to Haryana and there was no allegation that taxpayer had obtained its registration by means of fraud, will full misstatement.
Is the Allegation of availing of Fake Credit a ground for rejecting the Refund applications unless it is established?
No, The Hon’ble Delhi High Court in the case of M/s Balaji Exim Vs. Commissioner, CGST [W.P.(C) NOS. 10407 & 10423 OF 2022] dated March 10, 2023, has held that the allegations of availing of fake credit cannot be a ground for rejecting the refund applications unless it is established that the petitioner has not received the goods or paid for them.
Author’s Comments
As per the reports, GST evasion of over Rs. 1.01 lakh crores has been detected by the GST department in the fiscal year 2022-23. A recovery of Rs. 21000 crores was made. For the year 2021-22, evasion of Rs. 54000 crores was detected and tax recovery of Rs. 21000 crore was made. This is a cause of grave concern that the department is not able to recover and bring home the allegations leveled against the taxpayers.
One of the prominent reasons for this could be the poor drafting of SCNs, which results in defective SCNs. The defective SCN isfatal to the demand. Just pressing allegations by
making some conjecture will do no good.
There is an urgent need for continuous and robust training of the proper officers (especially the state department).
Where the errors committed are inadvertent, is the rectification of returns allowed?
Yes, the Madras High Court in the case of M/s Deepa Traders Vs. Principal Chief Commissioner of GST & Central Excise [W.P.NO.12382 OF 2020] Dated March 09, 2023, has held that the errors committed are inadvertent and, the rectification would, in fact, enable proper reporting of the turnover and input tax credit (ITC) to enable claims to be made in an appropriate fashion by the assessees.
The Department was directed to do needful to enable the uploading of rectified GSTR-1.
Author’s Comments
This judgment comes to the rescue of bonafide taxpayers to allow them to rectify their GSTR-1 and will allow recipients to settle the ongoing litigation.
In this regard, recently, in a similar matter, The Hon’ble Orissa High Court has permitted the assessee to rectify the error of mentioning B2C instead of B2B in Form GSTR-1 at the time of filing of returns in the case of M/s. Y. B. Constructions Pvt. Ltd. v. Union of India and others [W.P.(C) No.12232 of 2021 dated February 22, 2023], holding that the assessee would be prejudiced if it is not allowed to avail the benefits of Input Tax Credit.
Further, the Hon’ble Orissa High Court in M/s. Shiva Jyoti Construction v. The Chairperson, Central Board of Excise & Customs and others [W.P. (C) No.18216 of 2017 dated January 12, 2023] had permitted the assessee to rectify its Form GSTR-1 file for the months of September 2017 and March 2018, in order to claim ITC benefit by the recipient, wherein B2C was erroneously mentioned, instead of B2B. It was held that the assessee will be unnecessarily prejudiced if it is not allowed to avail the benefits of ITC.
Further, the Hon’ble Karnataka High Court in M/s. Wipro Limited India v. the Assistant Commissioner of Central Taxes and Ors. [Writ Petition No. 16175 of 2022 (T-Res) dated January 6, 2023] had allowed the assessee to rectify the errors committed at the time of filing of Forms and submitting GST Returns for FY 2017-2020.
Is the attachment of Bank Accounts, a draconian Step?
Yes, the Hon’ble Delhi High Court in the case of Sakshi Bahl Vs. Principal Additional Director General [W.P.(C) NO. 3986 OF 2023] dated March 29, 2023, has held that the attachment of bank accounts is a draconian step and the action can only be taken in case conditions specified in Section 83 of the CGST Act, are fully satisfied.
Where ITC fraud was alleged against a third party and petitioners claiming to be creditors were neither taxable persons nor persons as specified in section 122(1A), an order provisionally attaching their bank account was to be set aside.
Author’s Comments
The Hon’ble court has very rightly and strictly considered this trespassing of the law by the officers as a “Draconian Step”.
In law, there is no scope for assumptions, and the Proper Officers acting arbitrarily only on assumption and resorting to using such extreme power like attachment of bank accounts, are definitely violative of the rights of a person to live and do business given by the constitution of India.
Does the Professional services provided to an overseas entity, amount to intermediary services?
No, the professional services provided to the overseas entity do not amount to intermediary services as the taxpayer was directly providing such services and not facilitating or arranging such services between the overseas entity and the third party.
The Hon’ble Delhi High Court in the case of Ernst & Young Ltd. V. Additional Commissioner, Central Goods and Services Tax Appeals-IT [W.P.(C) NO. 8600 OF 2022] dated March 23, 2023, has ruled that the services provided by M/s Ernst and Young Limited (India), the Indian Branch Office of UK-based company, M/s Ernst & Young Limited (E&Y Ltd), to overseas EY Entities, is not an “intermediary service”.
The Court thus set aside the orders passed by the GST Authorities where it had rejected Ernst and Young’s application seeking a refund of input tax credit (ITC) with respect to the services exported by it, on the ground that it was an intermediary.
Supply of services is considered as export of services when an overseas entity/recipient was located outside India, consideration was received in foreign exchange and services were not covered under intermediary services.
Are the Liquidated damages liable to GST?
Yes, the authority for advance rulings (AAR), Andhra Pradesh in the case of AP Power Development Co. Ltd has ruled that the Liquidated damages paid by the defaulting party to the non-defaulting party for tolerating the act of non-performance or breach of contract have to be treated as consideration for tolerating an act or a situation under an agreement, thus, liquidated damages collected for non-performing of job assigned constitutes as supply as per section 7 and are exigible to tax at 18%.
Author’s Comments
The ruling was announced despite a circular issued by the government in 2022, which states that the liquidated damages are a mere flow of money from a party that caused a breach of contract to a party that suffered a loss due to such breach. Such payments do not constitute consideration for supply and are not taxable.
However, AAR ruled that the circular was not universal and absolute, but rather meant to clarify the position of law and shall be applied reasonably having regard to the facts of the case. AAR emphasized that the circular cited above has to be understood in the proper context. This meant that the payment towards damages is incidental to the main supply and since the main supply is taxable they shall also be taxable. If the principal supply is exempt,
the incidental shall also be exempt.
Can the GST on intermediary services be levied under CGST Act, 2017 and Maharashtra GST Act, 2017?
No, The Hon’ble Bombay High Court in the case of Dharmendra M. Jani Vs. UOI [WP. 2031 of 2018 dated April 18, 2023] has held that, to levy tax on intermediary services under the Central GST (CGST) and State GST/ Maharashtra GST (MGST) Acts, provisions of Section 13(8)(b)of the Integrated Goods and Services Tax, 2017, and Section 8(2) of the IGST Act, 2017 cannot be used.
The Hon’ble Court has also confirmed the legal validity of Section 13(8)(b) of the Integrated Goods and Services Tax, 2017, and Section 8(2) of the IGST Act and held that Section 13(8)(b) of the IGST Act and Section 8(2) of the IGST Act are confined in their operation to the provisions of IGST Act only and the same cannot be made applicable for levy of tax under the Central Goods and Services Tax, 2017 and the Maharashtra Goods and Services Tax, 2017.
Author’s Comments
Most of the intermediaries in India, have discharged CGST and SGST on the commission received by virtue of section 13(8)(b) read with section 7(5) of the IGST Act, 2017. There is a dichotomy that on one hand, the transaction of export of services (in the case of intermediary services), is treated as an inter-state supply u/s 7(5) of the IGST Act, whereas on the other hand , the same transaction is treated as an intra-state supply by virtue of
section 13(8)(b) of the IGST Act.
The authorities need to clear their stand on this issue urgently and till then the fate of taxation on intermediary services keeps swinging.
Reimbursable expenses to be included in the taxable value of the Service?
The Kolkata Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) in the case of M/s. MMTC Limited V. Commissioner of Central Excise & Service Tax, Bhubaneswar-I dated 13.04.2023, has held that the reimbursable expenses are not includible in the taxable value of the service in terms of Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006.
The bench relied on the decision of the Delhi High Court in the case of Intercontinental Consultants and Technocrats Pvt. Ltd. versus the Union of India, in which it was held that reimbursements of amounts it received cannot be charged to service tax.
A Procedural lapse cannot be the basis to deny a Service Tax refund, defeating the object of SEZ: CESTAT
The Delhi Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) in the case of M/s Lupin Limited Versus Commissioner of Central Goods & Service Tax & Central Excise, dated 23.03.2023 has held that the beneficial object of establishing the SEZ tax-free, without any burden of duties, means that the procedural lapse, if any, cannot be the basis to deny the refund.
The bench observed that the general principles of interpretation of the exemption notification, that it has to be construed strictly, do not really apply to the SEZ units, which are otherwise exempted from the liability of the various duties under the main statute itself. The avowed object of providing such exemptions has to be the guiding principle for the applicability and interpretation of the notification to the SEZ units.
Can the Central Government by way of notification, withdraw the exemption that was earlier available to a distinct class?
Yes, the Central Government by way of notification is authorized to withdraw the exemption that was earlier available to a distinct class.
The Hon’ble Delhi High Court in the matter of Uber India Systems Private Limited v. UOI [W.P.(C) NO. 14048 OF 2021 AND OTHS] dated April 12, 2023, has ruled that the notifications withdrawing exemption to service of transportation by auto rickshaw and non AC stage carriage provided through-commerce operators (ECOs) were not in violation of Articles 14, 19(1)(g) and 21 of Constitution of India
The Hon’ble Court noted that the CGST Act has itself identified Electronic Commerce Operators (‘ECOs’) as a separate class of persons vis-à-vis individual service providers and services provided through them are an independent taxable event. The Court further observed that there is a difference in the category of services provided by driver partners of ECOs as they offer greater convenience and hence cannot be treated as of the same class as services provided by individual drivers. Lastly, the Court held that exemptions cannot be demanded as a matter of vested right and the same can be withdrawn unanimously.
Supply of pre-packaged and Labelled Rice up to 25 Kgs, to the factory of the exporter attracts 5% GST: Haryana
AAR
The Haryana Authority of Advance Ruling (AAR) in the matter of D.D. International Private Limited, has held that 5% GST is applicable on supplies of prepackaged and labelled rice up to 25 kg to the factory of the exporter. The two-member bench observed that the legislature’s intention is that the supply of rice in packets of up to 25 kg, which are duly pre-packaged and labelled as per the Legal Metrology Act, 2009, and the rules made thereunder, is a taxable event and it’s not an exempted or nil rated supply.
As per Notification No. 06/2022-Central Tax (Rate) dated July 13, 2022, 5% GST is applicable on the supply of pre-packaged and labelled rice up to 25 kg if two conditions are satisfied. Firstly, it is pre-packaged and labelled. Secondly, it is required to bear the declarations under the provisions of the Legal Metrology Act, 2009.
The AAR held that if supplied goods are pre-packaged, labelled, and in packages of less than or equal to 25 kg in quantity, then they are taxable.
Does the transaction of Transfer/Sale of one of the independent running business divisions attracts GST?
Yes, The Karnataka Authority for Advance Ruling (AAR)in the matter of M/s Pico2femto Semiconductor Services (P.) Ltd.[ADVANCE RULING NO. KAR/ADRG 12 OF 2023] dated March 20, 2023, has held that the transfer or sale of one of the independently running business divisions attracts 18% GST.
AAR held that the sale of an independent running staffing business division with all assets and liabilities, on a going concern basis, and consideration received in multiple stages, is the supply of financial service, covered under SAC 997119 liable to an 18 percent GST rate.
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About the Author: CA Ritesh Arora – Partner, Ritesh Arora & Associates -Author
The author is practising chartered accountant with an experience of over a decade in indirect tax regime. His strength is providing one-stop solution for his clients businesses, financial and regulatory requirements. He offers his clients a full range of services including GST services, tax consultancy and litigation
Contact No. 9888466739 – Email: caritesharora1628@gmail.com
(The content and views stated in this article/write-up are solely for informational purposes. It does not constitute professional advice or recommendation in any manner whatsoever. For any feedback and queries write to me at caritesharora1628@gmail.com)
Author Bio
Very useful and required case laws.