Why IIT’s do not fall in the definition of Government for the purpose of CGST Act, 2017 and the AAR Judgement

Recently AAR Uttarakhand in the matter of IT Development Agency, Government of Uttarakhand, Dehradun held that that IIT is considered to be Government under CGST Act, 2017.Let’s try to analyse the decision whether IIT could be considered in the status of Government for the purpose of CGST Act, 2017 and why the decision of AAR requires reconsideration.

Definition of Government:

Section 2(53) of CGST Act, 2017 defines Government as

(53) “Government” means the Central Government

Definition of Central Government: The term “Central Government” has not been defined under the CGST Act, 2017 and therefore meaning of Central government as defined woUld have to be taken for reference purpose. The relevant extract of sub-clause (b) of clause (8) of Section 3 of General Clauses Act, 1897 is as follows:

(8) “Central Government” shall,—

(b) in relation to anything done or to be done after the commencement of the Constitution, mean the President; and shall include,—

(i) in relation to functions entrusted under clause (1) of article 258 of the Constitution, to the Government of a State, the State Government acting within the scope of the authority given to it under that clause;

“Emphasis Supplied”

Thus, it can be seen from the above that Central Government has been defined to mean President. Article 53 of the Constitution of India provides that the executive power of the union shall be vested in the president and shall be exercised by him either directly or through officers subordinate to him in accordance with the constitution. Therefore, functions of Union are exercised directly by the president or the officers subordinate to him.

Decision of Allahabad High Court in the matter of Banaras Hindu University, Varanasi…Petitioner Versus State of UP and another …Respondents dated 23^rd September 2010

The Hon’ble High Court held that

The BHU as well as IIT-K are statutory bodies incorporated under the Central Government Act. They have right to sue and can be sued in their own name.

The IIPR is the branch of ICAR that is a registered society under the Societies Registration Act. It can also sue and be sued in its own name.

A statutory corporation, or a society or a company, even if it is State within the meaning of Article 12 of the Constitution or an instrumentality of the Union, are not synonymous with it. They have different identity and cannot be treated to be Union.

Hon’ble Apex Court in the matter of Municipal Commissioner Of Dum … vs Indian Tourism Development … on 1 August, 1995 Equivalent citations: 1995 SCC (5) 251, JT 1995 (5) 610

The question before the Hon’ble Apex Court was:

“The question arising in this batch of appeals is whether the properties vested in the International Airport Authority of India under the provisions of International Airports Authority Act, 1971 can yet be called the properties of the Union within the meaning of Article 285 of the Constitution of India and, therefore, exempt from all taxes imposed by a State or by any authority within a State”

One significant observation which might help us in understanding the nature of governmental entity or government authority and why autonomous Institutions are not Government is the observation made by Hon’ble Apex Court in the matter of Municipal Commissioner Of Dum … vs Indian Tourism Development … on 1 August, 1995 Equivalent citations: 1995 SCC (5) 251, JT 1995 (5) 610

“Even before the advent of the constitution, the State had been carrying on several activities which were in the nature of commercial/trading/manufacturing activity but with the advent of the constitution introducing the concept of a welfare State – or a socialist State, as the case may be – both the State and Central Governments embarked upon an extensive and systematic course of activity where under several business ventures were commenced and in many cases taken over. Within a few years, however, it was realised that a business is to be carried on as a business and not in the manner of governmental activity. Accordingly, the Central and State Governments started creating corporations for carrying on these activities. In the case of major public utilities, statutory corporations were created under different enactments. For example, Road Transport Corporations under Road Transport Corporations Act, Electricity Boards under the Electricity Supply Act, 1948, Air India and Indian Airlines under the Airlines Corporation Act, Life Insurance Corporation under the Life Insurance Corporation Act and so on. In respect of several undertakings, companies were registered under the Companies Act. With a view to anable these statutory corporations and companies to carry on the activity which was hitharto carried on by the governments, the relevant properties assets and liabilities were transferred to such new corporations They were supposed to operate on business lines, pay taxes and justify their creation and constitution. These corporations, whether created under the statute or registered under the Companies Act are distinct juristic entities owning their own properties having their own fund, capable of borrowing and lending monies and entering into contracts like any other corporation. In many cases the entire share capital of these corporations is owned by the Government whether Central or State. In some cases, the major share holding is of the Government with some private share holding as well. In case of some statutory corporations, the enactment creating them did not provide for any share capital, though it was made a body corporate with all the necessary and incidental powers that go with such concept. The International Airports Authority is one such corporation created under the Act with no share capital but which has its own properties, its own fund, accounts, employees and capable of lending and borrowing and entering into contracts. The properties held by it can be categorised into two, viz., (1) those that were transferred to it under Section 12 of the Act at the time of its inception and (2) those that have been acquired by it subsequent to its constitution. There is no dispute about the second category of properties. Admittedly they are the properties of the Authority and not the properties of the Union. The only controversy is with respect to the first kind of the properties.”

The Hon’ble Apex Court finally held that

For all the above reasons, we are of the opinion that the International Airports Authority of India is a statutory corporation distinct from the Central Government and that the properties vested in it by Section 12 of the Act cannot be said to have been vested in it only for proper management. After the date of vesting, the properties so vested are no longer the properties of the Union of India for the purpose of and within the meaning of Article 285. The vesting of the said properties in the Authority is with the object of ensuring better management and more efficient operation of the airports covered by the Act. Indeed that is the object behind the very creation of the Authority. But that does not mean that it is a case of limited vesting for the purpose of better management. The Authority cannot, therefore, invoke the immunity created by Article 285(1) of the Constitution. The levy of property taxes by the relevant Municipal bodies is unexceptionable.

Comparative analysis of provisions of IIT Act, 1961 and International Airport Authority Act, 1971:-

A Comparative analysis of the provisions of IIT Act, 1961 and International Airport Authority Act, 1971 is as follows:

Particulars	*IIT Act, 1961*	*International Airport Authority Act, 1971*
Preamble	An Act to declare certain institutions of technology to be institutions of national importance and to provide for certain matters connected with such institutions and the Indian Institute of Technology, Kharagpur.	an Act to provide for the constitution of an authority for the management of certain aerodromes whereat international air transport services are operated or are intended to be operated and for matters connected therewith.
Applicability of the Act	Whereas the objects of institutions known as the Indian Institute of Technology, Bombay, the college of Engineering and Technology, Delhi; the Indian Institute of Technology, Kanpur and the Indian Institute of Technology, Madras are such as to make them institutions of national importance, it is hereby declared that each such institution is an institution of national importance.	the Act shall apply in the first instance to the aerodromes of Bombay (Santa Cruz), Calcutta (Dum Dum). Delhi (Palam) and Madras (Meenambakkam) and to such other aerodromes as the Central Government may notify in that behalf
Nature of Authority	Each of the Institutes mentioned in section 2 shall be a body corporate having perpetual succession and a common seal and shall, by its name, sue and be sued	The authority shall be a body corporate by the name aforesaid having perpetual succession and a common seal, with power, subject to the provisions of this Act, to acquire, hold and dispose of property both movable and immovable, and to contract and shall by the said name sue and be sued”
Vesting of Property	5. On and from the commencement of this Act;- (a) any reference to a society in any law (other than this Act) or in any contract or other instrument shall be deemed as a reference to the corresponding Institute; (b) all property, movable and immovable; of or belonging to a society shall vest in the corresponding institute; (c) all the rights and liabilities of a society shall be transferred to, and be the rights and liabilities of the corresponding Institute; and (d) every person employed by a society immediately before such commencement shall hold his office or service in the corresponding, Institute by the same tenure, at the same remuneration and upon the same terms and conditions and with the same rights and privileges as to pension, leave, gratuity, provident fund and other matters as he would have held the same if this Act had not been passed, and shall continue to do so unless and until his employment is terminated or until such tenure, remuneration and terms and conditions are duly altered by the Statutes: Provided that if the alteration so made is not acceptable to such employee, his employment may be terminated by the Institute in accordance with the terms of the contract with the employee or, if no provision is made therein in this behalf, on payment to him by the Institute of compensation equivalent to three months’ remuneration in the case of permanent employees and one month’s remuneration in the case of other employees.	“12.(1) Save as otherwise provided in sub-section (2), as from such date as the Central Government may appoint by notification in the Official Gazette in relation to any airport,– (a) all properties and other assets vested in the Central Government for the purposes of the airport and administered by the Director-General of Civil Aviation immediately before such day shall vest in the Authority; (b) all debts, obligations and lialibities, all contracts entered into and all matters and things engaged to be done by, with, or for the Central Government immediately before such day for or in connection with the purposes of the airport shall be deemed to have been incurred, entered into and engaged to be done by, with, or for the Authority; (c) all non-recurring expenditure incurred by the Central Government for or in connection with the purposes of the airport up to such day and declared to be capital expenditure by the Central Government shall, subject to such terms and conditions as may be determined by the Central Government, be treated as the capital provided by the Central Government to the Authority; (d) all sums of money due to the Central Government in relation to the air port immediately before such day shall be deemed to be due to the Authority; (e) all suits and other legal proceedings instituted or which could have been instituted by or against the Central Government immediately before such day for any matter in relation to the airport may be continued to instituted by or against the Authority; (f) every employee holding any office under the Central Government immediatelybefore such day solely or mainly for or in connection with such affairs of the airport as are relevant to the functions of the Authority under this Act shall be treated as on deputation with the Authority but shall hold his office in the Authority by the same tenure and upon the same terms and conditions of service as respects remuneration, leave, provident fund, retirement or other terminal benefits as he would have held such office, if the Authority had not been constituted and shall continue to do so until the Central Government, either on its own motion or at until the Authority, with the concurrence of the Central Government, duly absorbs such employee in its regular service, whichever is earlier; Provided that during the period of deputation of any such employee with the Authority, the Authority shall pay to the Central Government, in respect of every such employee, such contribution towards his leave salary, pension and gratuity as the Central Government may, by order, determine: Provided further that any such employee, who has, in respect of the proposal of the Authority to absorb him in its regular service, intimated within such time as may be specified in this behalf by the Authority his intention of not becoming a regular employee of the Authority, shall not be absorbed by the Authority in its regular service.”

Interestingly in the case of Ramana Dayaram Shetty vs The International Airport … on 4 May, 1979 Equivalent citations: 1979 AIR 1628, 1979 SCR (3)1014, for the same International Airport Authority the question before the Apex Court was whether International Airport Authority is an instrumentality or agency of the Central Government and falls within the definition of State and the Hon’ble Apex Court held that a conspectus of the provisions of the Act clearly shows that every test laid down by this Court in deciding whether a statutory authority comes within the purview of Article 12 of the constitution is satisfied in the case of the first respondent and they leave no room for doubt that it is an instrumentality or agency of the Central Government and falls within the definition of State.

7. Did Hon’ble Apex Court in the matter of Municipal Commissioner of Dum municipality And Ors. Etc. vs Indian Tourism Development Corporation And Ors. Etc. in the judgement given in the year 1995 did not follow the decision laid down by Hon’ble Apex Court in the matter of Ramana Dayaram Shetty vs The International Airport Authority of India (a Judgement delivered in the year 1979).

In Municipal Commissioner of Dum Municipality and ors. etc. Vs Indian Tourism Development Corporation and ors. etc., Hon’ble Apex Court after referring to the provisions of International Airports Authority Act, 1971 held that

“For all the above reasons, we are of the opinion that the International Airports Authority of India is a statutory corporation distinct from the Central Government.”

In the matter of Ramana Dayaram Shetty vs The International Airport Authority of India held that International Airport Authority, Hon’ble Apex Court after referring to the provisions of International Airports Authority Act, 1971 held that it is an instrumentality or agency of the Central Government and falls within the definition of State and the Hon’ble Apex Court held that a conspectus of the provisions of the Act clearly shows that every test laid down by this Court in deciding whether a statutory authority comes within the purview of Art. 12 of the constitution is satisfied in the case of the first respondent and they leave no room for doubt that it is an instrumentality or agency of the Central Government and falls within the definition of State.

The question now arises that whether the later decision of the Hon’ble Apex Court was against the principles laid down by Apex Court earlier. That is not the case.

We have to see the context of the decision. The decision of Ramana Dayaram Shetty vs The International Airport Authority of India was given in the context of Article 12 and Article 14 of the Constitution of India. Constitution of India has been divided into 22 Parts and Articles 1 to 395. Part III of the Constitution of India relates to “Fundamental Rights”. This part consists of Articles 12 to 35. Of these Articles, Article 12 is related to definition for Part III. Article 12 of the Constitution of India is being reproduced herewith:

Article 12 of the Constitution of India provides as follows:

12. Definition In this part, unless the context otherwise requires, the State includes the Government and Parliament of India and the Government and the Legislature of each of the States and all local or other authorities within the territory of India or under the control of the Government of India.

If we refer to the start of the Article 12, it starts with “Definition in this Part, unless context otherwise requires”. Therefore, this clearly means that Article 12 contains definition for Part III of the constitution of India only and cannot be extended beyond this part. The same can also be observed from the Article 14 of the Constitution of India which refers to “Equality before Law” and contains the word “State”

Article 14 of the Constitution of India provides as follows:

14. Equality before law: The State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India Prohibition of discrimination on grounds of religion, race, caste, sex or place of birth.

The relevant extract of the decision Dayaram Shetty vs The International Airport Authority of India is as follows:

Now this rule, flowing as it does from Article 14, applies to every State action and since “State” is defined in Article 12 to include not only the Government of India and the Government of each of the States, but also “all local or other authorities within the territory of India or under the control of the Government of India”, it must apply to action of “other authorities” and they must be held subject to the same constitutional limitation as the Government. But the question arises what are the “other authorities” contemplated by Article 12 which fall within the definition of ‘State’ ?

The authority “International Airport Authority” was sought to be included under the term “other authority” by this decision for the purpose of Article 14 of the Constitution of India read with Article 12 of the Constitution of India. Hon’ble Apex Court then also referred to the reasoning of holding International Airport Authority as “State” for the purpose of Chapter III of the Constitution of India which is as follows:

“The Government which represents the executive authority of the State may act through the instrumentality or agency of natural persons or it may employ the instrumentality or agency of Juridical persons to carry out its functions. With the advent of the welfare state the civil service, which traditionally carried out functions of Government through natural persons, was found inadequate to handle the new tasks of specialised and highly technical character. To fill the gap it became necessary to forge a new instrumentality or administrative device for handling these new problems and that is done by public corporations which has become the third arm of the Government. They are regarded as agencies of the Government. In pursuance of the industrial policy resolution of the Government of India corporations were created by the Government for setting up and management of public enterprises and carrying out public function. The corporations so created, acting as instrumentality or agency of Government, would obviously be subject to the same limitations in the field of constitutional and administrative law as Government itself though in the eye of law they would be distinct and independent legal entities. It Government acting, through its officers is subject to certain constitutional and public law limitations, it must follow a fortiori that Government, though the instrumentality or agency of corporations, should equally be subject to the same limitations.”

Thus, it was a completely different context that the judgement in the matter of Dayaram Shetty vs The International Airport Authority of India was given. It was more of a kind of breaking the corporate veil for the protection of fundamental rights of the people of India. Therefore, definition of State as given in Article 12 cannot be stretched beyond Part III of the Constitution of India.

Further even if refer to the report of Law Commission of India released in the month of April 2018, Chapter III of the report relates to Concept of State in Article 12 of the Constitution of India. It has to be borne in mind that Article 12 is relevant for the purpose of Chapter III of Constitution of India and has no relevance at other places for the purpose of definition of “Government” unless until specifically referred to. Therefore, Part III of the Law Commission of India is also not applicable in the given case.

The judgement of Ajay Hasia v. Khalid Mujib Sehravardi primarily relied upon in the report of the law commission for defining the term state was with reference to Article 32 of the Constitution of India. It may be apt here to emphasize again that Article 32 falls under the Part III of the Constitution of India and definition given in Article 12 of the Constitution of India would be applicable in that matter. Therefore the ration laid down by Hon’ble Apex Court in the matter of Dayaram Shetty vs The International Airport Authority of India was followed in that matter. The relevant extract of Law Commission Report is as follows:

“In the case of Ajay Hasia v. Khalid Mujib Sehravardi,42 (Ajay Hasia case) where a Regional Engineering College whose administration was carried on by a society registered under the Societies Act 1898, question arose as to whether it could fall under the definition of ‘State’ and thus be amenable to the writ jurisdiction of the Supreme Court under Article 32. It was held by the Court that a society is not on the same footing as the Government of India or the Government of any State, so what remains to be seen is whether it would fall under the ambit of ‘other authorities’. The Court emphasised that the concept of agency or instrumentality of the Government is not limited to a corporation created by a statute but is equally applicable to a company or a society and in each individual case it would have to be decided, on a consideration of relevant factors. The Court laid down the relevant tests to determine the existence of State agency or instrumentality, relying on the International Airport Authority…”

Relevant extract of the minutes of IIT Bhuvneshwar alongwith the reply received from Department of Revenue for whether IIT Employees are Employees of Central Government under Income Tax Act, 1961:

Section 17(2) of the Income Tax Act provides for valuation of perquisites in case of rent free accommodation and clause (ii) of Section 17(2) of the Income Tax Act provides for valuation of perquisites where a furnished accommodation is provided by Central Government or any State Government. In this regard, a clarification was sought by IIT that whether rent free accommodation provided by it to its employees would be covered under the valuation mechanism for rent free accommodation provided by Central Government. IIT Bhuvaneshwar specifically asked for the clarification. The relevant extract of the minutes alongwith the reply received from Department of Revenue is as follows:

“INDIAN INSTITUTE OF TECHNOLOGY BHUBANESWAR Minutes of the 26^th meeting of the Board of Governors (BoG) held on 25.02.2017 at 12 Noon in the Meeting Room of the Institute Guest House.

To report that the Ministry of Human Resource Development vide its letter F.No.3-19/2015-T.S.-I dated 29.11.2016 informed the Institute that the issue of valuation of rent free accommodation of employees of the IITs for the purpose of calculation of income tax at par with the Central Govt. employees has been examined in consultation with the Department of Revenue, Ministry of Finance, Govt. of India, and it has been observed that employees of autonomous organizations do not fall within the definition/ ambit of ‘Government’ for the purpose of Rule 3(I) in all CBDT’s circulars on TDS under section 192 of the Income Tax Act, 1961.Accordingly, the issue of rent free accommodation of the employees of IIT for the purpose of calculation of income tax at par with the Central Govt. employees has not been agreed to. The Board noted the above.”

Conclusion: IIT is not Government for the purpose of CGST Act, 2017 and the AAR decision requires reconsideration to that effect. Further, we cannot apply the meaning assigned to State under Article 12 of the Constitution of India. The clarification issued by the Government to IIT Bhuvneshwar, although under the Income Tax Act, 1961 and decision of Hon’ble Allahabad High Court also seems to hold the same view that statutory bodies are distinct from Central Government.

Whether registered person providing passenger transportation services through e-commerce operator be eligible for ITC after implementation of payment of tax by e-commerce operators?

There is a common perception that no registered person supplying services through the ecommerce operator will be eligible for the input tax credit. Although in most of the cases rate has been prescribed for without input tax credit but in case of passenger transportation services rates have been provided at 5% with ITC on service in the same line of business or renting of a motor vehicle or 12% with full ITC.

At the outset, vide entry no. 10 of Notification No. 11/2017-C.T. Rate Dated 28^th June 2017 as amended from time to time, it has been provided that a taxable person i.e. bus travel company who is involved in providing taxable services of passenger transportation services (by Air-conditioned buses) levying tax @ 5% is not eligible to claim any input tax credit other than the credit of input service in the same line of business i.e. service procured from another service provider of transporting passengers in a motor vehicle or renting of a motor vehicle.

Further, vide notification no. 17/2017 C.T. (Rate) Dated 28^th June 2017 as amended vide 17/2021-C.T. Rate Dated 18^th November 2021 provides that ecommerce operators shall be liable to pay tax on services of transportation of passengers by a radio-taxi, motorcab, maxicab, motor cycle, omnibus or any other motor vehicle.

Although tax liability on such services provided through e-commerce operators would be paid by the e-commerce operator but the question arises about the availability of Input Tax Credit to the actual service provider in such cases.

Let’s take a hypothetical question-Mr A runs a Bus Travel Agency and has taken A/C buses on rent. He pays GST on the rental amount being paid to the bus owners and till, 31^st December 2021 he will be discharging the liability by availing input tax credit of such GST Paid by him to the bus owners. Now from 1^st January 2022, tax would be paid by E-Commerce operator on the booking made through such e-commerce operator and for the bookings made at the counter or his own webportal, tax would be paid by the bus operator.

The question arises whether the bus service provider would be eligible to claim entire input tax credit on the rent paid by him.

Part-1-Whether the supplier in case of supplies made through the e-commerce operator is the person who has made the supplies or the e-commerce operator who is liable to pay the tax

Provision of Section 9(5) of the CGST Act, 2017 is being reproduce hereinbelow for ready reference-

(5) The Government may, on the recommendations of the Council, by notification, specify categories of services the tax on intra-State supplies of which shall be paid by the electronic commerce operator if such services are supplied through it, and all the provisions of this Act shall apply to such electronic commerce operator as if he is the supplier liable for paying the tax in relation to the supply of such services:

Therefore, the section provides that the tax shall be paid by the electronic commerce operator and all the provisions of this Act shall apply to such electronic commerce operator as if he is the supplier liable for paying the tax in relation to the supply of such services.

The true scope of Section 9(5) can be best understood with reference to Section 9(3) of the CGST Act, 2017 which provides that

(3) The Government may, on the recommendations of the Council, by notification, specify categories of supply of goods or services or both, the tax on which shall be paid on reverse charge basis by the recipient of such goods or services or both and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.

The scope of Section 9(3) provides that the tax on reverse charge basis shall be paid by the recipient and all the all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.

The reason for reproducing the Section 9(3) against 9(5) of CGST Act, 2017 is that the liability to pay tax in both the cases is not on the supplier who is making the supply of goods or services or both but on the recipient or the electronic commerce operator respectively. However, at the same time, statute has not deemed the recipient or e-commerce operator to be supplier or services but only the person who is liable to pay tax in respect of such services. Therefore, in both the cases although the person who is actually making the supply of goods or services or both will be treated as supplier of goods but the person liable to pay tax would be the recipient or the electronic commerce operator respectively.

The fact is also pretty much clear from Entry no. 2 and 3 of Notification No. 17/2017-Central Tax (Rate), Dated 28-6-2017 wherein e-commerce operator is only liable to pay tax except when the person supplying such service through electronic commerce operator is liable for registration under sub-section (1) of section 22 of the said Central Goods and Services Tax Act. Therefore, such turnover is liable to be added to the turnover of the taxable person supplying the goods or services through e-commerce operator but the liability to pay tax would be based upon the scope of the relevant entry in the notification.

Conclusion-The supplier in such cases is still the person who has actually made the supply of goods or services or both but the liability to pay tax is on the e-commerce operator through whom the supply has been made.

Further, on similar lines it has been clarified vide circular no. 167/23/2001 dated 17^th December 2021 although for restaurant services provided through e-commerce operators but equally applicable in the instant case as well that aggregate turnover of person supplying restaurant service through ECOs shall be computed as defined in section 2(6) of the CGST Act, 2017 and shall include the aggregate value of supplies made by the restaurant through ECOs. Accordingly, for threshold consideration or any other purpose in the Act, the person providing restaurant service through ECO shall account such services in his aggregate turnover.

Part-2-Are the supplies on the which e-commerce operator is liable to pay for the under Section 9(5) are exempted supplies for the person who has actually made the supplies of goods or services or both.

As per the provision of Section 2(47), exempted supply has been defined as a supply which attracts nil rate of tax or which may be wholly exempt from tax under section 11, or under section 6 of the Integrated Goods and Services Tax Act, and includes non-taxable supply.

On a conjoint reading of Section of Section 9(5) read with notification no. 17/2017-C.T.(Rate) Dated 28^th June 2017, supplies covered under Section 9(5) just like Section 9(3) are taxable supplies and the only thing is that in case of the supplies covered under Section 9(3) the person liable to pay tax is the recipient and in case of Section 9(5), person liable to pay tax is e-commerce operator. The nutshell is that supplies are taxable supplies.

That Circular no. 167/23/2001 dated 17^th December 2021 although for restaurant service providers but equally applicable in the present case makes a stop gap arrangement without holding such supplies as exempt supplies for supplier making these supplies through electronic commerce operator and provides that for the time being registered persons supplying restaurant services through ECOs under section 9(5) will report such supplies of restaurant services made through ECOs in Table 8 of GSTR-1 and Table 3.1 (c) of GSTR-3B.

Part-3-Does the provision of Section 16 restrict the Input Tax Credit to only persons liable to pay tax or it allows credit to all registered persons.

Section 16(1) of the CGST Act, 2017 provides that “Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax..”. Therefore, the scope of the section is much wider than person liable to pay tax and its covers every registered person irrespective of the fact that whether he is liable to pay tax or not. If a person is registered under the statute then irrespective of the fact that whether he is liable to pay tax or not, he will be eligible to claim input tax credit provided he satisfies the conditions laid down under the statute.

Part-4-Is there any example wherein restriction has been imposed although registered person eligible to claim input tax credit under section 16?

The restriction for claim of input tax credit attributable to taxable and exempt supplies is provided under Section 17. Therefore, where Section 16 provides for entitlement input tax credit for registered person but provisions of section 17 restrict is to taxable and exempt supply.

Thus, in case of supplies attracting reverse charge, although such supplies are by nature taxable but at the same time by way of Section 17(3) only for the purpose of reversal of input tax credit, they have bene treated as exempt supplies for the purpose of reversal of Input Tax Credit under Section 17(2) rea with Rule 42 and 43.

Further, services covered under Section 9(5) are not supplies covered under reverse charge as has also been clarified vide circular no. 167/23/2021 dated 17th December 2021 although for restaurant services but applicable in the instant case as well that E Commerce operators are not the recipient of restaurant service supplied through them.

Part-5: Is there any similar restriction to Section 9(3) in case of supplies covered under Section 9(5) under Section 17(3) read with Section 17(2) of CGST Act, 2017?

No, there is no restriction similar to the one for section 9(3) in section 17(3) for the supplies covered under Section 9(5). Further, neither the rate notification considers these supplies as exempt supplies and nor Rule 42/43 treats these supplies as exempt supplies for the purpose of reversal of input tax credit under section 17(2) of CGST Act, 2017.

Conclusion-That a registered person providing passenger services through e-commerce operator would be eligible for ITC on service in the same line of business or renting of a motor vehicle) even after implementation of payment of tax by e-commerce operators.

#GSTCase-162-Whether Fryums are Papad or not-A perennial Debate

Case: Alisha Foods [2020] 113 taxmann.com 495 (AAR – MADHYA PRADESH)

1. Facts: Applicant is a partnership firm and manufactures Fried Fryums of different shapes, sizes and varieties which are ready to eat.

2. Query:

What is the correct classification of Fried Fryums of different shapes, sizes and varieties which are ready to eat and What is the HSN Code and GST rate applicable on such goods manufactured.

3. Contention of the Applicant:

Papad even after roasting or frying are known and used as Papad only. In commercial or trade parlance also, the Fryums can be said to be known as Papad. Fried Papad and Fried Papad Pipes of different sizes, shapes, and all of varieties which are ready to eat may be classified under Chapter 19 Heading No. 1905. Cases Referred by the Applicant were as follows:

a) Shivshakti Gold Finger: All varieties of Papad, whether they are circular or flat in shape consisting of all ingredients whether it is of pulse, rice, Maida etc. entitled for exemption. The Hon’ble Supreme Court clearly held that size or shape is irrelevant. The Papad of all shapes and sizes are covered under the Entry “Papad”.

b) State of Karnataka Vs. Vasavamba Stores and others: Papad of all shapes and sizes are covered under the entry “Papad” and exempted from tax.

c) Jay Khodiyar Agency: Papad and Papad pipes (Fryums) are covered under Entry 9(2) of Schedule-1 appended to the VAT Act, 2003 and exempted from tax.

4. Observation:

1. Words not Defined in Statue are to be considered in popular sense: AAR observed that words not defined in statute must be construed in its popular sense, meaning “that sense which people conversant with the subject matter with which the statue is dealing would attribute to it”. It is to be construed as understood in common language. AAR referred to the decision of Hon’ble Supreme Court in the case of Indo International Industries v. Commissioner of Sales Tax, U.P. 1981 taxmann.com 385 (S.C.)], Oswal Agro Mills Ltd. v. Collector of Central Excise 1993 (66) E.L.T. 37 (S.C) and in the case of Commissioner of Central Excise v. Connaught Plaza Restaurant (P.) Ltd. [2012 (286) E.L.T. 321 (S.C.).

2. Whether Fryums in common parlance are understood as Papad- AAR therefore referring to the above decision then examined whether “Fried Fryums” would be covered by the term “Papad” as understood in common parlance.

3. Decision of CESTAT in the matter of T.T.K. Pharma Ltd. Vs. Collector of Central Excise [1993 (63) E.L.T. 446 (Tribunal)- The issue before CESTAT was classification of the product “Fry Snack Foods called Fryums” and whether it would be considered as “Namkeen” and not as “Papad”. It was held that “Fry Snack Foods called Fryums” have to be considered as “Namkeen” and not as “Papad”.

4. Why Fried Fryums are not Papad- AAR observed that Fried Fryums are eatable and used as food articles or eatables and such fried, salted Fryums are found to be commonly known and used as “Namkeen’. Further it can be seen that “Papad” even after roasting or frying are known and used as “Papad only. Whereas, in commercial or trade parlance also, the ‘Fried Fryums’ cannot be said to be known as “Papad’.

5. Why decision of Hon’ble Apex Court in the matter of Shivshakti Gold Finger is not applicable- Hon’ble Supreme Court examined the matter whether ‘Gole Papad’ manufactured out of Maida. Salt and Starch are Papad or not and held that size or shape is irrelevant and that Papad of all shapes and sizes are covered under the entry ‘Papad’. In the case of Shivshakti Gold Finger, Hon’ble Supreme Court has not examined the issue of ‘Fried Fryums’ and therefore the said case is not found to be applicable in the facts of the present case. Therefore, the ‘Fried Fryums’ are not classifiable as ‘Papad’ under Tariff Item 1905 90 40.

6. Classification of Fried Fryums: Tariff item 2106 90 99 includes sweet meats commonly known as “Misthans” or “Mithai” or called by any other name. They also include products commonly known as “Namkeens”, “Mixtures”. “Bhujia”. “Chabena” or called by any other name. Such products remain classified in these sub-headings irrespective of the nature of their ingredients.

AAR observed that Heading 2106 is an omnibus heading covering all kind of edible preparations, not elsewhere specified or included. Chapter Note 5 provides an inclusive definition of this heading and covers preparations for use either directly or after processing, for human consumption. In 5(b) above preparation for use after processing has been included and mentioned therein such as cooking, dissolving or boiling in water, milk or other liquids. Obviously, the term ‘such as’ is purely illustrative but not exhaustive and therefore processing includes frying also, hence fried goods are also covered under chapter head 2106 which is ready for human consumption. Further, Chapter Note 6 pertaining to Tariff Item 2106 90 99 also provides inclusive definition and products mentioned therein are illustrative only. Taking all these aspects into consideration, it is held that the product “Fried Fryums” is appropriately classifiable under Tariff Item 2106 90 99.

5. Held:

Sl. No. 23 of Schedule III of issued under the CGST Act, 2017 and corresponding Notification No. 1/2017-State Tax (Rate) dated 30.06.2017, as amended, issued under the CGST Act. 2017 covers “Food preparations not elsewhere specified or included [other than roasted gram, sweetmeats, batters including idli/dosa batter, namkeens, bhujia, mixture, chabena and similar edible preparations in ready for consumption form, khakhra, chutney powder, diabetic foods]” falling under Heading 2106.

Therefore, AAR held that GST Rate of 18% (CGST 9% + SGST 9% or IGST 18%) is applicable to the product ‘Fried Fryums’ as per Sl. No. 23 of Schedule III of Notification No. 1/2017 -Central Tax (Rate) dated 28.06.2017, as amended, issued under the CGST Act, 2017 and Notification No. 1/2017-State Tax (Rate) dated 30.06.2017, as amended, issued under the SGST Act, 2017 or IGST Act, 2017.

6. Comment

An issue of perineal dispute between the assessee and department whether Fryums are Papad or not. AAR referred in its observation that

Thus, in the aforesaid decision, the product “Fry Snack Foods called Fryums” have been considered as “Namkeen” and not as “Papad”.

7.10 It is observed that Fried Fryums are eatable and used as food articles or eatables and such fried, salted Fryums are found to be commonly known and used as “Namkeen’.

However, while classifying Fryums in HSN 2106 90 99 classified it in 18%.

In Pre GST Regime also there were decisions one which was referred by AAR i.e. T.T.K. Pharma Ltd. Vs. Collector of Central Excise [1993 (63) E.L.T. 446 (Tribunal) and other one i.e. Commissioner of Central Excise, Bangalore v. TTK Pharma Ltd [2005] 2005 taxmann.com 262 (Bangalore – CESTAT) held that Fryums are to be considered as namkeen which are to be required to be fried before they are consumed.

There are two other decision of AAR in GST Regime however relating unfried Fryums and there also dispute was whether Fryums are Papad or not. The same are as follows:

a) Sonal Product [2019] 103 taxmann.com 280 (AAR – GUJARAT)-The issue before this AAR was “Unfried Fryums” i.e. before Frying and not ready to eat. The applicant in its application has submitted that such ‘Un-fried Fryums’ are not a cooked foods, not used as ready to eat food, not an instant food article or eatable for human consumption.

Held: The product ‘Un-fried Fryums’ manufactured and supplied by M/s. Sonal Product (GSTIN 24AGPPK7290R1ZF) is classifiable under Tariff Item 2106 90 99 of the First Schedule to the Customs Tariff Act, 1975.

b) Subramani Sumathi,[2019] 104 taxmann.com 197 (AAR – TAMILNADU)- The issue to be decided before us is the rate of tax applicable to the product of the Applicant and the applicable HSN Code. From the various submissions of the Applicant, it is evident that the product is made out of dough of maida as main ingredient along with preservatives. The mixed dough is cut into desirable shapes and dried in oven. The Applicant uses machinery for making the same. The products are sold by the Applicant in retail packing which have shelf life of around 6 months as they have added preservatives are not fully cooked and are not ready to eat. On purchase by the consumer, they are to be fried in edible oil before consumption. It is seen from the samples and photographs produced during the hearing, that the items are indeed edible only after frying in oil which is not done by the Applicant but those who purchase it.

Held- The Applicants product namely “Maida Vadam/Papad” is classifiable under ‘1905 05 40’ and is exempted from CGST and SGST vide SI No. 96 of Notification No. 02/2017 -CT (Rate), dt 28.06.2017 as amended and Notification No. II(2)/CTR/532(d-5)/2017 vide G.O. (Ms) No. 63, dated 29.06.2017 respectively.

Whether Fees paid to ROC is liable for payment of tax under Reverse Charge Mechanism under GST?

There has been a lot of discussion about the levy of GST on fees paid to Registrar of Companies under Reverse Charge. The article discusses the question and how far it is correct to treat the fees paid to Registrar of Companies as a supply for being the same being liable to GST under reverse charge?

The activity is filing form as prescribed under the Companies act, 2013 using the MCA Webportal. The person who is uploading the form has to be pay prescribed fees before submission of the requisite Form. Let’s for simplification take an example wherein M/s ABC Limited has to file form SH-7 for alteration in share capital.

Reference to Statutory Provisions of Companies act, 2013

E Form SH-7 is required to be filed pursuant to Section 64 (1) of the Companies Act, 2013 and rule 15 of Companies (Share Capital & Debentures) Rules, 2014-Rule 15 of Companies (Share Capital & Debentures) Rules, 2014 is being reproduced herewith for ready reference

For the purposes of sub-section (1) of section 64, where a company alters its share capital in any manner specified in sub-section (1) of section 61, or an order is passed by the Government increasing the authorized capital of the company in pursuance of sub-section (4) read with subsection (6) of section 62 or a company redeems any redeemable preference shares, the notice of such alteration, increase or redemption shall be filed by the company with the Registrar in Form No. SH-7 along with the fee.

It would be pertinent to observe here that the Rule 15 provides that notice of alteration, increase or redemption shall be filed by the company with the Registrar in Form No. SH-7 along with the fee. That the fee is prescribed under the Rules itself.

Fees chart for filing up the form

Nominal Share Capital	Fixed	For every 10,000 or part thereof
Up to 1, 00, 000 5,000	5000	NA
More than 1,00,000 up to 5,00,000	5000+	400
More than 5,00,000 up to 10,00,000	21000+	300
More than 10,00,000 up to 50,00,000	36000+	300
More than 50,00,000 up to 1,00,00,000	156000+	100
More than 1,00,00,000	206000+	75

Further, it has been provided in the instruction part that for increasing the authorized share capital, the difference between fee applicable on the increased share capital and fee applicable on existing authorized capital, at the rates prevailing on the date of filing the notice, shall be payable. For this purpose, the rates will be same as specified above.

E.g. In case the authorized capital is increased by public company from Rupees 10,00,000 to Rupees 60,00,000, the fee payable will be calculated as:

Particulars	Amount	Comments
Fees payable on Rupees 60,00,000	Rupees 166,000	As per the rates prevailing on the date of filing
Less: Fees payable on Rupees 10,00,000	Rupees 36,000	As per the rates prevailing on the date of filing
Fee payable will be	Rupees 1, 30,000

Section 404 of Companies Act, 2013

It would apt to highlight provisions of Section 404 of Companies Act, 2013 which provides as follows-

All fees, charges and other sums received by any Registrar, Additional, Joint, Deputy or Assistant Registrar or any other officer of the Central Government in pursuance of any provision of this Act shall be paid into the public account of India in the Reserve Bank of India.

The Section provides that the fees paid under any of the provision of the Act shall be paid into the public account of India in the Reserve Bank of India.

Rule 7 of e Companies (Registration Offices and Fees) Rules, 2014 which provides for e-filing of the forms is as under-

7. Manner and conditions of filing- Every application, financial statement, prospectus, return, declaration, memorandum, articles, particulars of charges, or any other particulars or document or any notice, or any communication or intimation required to be filed or delivered or served under the Act and rules made there under, shall be filed or delivered or served in computer readable electronic form, in portable document format (pdf) or in such other format as has been specified in any rule or form in respect of such application or form or document or declaration to the Registrar through the portal maintained by the Central Government on its web-site or through any other website notified by the Central Government.

Rule 12 of e Companies (Registration Offices and Fees) Rules, 2014 which provides for payment of fees is as follows

(1)The documents required to be submitted, filed, registered or recorded or any fact or information required or authorised to be registered under the Act shall be submitted, filed, registered or recorded on payment of the fee or on payment of such additional fee as applicable, as mentioned in Table annexed to these rules.

Reference to Section 7(2) of CGST Act, 2017

It would be worthwhile to highlight provision of Section 7(2) of CGST Act, 2017-

Notwithstanding anything contained in sub-section (1)–

(a) ……; or

(b) such activities or transactions undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities, as may be notified by the Government on the recommendations of the Council, shall be treated neither as a supply of goods nor a supply of services.

However, again the fact is anything which is covered under Section 7(1) is being overridden by a non-obstinate clause. This again is not a deeming fiction that everything provided by Central Government and State Government is supply and only that excluded by Section 7(2) is overridden. It only says that what is included in Supply by virtue of Section 7(1) will be taken out of the purview of Section 7(1) by exercising powers under this section.

The question is what is included in Section 7(1) of CGST Act, 2017 as what is included in Section 7(1) can be taken out by Section 7(2).

Process of Identifying whether and how particular activity or transaction is taxable under GST and what is included in Section 7(1)(a) of CGST Act, 2017 to constitute a “Supply” and how the statute proceeds therefrom for identifying “Supply of Goods” or “Supply of Service”

Before moving on to Section 7(1) and identify supply, it would be interesting to identify what is the process which is coming out from the statute for the purpose of arriving at whether and how particular activity or transaction is taxable under GST. The lead is being given by Section 7(1A) of the CGST Act, 2017 which is being reproduced hereunder-

“Where certain activities or transactions constitute a supply in accordance with the provisions of sub-section (1), they shall be treated either as supply of goods or supply of services as referred to in Schedule II”

The flow of identifying the taxability as coming out of the above provisions can be marked as below-

Identify the activity or the transaction in hand.
Whether such activity or transaction constitute a supply in accordance with the provisions of Section 7(1).
If yes, then identify whether such activity or transaction is excluded from the purview of Supply by virtue of provisions of Section 7(2).
If No, then identify whether such activity or transaction has to be treated as Supply of Goods or Supply of Service with reference to Schedule II if mentioned therein and read with definition of “composite supply” and “mixed supply” and “goods” and “service” provided under Section 2 of CGST Act, 2017.
Once identified regarding the activity or transaction being “supply of goods” or “supply of services”, relevant provisions for “place of supply”, “time of supply” and tax rate can be identified an applied.

The above process gains more strength from the fact that Section 7(1)(a) starts with the phrase-

For the purposes of this Act, the expression “supply” includes all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal.

Thus, what is included in “supply” is all forms of “supply of goods or services or both” without any distinction whether it is “supply of goods” or “supply of services” as it is immaterial at this stage of identify whether it is supply of goods or services as long as such activity of transaction fulfils the three ingredients for supply of goods or services or both to be covered under the scope of Section 7(1)(a) of CGST Act, 2017-

a) Activity or Transaction should be made or agreed to be made for a consideration.

b) Activity or Transaction should be made by a person.

c) Activity or Transaction should be in the course or furtherance of business.

Hon’ble Karnataka High Court in the matter of Bangalore Turf Club Limited vs The State Of Karnataka on 2 June, 2021 held that

“In terms of Section 7 the taxable event is supply i.e., supply of goods for consideration and in course of furtherance of business. All three events must concur for a taxable event to occur.”

In light of the above discussion, lets discuss whether filing of form and in turn payment of amount to ROC constitutes a “Supply” in GST?

Whether Fees paid to ROC constitutes a “Supply”

a) Condition-1-Activity or Transaction should be made by a person- That when form SH-7 is being filed in case of alteration of the share capital by a company, there are two persons involve in the transaction i.e. Company filing the form and Central Government irrespective of the fact that Rule 7 of the Companies (Registration Offices and Fees) Rules, 2014 provide that the filing of the form can be through the portal maintained by the Central Government on its web-site or through any other website notified by the Central Government. The activity of filing the form is between the company and the Central Government and the portal is an intermediary whether the portal maintained by the Central Government or any other portal notified by the Central Government. Even if it’s a portal notified by the Central Government, portal will be providing service to the government as it’s the statutory duty of the Government to provide Portal and not at the option or choice of the person using the platform whether he wants to use the same or not. The company using the platform for filing of the form does not have a say whether the service provider is good or not or whether they want another service provider. Further the interaction on using the portal would be between the government and the company only.

It would be worthwhile to mention that by way of Clause 2(84)(k) of CGST Act, 2017, Central Government has been covered under the definition of the “Person”. Further by way of Article 2(84)(c) of the CGST Act, 2017, a company is also covered under the definition of “person”.

b) Condition-2-Activity or Transaction should be in the course or furtherance of business-

Definition of “Business” as per Clause 2(17)(i) of CGST Act includes any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities.

c) Condition-3-Activity or Transaction should be made or agreed to be made for a consideration.

The question is when amount is being paid to ROC, whether it can be can be called consideration against supply of services. The “term” consideration” has been defined under Section 2(31) of CGST Act, 2017 as follows-

(31) ―consideration‖ in relation to the supply of goods or services or both includes–

any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;
the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government:

Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply;

It is to be noted that merely the fact that an activity has been covered under the definition of “business” does not itself ipso facto satisfies the condition that there is presence of consideration. The condition has to be satisfied separately and cannot be lost sight of. In light of the above lets try to decipher presence of consideration in case of fees paid to Registrar of Companies.

It was held by Hon’ble Apex Court in the matter of S.P. Goel vs Collector of Stamps, Delhi on 8 December, 1995 Equivalent citations: 1996 AIR 839, 1996 SCC (1) 573 observed about the duties being carried out by Registrars or Sub- Registrar while registering the document on the payment of stamp duty. Hon’ble Apex Court held that

They only perform their statutory duties (some of which, as earlier indicated, are judicial or, at least, quasi-judicial in nature) to raise and collect the State revenue which is a part of the sovereign power of the State.

Hon’ble Orissa High Court in the matter of Regional Transport Officer vs Arun Kumar Behera And Others on 5 February, 2020 observed about the Regional Transport Officer and held that

As such, granting of permit and collection of tax from motor vehicle are all statutory in nature and the said functions are not discharged for consideration.

It would be apt reproduce circular dated 18th December, 2006 bearing No. 89/7/2006 wherein it was clarified from the point of view of presence of consideration involved in sovereign function-

The Board is of the view that the activities performed by the sovereign/public authorities under the provision of law are in the nature of statutory obligations which are to be fulfilled in accordance with law. The fee collected by them for performing such activities is in the nature of compulsory levy as per the provisions of the relevant statute, and it is deposited into the Government Treasury. Such activity is purely in public interest and it is undertaken as mandatory and statutory function. These are not in the nature of service to any particular individual for any consideration. Therefore, such an activity performed by a sovereign/public authority under the provisions of law does not constitute provision of Taxable Service to a person and, therefore, no Service Tax is leviable on such activities.

That again it is highlighted that amount paid for services performed under statuary obligations are devoid of character of “consideration” or does not partake the nature of “Consideration”.

Before Moving ahead, it would be apt to highlight the relevant extract of the judgement in the matter of Commissioner of Service Tax Vs Repco Home Finance Ltd. (CESTAT Chennai) wherein it was held that for being considered as consideration amount received has to be “consideration to the contract” rather than “condition to a contract”.

22. A Larger Bench of the Tribunal in Bhayana Builders (P) Ltd. vs Commissioner of Service Tax observed that “implicit in the legal architecture is the concept that any consideration whether monetary or otherwise, should have flown or should flow from the service recipient to the service provider and should accrue to the benefit of the latter.” In the said decision, the Larger Bench made reference to the concept of “consideration”, as was expounded in the decision pertaining to Australian GST Rules, wherein a categorical distinction was made between “conditions” to a contract and “consideration”. It has been prescribed under the said GST Rules that certain “conditions” contained in the contract cannot be seen in the light of “consideration” for the contract and merely because the service recipient has to fulfil such conditions would not mean that this value would form part of the value of the taxable services that are provided.

It was further observed that

27. What follows from the aforesaid decisions is that “consideration” must flow from the service recipient to the service provider and should accrue to the benefit of the service provider and that the amount charged has necessarily to be a consideration for the taxable service provided under the Act. It should also be remembered that there is marked distinction between “conditions to a contract” and “considerations for the contract”. A service recipient may be required to fulfil certain conditions contained in the contract but that would not necessarily mean that this value would form part of the value of taxable services that are provided.

It was concluded that

35. The “expectation interest” is a popular measure for damages arising out of breach of contract. The foreclosure charges, therefore, are not a consideration for performance of lending services but are imposed as a condition of the contract to compensate for the loss of “expectations interest” when the loan agreement is terminated pre-maturely. In fact, fore-closure charges seek to deter the borrowers from switching over to cheaper available sources of loan, as has been so clearly stated in the Circular dated 26 June, 2012 issued by the Reserve Bank of India.

The question is whether the fees paid to ROC is against any service or whether the quid-pro-quo is absent and it is a regulatory fee and thus the essential ingredients of consideration are thus absent.

Initially there were Judgements which held that levy of fee should be for a consideration of certain services which the individual accept or the fee may generally be defined as a charge for a special service rendered to individuals by some governmental agency.

In the matter of The Commissioner, Hindu Religious Endowments, Madras vs. Sri Lakshmindra Thirtha Swamiar of Sri Shirur Mutt (1954 SCR 1005) it was held that a fee may generally be defined as a charge for a special service rendered to individuals by some governmental agency. The amount of fee levied is supposed to be based on the expenditure incurred by the Government in rendering the services.

The Chief Commissioner, Delhi & Anr. v. The Delhi Cloth & General Mills Co. Ltd. & Ors.- Levy of fee should be in consideration of certain services which the individuals accept either willingly or unwillingly and secondly the collection from such levy should not be set apart or merged in the general revenue of the State to be spent for general public purposes but should be appropriated for the specific purpose for which the levy is being made.

Om Parkash Agarwal & Ors. v. Giri Raj Kishori & Ors. (1986 (1) SCC 722) wherein it was held that wherein this Court held that when the money collected by the levy of fee is to be deposited in a fund which was to vest in the State Government and not in the Municipality or a Marketing Committee or any other local authority having limited functions specified in the enactment under which the fund was constituted and was empowered to be expended by the State Government virtually on any object which the State Government considered to be the development of rural areas, that levy could not be treated as a fee because it was more in the nature of a tax primarily in view of the fact that the collection so made was being utilised not for fulfilling the objects of the Act under which the collection was authorised but for the general requirement of the States functions.

However, in the case of B.S.E. Brokers Forum, Bombay & … vs Securities & Exchange Board Of … on 1 February, 2001, referring to the above judgements, it was held that

A lot of ice has melted in the Himalayas after rendering the judgments in the above-cited cases so also there has been see changes in the judicial thinking as to the difference between a tax and a fee since then.

The court referred to many judgements but the one in the matter of In Vam Organic Chemicals Ltd. & Anr. v. State of U.P. & Ors. (1997 (2) SCC 715), it was held that there is a distinction between a fee charged for licence, that is regulatory fees and fees for services rendered as compensatory fees. In the case of regulatory fees, Court held that like the licence fees, existence of quid pro quo is not necessary although the fee imposed must not be, in the circumstances of the case, excessive, keeping in view the quantum and nature of the work involved in the required supervision.

Hon’ble Court also referred to In Secunderabad Hyderabad Hotel Owners Association & Ors. v. Hyderabad Municipal Corporation, Hyderabad & Anr. (1999 (2) SCC 274) wherein it was held that, this Court after considering the earlier judgments, to some of which we have already made reference, held that a licence fee may be either regulatory or compensatory. When a fee is charged for rendering specific services, a certain element of quid pro quo must be there between the service rendered and the fee charged so that the licence fee is commensurate with the cost of rendering the service although the exact arithmetical equivalence is not expected. It held, however, that is not the only kind of fee which can be charged. Licence fees can also be regulatory when the activities for which a licence is given require to be regulated or controlled. The fee which is charged for regulation of such activity would be validly classifiable as a fee and not a tax although no service is rendered. An element of quid pro quo for levy of such fee is not required although such fees cannot be excessive.

The Hon’ble court observed that

From a conspectus of the ratio of the above judgments, we find that so far as the regulatory fee is concerned, the service to be rendered is not a condition precedent and the same does not lose the character of fee provided the fee so charged is not excessive.

It further observed that

If we apply the test as laid down by this Court in the abovesaid judgments to the facts of the case in hand, it can be seen that the Statute under Section 11 of the Act requires the Board to undertake various activities to regulate the business of the securities market which requires constant and continuing supervision including investigation and instituting legal proceedings against the offending traders, wherever necessary. Such activities are clearly regulatory activities and the Board is empowered under Section 11(2)(k) to charge the required fee for the said purpose, and once it is held that the fee levied is also regulatory in nature then the requirement of quid pro quo recedes to the background and the same need not be confined to the contributories alone.

It was finally held that

Once we come to the conclusion that the fee in question is primarily a regulatory fee then the argument that the service rendered by the Board should be confined to the contributories alone, cannot be accepted. What the Court has to investigate while examining a challenge of this nature is to see what is the primary object of the Regulations for which the fee is being collected and find out whether the Regulation in question is in public interest or not. Once the levy is in public interest and connected with the larger trade in which the contributories are involved then confining the services only to the contributories does not arise. As has been held by this Court in City Corporation of Calicut (supra). Applying the said principle, we are of the opinion that since the amount collected under the impugned levy is being spent by the Board on various activities of the stock and securities market with which the petitioners are directly connected, the fact that the entire benefit of the levy does not accrue to contributories i.e. the petitioners would not make the levy invalid.

In the matter of Sona Chandi Oal Committee & Ors vs State of Maharashtra on 16 December, 2004, the matter was regarding levy of inspection fees under Bombay Money Lenders Act, 1946 it was observed that

A three Judge Bench of this Court in B.S.E. Brokers’ Forum, Bombay and Others v. Securities and Exchange Board of India and Others [(2001) 3 SCC 482], after considering a large number of authorities, has held that much ice has melted in Himalayas after the rendering of the earlier judgments as there was a sea change in the judicial thinking as to the difference between a tax and a fee since then. Placing reliance on the following judgments of this Court in the last 20 years, namely, Sreenivasa General Traders Vs. State of Andhra Pradesh, (supra); City Corporation of Calicut Vs. Thachambalath Sadasivan, (1985) 2 SCC 112; Sirsilk Ltd. Vs. Textiles Committee, (1989) Supp. 1 SCC 168; Commissioner & Secretary to Government Commercial Taxes & Religious Endowments Department Vs. Sree Murugan Financing Corporation Coimbatore, (1992) 3 SCC 488; Secretary to Government of Madras Vs. P.R.Sriramulu, (1996) 1 SCC 345; Vam Organic Chemicals Ltd. Vs. State of U.P., (1997) 2 SCC 715; Research Foundation for Science, Technology & Ecology Vs. Ministry of Agriculture, (1999) 1 SCC 655 and Secunderabad Hyderabad Hotel Owners’ Association Vs. Hyderabad Municipal Corporation, Hyderabad, (1999) 2 SCC 274, it was held that the traditional concept of quid pro quo in a fee has undergone considerable transformation. So far as the regulatory fee is concerned, the service to be rendered is not a condition precedent and the same does not loose the character of a fee provided the fee so charged is not excessive. It was not necessary that service to be rendered by the collecting authority should be confined to the contributories alone. The levy does not cease to be a fee merely because there is an element of compulsion or coerciveness present in it, nor is it a postulate of a fee that it must have a direct relation to the actual service rendered by the authority to each individual who obtains the benefit of the service. The quid pro quo in the strict sence was not always a sine qua non for a fee. All that is necessary is that there should be a reasonable relationship between the levy of fee and the services rendered. It was observed that it was not necessary to establish that those who pay the fee must receive direct or special benefit or advantage of the services rendered for which the fee was being paid. It was held that if one who is liable to pay, receives general benefit from the authority levying the fee, the element of service required for collecting fee is satisfied.

The Court finally held that

This apart the fee charged is regulatory in nature to control and supervise the functioning of the money lending business to protect the debtors the vast majority of which are poor peasants, tenants, agricultural labourers and salaried workers who are unable to repay their loans. The object of the Act is to control the money lending business and protect the debtors from the malpractices in the business by detecting illegal money lending. This exercise is a must to carry out the object of the Act for which lot of infrastructure is required. The duty of the staff and the officers of the Department is to visit the places of money lending business, inspect the accounts and other matters relating to the business, to find out illegal money lending, carry out raids in suspicious cases and do regular inspection as provided in the Act. The Act serves a larger public interest.

Thus, it can be seen from the above that levy of fees can be regulatory in nature and once the levy of fees is regulatory in nature, the service to be rendered cannot be a condition precedent. The primary object for which fees is being charged can be in the public interest and can be or the regulation of the field for which the statute has been enacted. As was observed in the matter of Sona Chandi Oal Committee&Ors vs State Of Maharashtra on 16 December, 2004 by the Hon’ble Apex Court that inspection fee charged is regulatory in nature to control and supervise the functioning of the money lending business to protect the debtors the vast majority of which are poor peasants, tenants, agricultural labourers and salaried workers who are unable to repay their loans.

Statement of Objects of Companies Bill 2009

The Statement and Objects of Companies Bill 2009 provides about the object of Companies Act. 4. However, in view of large amendments to the Companies Bill, 2009 arising out of the recommendations of the Parliamentary Standing Committee on Finance and suggestions of the stakeholders, the Central Government decided to withdrew the Companies Bill, 2009 and introduce a fresh Bill incorporating therein the recommendations of Standing Committee and suggestions of the stakeholders as Companies Bill, 2011.However the broader objective for repealing the Companies Act, 1956 are as follows-

3. The expansion and growth of the Indian economy has also generated considerable interest in the international investing community. However, there is a need for sustaining growth in a globalised and competitive environment. The increasing options and avenues for international business, trade and capital flows have made it imperative for the growing Indian economy to not only harness its entrepreneurial and economic resources efficiently but also to be competitive in attracting investment to sustain the impressive growth recorded by it in recent years. Many investors are also looking towards the statutory and regulatory framework for the corporate sector in the country while deciding on their investment options. Modernisation of corporate regulation, governing various aspects of setting up of enterprises, structures for sharing of risk and reward, their governance and accountability to stakeholders, financial procedures and responsibility for disclosures, procedures for rehabilitation, liquidation and winding up is, therefore, critical to the perceptions of investors and determining their business and investment decisions.

4. In the background of the above developments and recognising that the competitive and technology driven business environment today require the corporate entities to be provided greater autonomy of operation and innovation with reasonable process requirements and compliance costs, a need was felt to help sustain the growth of the Indian corporate sector by enabling a new legal framework that would be compact, amenable to clear interpretation, and respond in a timely and appropriate manner to meet the requirements of ever evolving economic activities and business models, while fostering a positive environment for investment and growth. In addition, there is also a need to avoid overlapping and conflict of jurisdiction in the area of sectoral regulations. Therefore, piecemeal re-engineering of the corporate regulatory framework was not considered adequate to enable the systemic changes required. Hence, a comprehensive review of the Companies Act, 1956, and introduction of a revised statutory framework in the form of a new Companies Bill has been considered essential to achieve the desired reform.

That one of the objectives of Companies Act, 2013 is to provide statutory and regulatory framework for the corporate sector and the levy of fees for filing of various forms not only ensures controlling and supervising the functioning of corporates to protect the interest of the investors or the shareholders but at the same time puts a check on the corporate sector to perform the compliances which are mandatory under the statute. The filing of various forms ensures supervision of the activities of the company and at the same time curb the malpractices if any. The levy of additional fees is required not to generate the source of revenue but to force compliances from the corporate sector so that if any compliance which are mandatory in nature to control and regulate the activities of the company are not fulfilled, they might be done so. Therefore, fees being levied is nothing but a regulatory fee which does not satisfy the condition of quid-pro-quo and when fees is being collected under Companies Act, 2013 for the purpose of filing of form, the element of consideration is absent as the fees is regulatory in nature rather than for the purpose of rendering of service. There is no quid pro quo or reciprocity when the amount is paid as the amount is not compensatory in nature but regulatory in nature.

The argument gains more emphasis since the fact that payment of additional fees for alteration of share capital from Rs 1 Lakh to 10 Lakh or from Rs 1 Lakh to 1 Crore does not provide any additional benefit from the regulator to the company like additional facility on portal being given or special treatment being afforded. The levy of additional fees is regulatory in nature and also acts as deterrent to the non-serious concerns or malpractices as alteration of share capital for increase in authorised capital allows the company to raise additional funds from the investors. Now comparing it against payment of additional charges for booking a room in 5-Star Hotel as compared to a 3 Star Hotel, it has its own additional facilities which are absent in case payment of additional fees for alteration of the share capital. That the payment of fees is a condition for filing of the form and not a consideration for filing of the form. The primary requirement for filing of the form is not for earning revenue but to regulate compliance.

In addition to the above, taking a cue from Income Tax Act, 1961 wherein an amount has to be paid for filing of Income Tax Appeal under Section 246A. The right to appeal is a statutory and a constitutional right and cannot be taken away and to say that appeal fees of Rs 500/- is a consideration for allowing the appeal to be filed would tantamount to the fact that had there been no appeal fees, there would have been no appeal. The payment of appeal fees is regulatory in nature and part of a statutory process rather than act as a consideration for providing justice to the aggrieved. That having a right against the action of the State is a constitutional right and money charged as appeal fees cannot be taken as a consideration for that constitutional right but is in the nature of regulatory framework.

Taking the example further, a fee of Rs 100/- had to be deposited under the Rajasthan Value Tax Act, 2003 before filing application for reopening of ex-parte assessment. Subsequently the Government of Rajasthan scrapped the fees. So whether by way of scrapping of fees, it meant that justice was now available free of cost or without any amount being paid or previously justice was available at the payment of Rs 100/- as consideration. Neither the intention of the Government was to earn from that Rs 100/- and nor was there any fact of reciprocity present therein. The only intention of the government when Rs 100/- was levied to regulate the manner in which the applications are being filed and as a condition of filing the form.

Therefore, the condition “consideration to a contract” is absent in the transaction wherein amount is paid to Registrar of Companies for filing of form since the amount paid is regulatory in nature rather than being paid as a consideration for the services being rendered. The payee might be a beneficiary as part of the public as the statute is for the purpose of protecting public interest but the amount paid does not relates to any specific service being received by him. Thus, the amount paid cannot be held to be in respect of, in response to, or for the inducement of, the supply of goods or services or both. It is not a consideration flowing to the Central Government but it is a condition for filing the form without which the form cannot be filed.

Conclusion-That since the third condition regarding presence of consideration is absent in the above case of payment of amount to ROC for filing of form, the same cannot be held to be supply of service by Government to the Company and since it is not a supply, therefore in the humble but firm view, tax is not required to be paid under reverse charge.

#GSTCase-82-Input Tax Credit on construction of Sheds in factory premises not allowed and blocked by virtue of provisions of Section 17(5)(c) and (d) of CGST Act, 2017

Maruti Ispat & Energy (P.) Ltd. [2018] 99 taxmann.com 103 (AAR – ANDHRA PRADESH)

1. Query:

Whether applicant is eligible to take GST input on Goods and Services used for installation (Foundation) and protection (by creating sheds) of plant and machinery?

2. Facts

Applicant is a private limited company, and manufacturers of steel and generation of power. Applicant submitted that they had DRI (direct reduced iron) i.e. spong iron unit and they involve in generation of power. They stated the nature of industry and product requires buying of large plant and machinery for installation and protection of this plant & machinery, they required to lay foundations, and also to construct the sheds.

3. Contention of the petitioner:

There is no restriction to claim input, with respect to items related to plant & machinery. Further, structural support and civil structure are covered as per the explanation to the provisions of Section 17(5). The digging process is done with regard to creation of foundation for specific installation of plant & machinery and is completely suitable only for the specific plant & machinery. The word ‘support’ used in explanation not only means support from base, but also support from all the ways, creating sheds is to protect the plant & machinery.

4. Observation by AAR

On being perusal of photographic evidences, AAR was of the opinion that argument of applicant to treat civil structures as structural support for plant and machinery is not tenable. The civil structures under consideration squarely falls under other civil structures which are excluded as per explanation to the proviso as stated above.

5. Held

As per the material on record and photographic evidences of the applicant, on which sought for clarification does not fall under the ambit of explanation to the proviso to the Section 17(5) of CGST/APGST Act,2017. Hence, the applicant is not entitled to claim the input tax credit on the goods and services.

6. Comment:

Section 17(5)(c) and (d) of CGST Act alongwith the explanation is reproduced hereinbelow:

(5) Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18, input tax credit shall not be available in respect of the following, namely:—

(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;

Explanation.—For the purposes of this Chapter and Chapter VI, 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

(ii) pipelines laid outside the factory premises.

Emphasis Supplied

It’s the portion which has been highlighted which was the primary question before the AAR whether foundation to the machinery and sheds fall within the ambit of “foundation and structural support” for plant and machinery or not.

For the purpose of Sheds, AAR held that it neither falls within the ambit of foundation and nor within the ambit of structural support. For the foundation of the machinery, whether on the basis of evidences or otherwise and which might need reconsideration, AAR held that such foundation is not covered by the explanation to Section 17(5).

It seems that the view might need reconsideration since, sheds might not fall within the ambit of structural support to the plant and machinery but foundation which is specific to machinery would be falling within the ambit of the explanation which allows “foundation and structural support” to the machine to be part of the plant and machinery and takes it out of the ambit of Section 17(5)(c) and (d) . If foundation specific to the machinery is taken out of the ambit of the Explanation to Section 17(5), then the purpose of inserting the explanation might get defeated since Explanation does nothing but to clarify what is already written in the main part of the law.

Whether a registered person who is also an agriculturist, is required to pay tax on sale of agriculture produce which are taxable in GST

Question-Mr. A is registered person in GST. He is having a manufacturing enterprise. Along with the manufacturing enterprise, he is also having an agriculture land on which he is growing agriculture produce. The goods are taxable in GST by virtue of notification No. 1/2017-Central Tax (Rate) Dated 28^th June 2017 (as amended from time to time).

The moot question is whether such person is required to charge tax on such sale of agriculture produce or whether he enjoys exemption on sale of such agriculture produce since he is an agriculturist.

Answer-Let’s try to analyse the above scenario firstly by virtue of Section 23 and then by virtue of Section 9 and Section 11 of CGST Act, 2017-

Section 23(1)(b) of CGST Act, 2017-Exemption from Registration to an Agriculturist-

At the outset, lets first refer to Section 23(1)(b) of CGST Act, which is being reproduced herewith-

Persons not liable for registration. — (1) The following persons shall not be liable to registration, namely: ––

(b) an agriculturist, to the extent of supply of produce out of cultivation of land.

The above provision provides that an agriculturist would not be liable for registration to the extent of supply of produce out of cultivation of land. However, if agriculturist is already a registered person on account of making other taxable supplies, then in such case applicability of section 23 cease to have effect and he becomes a registered person under GST and all provisions of GST Act are applicable upon him as they are applicable on any other person.

Taxability of Supply of Agriculture produce sold by Mr. A

Now in the above situation, Mr. A is already registered in GST and is making supply of agriculture produce which is taxable as per Notification No. 1/2017-Central Tax (Rate) Dated 28^th June 2017 (as amended from time to time).

The question is now once Mr. A is already registered in GST and Section 23(1)(b) ceases to have any applicability on the given scenario, whether Mr. A would be required to levy tax on the supply of agriculture produce. The answer lies in the fact that once a person is registered in GST, then exemption from levy of tax can only be given under Section 11 of CGST Act, 2017 and there is no such exemption given in Section 11 of CGST Act, 2017 to a registered person supplying agriculture produce which is taxable in GST, even though he might be an agriculturist.

Conclusion-Therefore, since Mr. A is registered in GST, thus even though he might be an agriculturist but still he would be liable to charge tax on supply of taxable agriculture produce. He cannot claim exemption from levy of tax by virtue of provisions of Section 23(1)(b) of CGST Act, 2017 since the same are registration provisions and they ceases to have applicability once a person is registered in GST and further there is no exemption notification issued in Section 11 of CGST Act from levy of tax for an agriculturist who is a registered person in GST.

Communications to be made by the Department with the assessee in GST-What is meant by the term “electronically” and ambiguity arising out of differing activities i.e. “issued”, “made available”, “informed”, “served”, “uploaded” and “on the common portal” attached to the term “electronically” in GST-Part I

It is very common to read through out the CGST Rules, 2017 that communication has to be made electronically and it’s our general understanding too that all communications in GST would be made “electronically”.

However, at first this is not true as CGST Act has not mandated it anywhere and further CGST Rules do not always provide that communication should be always be made “electronically” and secondly it’s very common to see that some communications are being served on email of the taxpayer through the email ID of the proper officer and some are served on common portal by the proper officer. The issue gets more important because if the notices are not replied for, there is a very strict mechanism for passing the order to the best of the judgement of the proper officer. So lets try to analyse the issue and see what we have goth through the statute and the rules made thereunder.

Section 169 of CGST Act, 2017provides for service of notice in certain circumstances and nowhere provides that all communications have to be made electronically

Section 169 of CGST Act prescribes six mode of service of decision, order, summons, notice or other communication. Out of the six modes, Section 169 provides that any one of the modes can be selected for service of the decision, order, summons, notice or other communication the CGST Act or the rules made thereunder. It nowhere provides that all communications have to made electronically. The six modes are as follows-

a) by giving or tendering it directly or by a messenger including a courier- The communication can be serviced by giving or tendering it directly or by a messenger including a courier to the specified persons. The specified persons are

Addressee, or
The taxable person, or
To manager of the taxable person, or
to the authorised representative if the taxable person, or
To an advocate or a tax practitioner holding authority to appear in the proceedings on behalf of the taxable person, or
To a person regularly employed by him in connection with the business, or
To any adult member of family residing with the taxable person.

b) Registered post or speed post or courier with acknowledgement due-The communication can be sent by registered post or speed post or courier with acknowledgement due, to the specified person at his last known place of business or residence. The specified person in such cases is either the person for whom it is intended or his authorised representative.

c) E-Mail Address- The communication can be sent to e-mail address of the taxable person provided at the time of registration or as amended from time to time.

d) Common Portal- The communication can be made available on the common portal.

e) Publication in News Paper-The communication can be published in a newspaper circulating in the locality of the specified person in which he is last known to have resided, carried on business or personally worked for gain. The specified person is

The taxable person or
The person to whom it is issued

f) In cases none of the modes are practicable-if none of the modes aforesaid is practicable, the communication can be affixed in some conspicuous place at his last known place of business or residence and if such mode is not practicable for any reason, then by affixing a copy thereof on the notice board of the office of the concerned officer or authority who or which passed such decision or order or issued such summons or notice.

CGST Rules, 2017 provides at many places that the communication has to be made electronically-Are the provisions of the CGST Rules overriding the provisions of Statute as Section 169 provides that communication can be made by any of the six modes

Section 169 of the CGST Act, 2017 provides that the communication can be sent by any of the modes as provided thereunder. However, it can be seen that CGST Rules, 2017 at many places provide that communication has to be made electronically. Thus, the rules are restricting the mode of communication which was left by any of the six modes by virtue of Section 169 of CGST Act, 2017. Are the Rules overriding the provisions of CGST Act, 2017.

Term “electronically” has not been defined in the Statute and i.e. whether it means communication to be sent on e-mail or to be uploaded on common portal; Section 169 treats sending on email ID and uploading on portal as different modes of communication.

Although CGST Rules, 2017 provides at many places that communication has to be made electronically but nowhere has the CGST Act, 2017 mandated that the communication has to be made electronically. Further, nowhere it has been specified that what is meant by the term “electronically” i.e. whether it means communication to be sent on e-mail or to be uploaded on common portal or to be sent on mobile number and Section 169 of CGST Act treats sending on email ID and uploading on portal as different modes of communication.

It would be apt to highlight here that once the notice is uploaded on portal then an instant communication of the same is made on the registered email ID and the mobile number of the taxpayer. The issue has been left open ended by the Statute.

Terminology and the Scope of the term “electronically” has been used in vague manner across the rules

Let’s try to see if the CGST Rules, 2017 provide us any clue regarding what is meant by term “electronically”. But sadly, rules also do not provide any clarity on the matter about what is meant by the term “electronically”, whether it means sending through to the email or being uploaded on the common portal or whether a free hand has been given in the law to send the communication whatever electronic mode is available.

Interestingly, let’s see the ambiguity with which the term “electronically” has been used with the activity “issued”, “made available”, “informed”, “served”, “uploaded” and that too at some places “on the common portal” and at some places nothing has been specified and has been left open ended. Some of the specific circumstances with examples are as follows-

a) Relevant Provisions providing that the communication shall be issued electronically (whether or not through the portal not specified)-Some places it has been provided that communication shall be issued electronically although it has not been provided whether such communication has to be through the portal or not.

Rule	Particulars
8(5)	An acknowledgement shall be issued electronically to the applicant in FORM GST REG-02
9(2)	He may issue a notice to the applicant electronically in FORM GST REG-03 within a period of three working days from the date of submission of the application and the applicant shall furnish such clarification, information or documents electronically, in FORM GST REG-04
19(1)(A)	Issue an order in FORM GST REG-15 electronically
68	A notice in FORM GSTR-3A shall be issued, electronically, to a registered person who fails to furnish return under section 39 or section 44 or section 45 or section 52

b) Relevant Provisions providing that the communication shall be made available electronically on/through the portal- At some places it has been specifically provided that communication shall be made available electronically on/through the portal.

Rule	Particulars
24(2)(C)	A certificate of registration in FORM GST REG-06 shall be made available to the registered person electronically on the common portal.
90(1)	Where the application relates to a claim for refund from the electronic cash ledger, an acknowledgement in FORM GST RFD-02 shall be made available to the applicant through the common portal electronically

c) Relevant Provisions providing that the applicant shall be informed electronically (whether or not through the portal not specified)-At some places it has been provided that applicant shall be informed electronically although it has not been provided whether such communication has to be through the portal or not.

Rule	Particulars
9(4)	Reject such application and inform the applicant electronically in FORM GST REG05

d) Relevant Provisions providing that the applicant shall be served electronically (whether or not through the portal not specified) –At some places, it has been provided that the communication shall be served electronically although it has not been provided whether such communication has to be through the portal or not. It would be apt to highlight that Rule 142(1) where the terminology has been used, therein DRC-02 cannot be served without the use of common portal. Therefore, the issue gets more complicated wherein the form cannot be served without the use of common portal but the rules do not specifically provide so and at other places they specifically provide so.

Rule	Particulars
142(1)	The proper officer shall serve, along with the Statement under sub-section (3) of section 73 or sub-section (3) of section 74, a summary thereof electronically in FORM GST DRC-02,

e) Relevant Provisions providing that the taxpayer shall be informed electronically (whether or not through the portal not specified)–At some places, it has been provided that the taxpayer shall be informed electronically although it has not been provided whether such communication has to be through the portal or not. Although not specifically provided for, such communication is being done through the portal itself.

Rule	Particulars
138(8)	He shall be informed electronically, if the mobile number or the e-mail is available

f) Relevant Provisions providing merely that the communication shall be uploaded electronically (whether or not on the portal not specified)-At some places, it has been merely provided that communication shall be uploaded electronically although it has not been provided whether such communication has to be through the portal or not. However, even though not provide for but such form can be uploaded on the common portal. The rules do not specifically provide so and at other places they specifically provide so.

Rule	Particulars
100(1)	A summary thereof shall be uploaded electronically in FORM GST DRC-07
142(6)	A summary of the order issued under section 52 or section 62 or section 63 or section 64 or section 73 or section 74 or section 75 or section 76 or section 122 or section 123 or section 124 or section 125 or section 127 or section 129 or section 130 shall be uploaded electronically in FORM GST DRC-07, specifying therein the amount of tax, interest and penalty payable by the person chargeable with tax.
142(7)	A summary of the rectification order or of the withdrawal order shall be uploaded electronically by the proper officer in FORM GST DRC-08.

g) Relevant Provisions providing that the communication shall be uploaded electronically on the common portal-At some places, it has been specifically provided that that the communication shall be uploaded electronically on the common portal.

Rule	Particulars
142A	May be uploaded in FORM GST DRC-07A electronically on the common portal for recovery under the Act and the demand of the order shall be posted in Part II of Electronic Liability Register in FORM GST PMT-01

Conclusion-It seems that such an important issue of communication to the taxpayer has been left ambiguous. There are many places where the communication or the form has to be through the common portal but the rules do not provide for and keep everybody guessing. At other places the communication might be made both ways i.e. through portal or through email but nothing specific has been provided. At some places, it has been provided that the notice has to be issued electronically and at some places it has been provided that the notice shall be served electronically. Differing Terms and Differing Interpretation. We would be further covering the issue in our second article.

Treatment of Discounts on offtake from the perspective of recipient in GST-Part II

This part of the article discusses the situation wherein the terms of discount had been decided before or at the time of supply and are linked to specific invoices, but the supplier chooses not to reduce the tax liability as per provisions of Section 15(3) of CGST Act, 2017 on the discount given to the recipient.

Discount by A Ltd. with regard to offtake of goods by M/S B Ltd.:

Let’s try to analyse different situation with the help of an example wherein “A Ltd.” (who is a wholesaler) supplies electronic goods to “B Ltd. ” (being a retailer) and “B Ltd.” supplies goods to “C” (being a customer). There can be following situations which may be possible in the above transaction:

a) Terms of Discount decided on or before supply and discount is linked to specific Invoice

Supplier opts to reduce the tax charged earlier on the supply of goods as per the provisions of section 15(3) of CGST Act, 2017
Supplier does not opts to reduce the tax charged earlier on the supply of goods

b) Terms of Discount decided after the supply and discount is linked with specific Purchase Invoice:

Supplier has no option to reduce tax charged earlier on the supply of goods.

c) Terms of discount whether decided on or before or after the supply of goods and is not linked with specific purchase Invoice:

Supplier has no option to reduce tax charged earlier on the supply of goods.

This part of the article only discusses the situation wherein terms of discount have been decided on or before supply and discount is linked to specific purchase invoice. The rest of the situations would be dealt with in the ensuing articles.

For the sake of clarity, it is clarified that there are provisions under Section 15(3) are divided into two parts i.e. Section 15(3)(a) which provides for discount on the invoice itself and Section 15(3)(b) which provides for discount through credit note.

As per provisions of Section 15(3)(a), discount should be given before or at the time of supply and it should be duly recorded in the invoice issued in respect ofsuch supply. Further as per provisions of Section 15(3)(b) discount should be established in terms of an agreement entered into, at or before the time of supply and it should be specifically linked to relevant invoices.

However, in my opinion even though the terms of discount were decided before or at the time of supply and linked to specific invoices, it’s not mandatory from the point of the view of the supplier to avail reduction in transaction value and consequential reduction of tax liability, he may opt to reduce the discount from transaction value or he may not opt to do so.

If he opts to do so in term of Section 15(3)(a), he would deduct the discount in the invoice from the value of taxable supply before calculation of tax and in terms of section 15(3)(b), he would issue a credit note to the recipient wherein recipient would have to reverse the credit claimed earlier and the supplier would be eligible to reduce the tax liability.

If the supplier does not opts to reduce his tax liability by virtue of provision of section 15(3)(a), he would deduct the discount amount after levy of tax or issue a credit note without reducing the tax or by virtue of Section 15(3)(b) he would issue a credit note without reducing the tax liability thereon.

Let’s try to analyse these situations on an individual basis and consequential impact of discount offered by the supplier from the perspective of the recipient. A Ltd. gives discount to B Ltd. on off take of certain quantity during a period or discount for early payment of the outstanding amount etc. A Ltd. may also give other discount in the name of rate difference or special discount which have been decided before or at the time of supply of goods and are linked to specific invoices of purchase.

Case Study 1: Discount by A Ltd. on offtake of goods made by M/S B Ltd. and M/S A Ltd. reduces the tax charged earlier on supply of goods by issue of credit note:

It is assumed that terms of discounts were fixed before or at the time of supply and were linked to specific invoice and A Ltd. offered discount to B Ltd. say of Rs 10 for units purchased during the month of October. A Ltd. passes discount through credit note to B Ltd. and reduces the tax on discount passed on through the credit note.

Particulars	Deduction claimed from Selling Price
Sales Price	100
Tax @ 20%	20
Gross Value	120
Less: Discount passed post supply through Credit Note	10
Less: Tax Liability reduced through Credit Note	2
Net Value	108

A Ltd. in the above situation has collected net selling price of Rs 90 and net tax collected by him on the selling price of Rs 90 is Rs 18. B Ltd although would initially claim credit of Rs 20 for the tax paid but would have to reduce the tax of Rs 2 later on when A Ltd would issue the credit note. Therefore, net credit claimed by B Ltd. would be Rs 18. This is the simplest of the situation.

Case Study 2-Discount by A Ltd. on offtake of goods made by M/S B Ltd. and M/S A Ltd. does not to reduces the tax charged earlier on supply of goods:

It is assumed that terms of discounts were fixed before or at the time of supply and were linked to specific invoice and A Ltd. offered discount to B Ltd. say of Rs 10 for units purchased during the month of October. A Ltd. passes discount through credit note to B Ltd. and opts not to reduce the tax on discount passed on through the credit note.

Particulars	No Deduction clamed from Selling Price
Sales Price	100
Tax @ 20%	20
Gross Value	120
Less: Discount passed post supply through Credit Note	10
Less: Tax Liability reduced through Credit Note	–
Net Value	110

A Ltd in the above situation has collected net selling price of Rs 90 and but the tax collected by him on the selling price of Rs 90 is Rs 20. B ltd would claim credit of Rs 20 for the tax paid.

Thus in both Case Study 1 and Case Study 2, price paid by B Ltd to A Ltd is Rs 90 (i.e. Rs 100- Rs 10). In both the Case Study, B Ltd. has received back Rs 10 through the credit note. However, Input Tax Credit claimed by B Ltd in Case Study 1 is Rs 18 and in Case Study 2 is Rs 20.

The only difference in Case Study 1 and Case Study 2 is that under Case Study 1, B Ltd. has also received back Tax of Rs 2 earlier paid to A Ltd. but in Case Study 2, B Ltd. has not received back Tax of Rs 2 earlier paid to A Ltd, therefore B Ltd. would be claiming additional credit of Rs 2/- under Case Study 2 as compared to Case Study 1.

Supposedly, B Ltd. sells those goods for Rs 120/- to C and collects tax at the rate of 20% on Rs 120/-. In such a case, B Ltd. would pay difference tax of Rs 4/-. The question is what would be the treatment of Rs 10/- discount passed on by A Ltd. to B Ltd.. Whether B Ltd. would have to reverse credit on Rs 10/- in the books of accounts or would have to charge tax on Rs 10/- discount received from A Ltd. treating the same as supply.

Whether tax has to be levied and paid by B Ltd. on Rs 10/- received as discount from A Ltd.:

a) Whether receipt of discount is an independent supply under CGST Act, 2017:

At the outset, discount being received from the supplier by the recipient is not an independent supply within the scope of section 7 of the CGST Act, 2017. Therefore, individually receipt of Rs 10/- by B Ltd. from A Ltd. cannot be included within the scope of supply of Section 7 of CGST Act, 2017.

b) Whether discount received can be considered as subsidy in terms of section 15(2)(e) of CGST Act, 2017:

Another view which has been coming is that whether the amount received as discount on which tax has not been reduced by the supplier can be considered part as the transaction value by virtue of provision of Section 15(2)(e) of CGST Act, 2017. The contention is that such discount received is part of reimbursement of selling price and whether the selling price is recovered from the purchaser or any other person, but still it has to be included in the transactional value.

c) Specific Provision for non-inclusion of discount decided before or at the time of supply and specifically linked to purchase invoice

If we observe scheme of the Section 15 of CGST Act, 2017 it is as follows:

Section 15(1): Value of Supply shall be:

Section 15(2): Value of Supply shall include:

Section 15(3): Value of Supply shall not include:

All these three sections are from the point of the view of arriving at the value at which the supplier would levy and collect tax from the recipient. Section 15(1) provides for value of supply and Section 15(2) adds what would be included in the value of supply and Section 15(3) deducts what would not be included in the value of supply. Thus all these three provisions add on to what would be the final value of supply for the supplier for the purpose of levy of tax. Once an agreement has taken place before the supply, then the liability to discharge the tax also happens to be that of the supplier. That’s why Section 15(1), 15(2) and 15(3) covers all the points of taxation which add up to the value of supply for the recipient. Anything which happens before the supply is complete is either added to the value of the supply or is deducted from the value of supply and its liability of the supplier to discharge uptil then.

Therefore, payment of tax on the discount amount fixed before or at the time of supply is the responsibility of the supplier and if he opts either to pay tax on that value or opts not to pay tax on that value, it is purely his responsibility and recipient has nothing to do with it. Nowhere any condition can be imposed on recipient to be fulfilled.There can be no instance wherein if liability or responsibility has been fixed on supplier for payment of tax and if the supplier does not discharge responsibility, tax would be recovered from recipient treating it part of his selling price.

It has to be appreciated that when terms of discounts have been finalized before or at the time of supply, then recipient would always treat purchase price of goods as net of those discounts. Discounts fixed before or at the time of supply is not a subsequent event which happen post supply of goods.Further since the event takes place prior to the completion of the supply, therefore recipient it’s a deduction from the purchase price and not a reimbursement of the selling price.

d) Does the law intend to shift the liability for payment of tax on discount fixed before or at the time of supply from the supplier to the recipient

At the outset, provision of section 15(3) does not shifts the liability to pay tax from the supplier to the recipient but excludes the discounts fixed before or at the time of supply from the value of supply of the supplier subject to certain conditions being satisfied. Thus, supplier is liable to pay the due tax on discounts fixed before or at the time of supply at all times except when he fulfills conditions as provided under section 15(3).

It has to be borne in mind that section 15(2) and 15(3) are not akin to section 9(3)/9(4) of CGST Act, 2017 which shifts the burden on tax from supplier to recipient but is a specific section which provides that certain value would be excluded from the value of supply.

e) What happens when we try to make both the ends meet and include such discount on offtake as part of sales price of the recipient treating it as subsidy linked to price.

Now coming to the fact whether such off take discount would fall within the purview of Section 15(2)(e) of CGST Act, 2017, let’s for a moment accept that the discount provided by the supplier on off take can be included the value of supply for the recipient as in the form of price linked subsidy.

Such discount although decided at or before the time of supply and specifically linked to invoices would still be included as value of supply in both the cases i.e.

Situation 1: Wherein supplier has reduced the tax by issue of credit note and
Situation 2: Wherein supplier has although issued the credit note but has not reduced the tax thereon.

Assuming that the intention of lawmakers was to add discount received as subsidies directly linked to selling price to value of taxable supply, but then no distinction has been made under section 15(2)(e) of CGST Act between the two situations i.e. tax has been reduced by the supplier or not. Therefore treatment of such subsidy would be same in hands of recipient whether or not supplier has reduced tax on such discount.

It is situation 1 which leads us to the absurd situation which would be created by accepting this hypothesis of including discount received on purchase invoices as part of sales price treating it as a subsidy and help us in arriving at the conclusion that why discount decided before or at the time of supply and specifically linked to invoices should not be part of selling price even though tax has not been reduced by the supplier. Let’s try to understand the implication with the help of an example

Transaction 1: Supply by A Ltd. to B Ltd.

Particulars	Deduction claimed by supplier from Transaction Value
Sales Price	100
Tax @ 20%	20
Gross Value	120
Less: Discount passed post supply through Credit Note	10
Less: Tax Liability reduced through Credit Note	2
Net Value	108
Net Tax Collected by A Ltd from B Ltd	18 (i.e. 20-2)

Transaction 2: Supply by B Ltd to C

Particulars	Not treating discount received as part of sales price	Treating discount received as part of sales price
Sales Price	120	120
Add: Discount by A Ltd to B ltd	–	10
Gross Sales Price	120	130
Tax @ 20%	24	26
Value	144	156

As is evident in the above example, A Ltd. themselves have reduced Rs 10/- from value of Supply and has also reduced the tax. In such case, would it be correct if B Ltd. would have to again pay the tax on Rs 10/- treating it as part of his supply as price linked subsidy under Section 15(2)(e) of CGST Act, 2017. This would be the most absurd situation and would amount to double taxation wherein supplier has reduced the tax and recipient is also bound to pay the tax treating it as part of value of supply.

As we all know, GST is a tax on the value added by each of the supplier and is destination based tax wherein tax is borne by the last consumer. Let’s try to arrive at the value addition made by A Ltd, B Ltd tax incidence to be borne by C. In the general scenario, everybody would accept that value addition by B Ltd. is Rs 30 and difference tax should be Rs 6/-.

Not treating discount received as part of sales price
Particulars	Supply by A Ltd to B Ltd	Supply by B Ltd to C
Sales Price	90	120
Less: Purchase Price	0 (Assumed for Simplicity)	90
Value Addition	90	30
Tax on Value Addition @ 20%	18	6

But as we move ahead and accept the hypothesis of including the value of discount as part of sales price for B Ltd. treating it as a price linked subsidy, price on which tax would have to be charged by B Ltd would be Rs 130 (i.e. Rs 120 plus Rs 10 of Discount) and the value addition by B would come to Rs 40 (i.e. Rs 130 Minus Rs 90 for purchase cost) and tax thereon of Rs 8/-. The actual value addition is only Rs 30 and tax thereon is Rs 10, now the question is who bears the difference tax on Rs 10/-.

Treating discount received as part of sales price
Particulars	Supply by A Ltd to B Ltd	Supply by B Ltd to C
Sales Price	90	120
Add: Value Addition through Discount passed by A Ltd to B Ltd	–	10
Gross Sales Value	90	130
Less: Purchase Price	0 (Assumed for Simplicity)	90
Value Addition	90	40
Tax on Value Addition @ 20%	18	8

If at all the intent of the lawmakers would have been to treat it as subsidy linked to price then exception would have been provided under the law that unless supplier deducts discount from the value of supply, such discount would be added to the value of the supply of the recipient under section 15(2)(e) of the CGST Act, 2017. But no such distinction has been made. The law does not provide any exception to the fact that once tax has been reversed by the supplier, recipient does not have to pay tax treating the discount as subsidy received.

Therefore, similar treatment of discount in the hands of recipient whether or not supplier reduces the tax would lead us to understand that why such an interpretation would lead to absurd result and in turn indicate that such amount is not liable to be included in value of supply. Hence, when section 15(3) seeks to cover discounts fixed before or at the time of supply and linked to specific invoice, it cannot be included in the value of supply for recipient in both the scenario, i.e. wherein supplier has opted to reduce the tax under Section 15(3) of CGST Act, 2017 or supplier has opted not to reduce the tax on the discount.

f) What about discounts received on invoice itself and then whether they should also be treated as part of value of supply for the recipient

It is added that discount cannot only be passed through credit note but can also be passed on the invoice itself. The supplier may at his own choice as per section 15(3) of CGST Act, 2017 chose either to deduct discount from value of supply and then levy tax or he may chose to levy tax on the entire value and then thereafter deduct discount from the value of supply through credit note.

When we talk about subsidies to be added to the selling price, why only discount received through credit note should be treated as subsidies received by recipient. Why then subsidies received as discount on the invoice itself should not be treated on the same lines and added to the value of supply for the recipient . Law does not makes any distinction when it refers to the subsidies linked to the price and if discount received through credit note is considered to be subsidy then the discount received on invoice also stands on same footing. This would be highly untenable and would then defeat the purpose of Section 15(3).

Thus merely because tax has not been reduced by the supplier on discount offered would not mean that the same would be added to the value of the supply. There needs to be an enabling provision under the statute which specifically covers the situation and removes the anomaly, if at all such discount has to be added to value of supply.

g) What about the discounts for which terms were fixed before or at the time of supply and were specifically linked to invoices but the supplier failed to issue the credit note within the time prescribed under section 34 for issuance of the credit note.

Supposedly terms of discount were decided at or before the time of supply and were linked to relevant invoices but the conditions were met by the recipient after expiry of the time limit as prescribed under section 34 of CGST Act, 2017 for issuance of credit note or the supplier failed to issue the credit note within the prescribed time limit as provided under section 34 of CGST Act, 2017, in such a scenario whether the discount offered would then be termed as subsidy directly linked to price.

Accepting the hypothesis of adding such discount to the value of supply wherein discount has not been reduced by the supplier on invoice, there would be an anomaly wherein if credit note has been issued within the time limit as prescribed under section 34 of the CGST Act, 2017, amount received by the recipient would not be termed as subsidy linked to price but on the same terms and conditions, if credit note is issued after prescribed time limit under section 34 of CGST Act, 2017 then it would be added to value of supply treating as subsidy linked to price. Recipient would have to keep waiting for the credit note to be issued to decide whether the discount received is subsidy directly linked to price or not. This intention of law is nowhere to be seen from the provisions of Section 15(2)(e) of CGST Act, 2017.

And what would be the situation wherein before supplier had reduced the value of the taxable supply by issue of credit note, the recipient sells the goods treating the discount as subsidy directly linked to supply and then supplier issues the credit note and the recipient denies accepting the credit note that since he has added the value of discount as subsidy linked to price, he would not accept the credit note.

Hence in my opinion, in cases where terms of discounts were fixed before or at the time of supply and were linked to specific invoice and supplier does not opts for reduction of tax liability, no addition to the value of supply in terms of Section 15(2)(e) of CGST Act, 2017 can be made in the hands of the recipient of discount as it relates to an event happening prior to the completion of supply and all liability to discharge the due tax for events upto completion of supply are responsibility of the supplier.

If Discount of Rs 10/- cannot be added to the value of Supply then whether credit has to be reversed by B Ltd. on discount received of Rs 10/-:

It is an admitted position that A ltd has passed on the benefit of Rs 10 to B Ltd. on which tax has not been reversed by B Ltd.. B Ltd. after taking into account the discount passed on by A Ltd. has sold the goods at Rs 120/-. Therefore, in an ideal scenario wherein the value addition should have been Rs 30 and difference tax to be paid by B Ltd. would have been Rs 6. The value addition still comes to Rs 30 but the difference tax comes to Rs 4.

Particulars	Sales	Purchase	Value Addition	Tax
A Ltd.	100	0	100	20
Less: Value addition through discount passed on A Ltd. to B Ltd.	(10)	–	–	–
B Ltd.	120	90	30	24
C (Purchase Price and Tax Incidence to be Borne)	–	120	–	24

Whether B Ltd. would be liable to reverse the credit taken on Rs 10/- as no tax has been paid by him on such Rs 10/- and whereas value addition made by him is Rs 30/- but the difference tax thereon has been paid to the extent of Rs 4/- only.

In this matter, similar issues arose in Rajasthan Value Added Tax, 2003 prior to 9^th March 2011 wherein tax was sought to be levied by the department on discount received by the recipient and goods sold at subsidized prices recipient to the consumer. However, from 9^th March 2011, an enabling provision was inserted to reverse input tax on difference between the purchase price and sale price, if goods have been sold below the cost price due to subsidy or discount received.

Hon’ble Rajasthan High Court in the matter of Commercial Tax Officer, Circle-B, Bharatpur (Rajasthan) Narendra Kumar Govind Prasad dated January 19, 2015 held that

“In my view, the Rajasthan Tax Board has decided the issue on the factual backdrop and on the facts placed on record by the assessee before the AO, DC (A) as well as Tax Board. In so far as the assessee is concerned he sold the goods granting further discount to the ultimate consumers keeping in view that the discount and incentives (commission) received by the assessee and there was no restriction in selling of the goods on price lower than the purchase value in VAT invoice as there being no restriction under the VAT Act. The Tax Board has rightly considered that the input-tax credit (ITC) is allowable as per the VAT invoice alone.”

The above decision was for the year 2008-09. In the year 2010-11 w.e.f. 9^th March 2011, Rajasthan Value Added Tax Act, 2003 was amended to provide as follows:

(3A) Notwithstanding anything contained in this Act, where any goods purchased in the State are subsequently sold at subsidized price, the input tax allowable under this section in respect of such goods shall not exceed the output tax payable on such goods.

The constitutional validity of the provision was challenged before the Hon’ble Rajasthan High Court on the ground that it is against the basic concept of the law, governing input tax credit, under the Rajasthan VAT Act, 2003, and being consfiscatory of the input tax credit, is violative of Articles 14, 19(1)(g) and 300A of the Constitution of India.

The contention of the appellant before the Hon’ble court was

It is submitted that the claim of credit of the tax paid at the time of purchase, that is, Input Tax Credit is an indefeasible and concrete right of the assessee. The assessee is entitled for claiming credit of the tax paid at the time of purchase on the goods, and such right cannot be taken away, curtailed or clipped by executive authorities, or even by legislature. The practice prevailing since the time of trading, is that a manufacturer gives quantity discount and sales incentive to its stockists, dealers or selling agent, based on the targeted quantity lifted by him. At the time of supply of the goods, the manufacturer supplies the goods at a particular price and charges applicable VAT thereupon. The dealer, distributor or seller, being conscious of the marketing or incentive scheme floated by the manufacturer, takes a decision to sell the goods at competitive price, and even at lesser price than the purchase price in anticipation of getting quantity discount or sales incentive, on achieving a particular sale figure or reaching the target. Such reduction in price can, by no stretch of imagination, be treated to be a sale at subsidized price.

It is submitted that the subsidized price itself suggests that it is indicative of an incidence, when the seller decides to sell his goods at a substantial lower price, bearing a loss or share the cost, or burden from his own pocket. Where however, dealer sells the goods at competitive price, keeping in view the ultimate quantity discount or sales incentive, such sale cannot be termed, or alleged as sale at subsidized price, attracting Section 18(3A) of the VAT Act, 2003.

Hon’ble Court held that

“31. There is no force in the contention that Section 18(3A) would operate as an embargo to the registered dealer in claiming ITC causing prejudice to the registered dealer. The condition stipulated in Section 18 effectuates the scheme of the Act and more in the nature of beneficial to the registered dealer.

The benefit of credit under the Act is in the nature of a concession given which could be availed only in the manner and in the circumstances mentioned in Section 18.”

Hon’ble Madras High Court in the matter of Jayam & Co vs The Assistant Commissioner (Ct) … on 17 July, 2013 was faced a similar controversy under Section 19(20) of the TNVAT Act wherein it was referred that

“33. The controversy arises in view of the discount given by the vendor/manufacturer after issuance of the tax invoice and charging VAT on the selling price, extending discount to the petitioner/purchasing dealer which were in the form of credit notes. On receipt of the credit notes, the purchasing dealer calculated the purchase price of the goods taking into account discount given by credit note and fixed the same as his purchase price. By value addition, the purchasing dealer sold the goods to the consumer and VAT was calculated on the sale price fixed by the purchasing dealer by reckoning the discount offered under the credit note. If the purchase price of the goods is taken as per the tax invoice undoubtedly the selling price was lower.”

Hon’ble Court held that

In order to protect the revenue and with a view to curb the clandestine transactions resulting in evasion of tax, in respect of second and subsequent sales, Section 19(20) was introduced, where any dealer has sold goods at a price lesser than the price of the goods purchased by him, the amount of Input Tax Credit over and above the output tax of those goods, shall be reversed.

We may at this stage, refer to as to why the legislature thought fit to bring about an amendment by inserting sub-section (20) of Section 19. From the communication dated 24.11.2009, emanating from the Commissioner of Commercial Tax to the Principal Secretary to Government Commercial Taxes and Registration, it is seen that the department observed a sudden fall in the tax collection after the advent of the VAT regime. On a closure scrutiny, it was observed that non-realization of tax under TNVAT Act, is due to various discount received by the dealers after the issue of sale invoices, which were in the form of credit notes. These discounts resulted in accumulation of input tax credit claimed by virtue of purchase invoices raised without these discount components.

VAT structure has the ultimate goal of augmenting the revenue by making the procedure simple and more transparent. The scheme of the Act requires the Input Tax Credit to be claimed along with returns, original tax invoice duly filled with particulars. Sub-section (20) of Section 19 prescribes that where goods are sold at lesser price than the purchase price of the goods, the Input Tax Credit over and above the Output tax shall be reversed. Sub-section (20) of Section 19 was inserted in order to safe guard the interest of the revenue. In the light of all the discussion we hold that Section 19(20) as amended by Amendment Act 22 of 2010, is a valid piece of legislation and the amendment given retrospective effect with effect from 01.01.2007, by Amending Act 42 of 2010, cannot be struck down as being either unreasonable, discriminatory or causing any unforeseen or unforeseeable financial burden for the past period nor unduly oppressive or confiscatory. Accordingly Constitutional validity of the impugned enactment is upheld.

Similar provisions were incorporated under the Kerala VAT Act, West Bengal VAT Act, Orissa VAT Act, Delhi VAT Act and Punjab VAT Act.

Thus, the important thing coming out of the above decisions is that the reversal of Input Tax Credit can only be made with the machinery provisions under the law and if the law does not provides for any machinery provision, then the reversal of Input Tax Credit is not permissible. Therefore, there might be loss of revenue to the government but unless provisions similar to Section 18(3A) of Rajasthan Value Added Tax 2003 or Section 19(20) of TNVAT Act or second proviso to Section 11(3) of Kerala Vat Act, 2003 is introduced, there cannot be reversal of input tax credit on the discount amount received by the recipient on which tax has not been reversed by the supplier.

Conclusion: In my opinion, in cases where the terms of discounts have been fixed before or at the time of supply and are linked to specific invoices, and the supplier does not opts for reduction of tax liability, no addition to the value of supply in terms of Section 15(2)(e) of CGST Act, 2017 can be made in the hands of the recipient and nor can the reversal of input tax credit availed take place in the hands of the recipient.

In the ensuing articles, levy of tax or reversal of Input Tax Credit thereof would be discussed for situations where in

a) Terms of discount have been decided after the supply and discount is linked with specific Purchase Invoice, and

b) Terms of discount whether decided on or before or after the supply of goods and is not linked with specific purchase Invoice

Treatment of Discounts from the perspective of recipient and analysis of Section 15(2)(e) of CGST Act, 2017-Part I

GST UPDATES

Treatment of Discounts from the perspective of recipient and analysis of Section 15(2)(e) of CGST Act, 2017-Part I

There has been a lack of clarity in terms how discounts would be treated by the recipient wherein either tax has not been reversed by the supplier or wherein tax has been reversed by the supplier. This series of article seeks to analyse treatment of discount from the perspective of the recipient in different situations.

The analysis and interpretation of Section 15(2)(e) of the CGST Act, 2017 holds one of the keys in unlocking and analyzing the impact of discount on the valuation of taxable supply from the perspective of the recipient. Let’s refer Section 15(2)(e) of CGST Act, 2017 which is as follows:

(2) The value of supply shall include–––

(e) subsidies directly linked to the price excluding subsidies provided by the Central Government and State Governments.

Explanation.––For the purposes of this sub-section, the amount of subsidy shall be included in the value of supply of the supplier who receives the subsidy.

Meaning of the word Subsidy:

The term subsidy has not been defined under the CGST Act, 2017. The term has been defined under the Cambridge Dictionary as

“money given as part of the cost of something, to help or encourage it to happen”

Hon’ble Rajasthan High Court in the matter of M/s Panwar Trading Corporation Vs. State of Rajasthan & Ors. in the judgement dated 12^th November 2014, discussed the meaning of subsidize as follows:

We do not agree with the contention advanced by learned counsel appearing for the petitioner that the word ‘subsidize’ would mean the price to be subsidized by the government, under any scheme. The word ‘subsidize’, in sub-section (3A) of Section 18, has not been used in a sense, in which the goods are sold on any concession, exemption, or subsidy, given by the State Government under any scheme. The word ‘subsidize’ has been defined in ‘The New Shorter Oxford English Dictionary’, as follows:-

“subsidize.- 1. Pay money to secure the services of (mercenary or foreign troops); provide (a country or leader) with a subsidy to secure military assistance or neutrality. 2. Support (an organization, activity, person, etc.) by grants of money. Also, reduce the cost of (a commodity or service) by subsidy.”

In ‘Concise Oxford English Dictionary’, the word ‘subsidize’ has been defined as follows:-

“subsidize or subsidise. v. support (an organization or activity) financially.> pay part of the cost of producing (something) to reduce its price.”

Thus, subsidy can be summarized as an amount which goes on to reduce the cost of the goods or services. It is in the nature of assistance or support to pay the part of the cost of the goods or services.Therefore, It would be wrong to restrict the meaning of subsidy to amount received from central government or state government and any amount received under any nomenclature i..e discount, reimbursement, concession, rebate etc which goes on to reduce the cost of the product would fall in the purview of subsidy.

Scope of the word “Price”

Now question is what is the scope of the word “price” referred in section 15(2)(e). The word price referred to in section 15(2)(e) of CGST Act, 2017 takes colour from the provisions of Section 15(1) of CGST Act, 2017 which provides as follows:

The value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both…

Section 15(1) refers to price actually paid or payable for the purpose of value of supply and 15(2) provides that value of supply as referred to in 15(1) shall include the subsidies which are linked to the “price”. Therefore, price which has been referred to in section 15(2)(e) would be the price at which the goods are being supplied.

Meaning of the Word “link”

The word “link” has been defined in Cambridge dictionary as “to make a connection between two or more people, things, or ideas”. Dictionary.com defines it as “Anything serving to connect one part or thing with another; a bond or tie:”.

Thus anything which establishes a tie or connect two different things or one part of the thing to another has been defined as a link. Scope of the word “link” include both direct connection i.e. anything which is close or integrally connected to another and also indirectly connected i.e. anything which has an association but which does not have an immediate cause and effect relationship.

“Directly linked to Price”-Impact of the use of word “Directly”

The provision uses the words “directly linked to”. The issue arises that what is the scope of the words “linked to” and “directly linked to”. Does it make any difference if the word “directly” has been attached to the words “linked to price”.

The difference between the two phrases can at best be understood with the example of difference between the words “in relation to” and “directly in relation to”. How the narrative changes with the word “directly” being attached to the words “in relation to”.

a) Meaning of the Words “in relation to”

Hon’ble Apex Court in the matter of Doypack Systems Pvt Ltd v. Union of India: AIR 1988 SC 782, observed meaning of expressions “in relation to” as under:-

“49. The expression “in relation to” (so also “pertaining to”), is a very broad expression which presupposes another subject matter. These are words of comprehensiveness which might both have a direct significance as well as an indirect significance depending on the context…” “…

In this connection reference may be made to 76 Corpus Juris Secundum at pages 620 and 621 where it is stated that the term “relate” is also defined as meaning to bring into association or connection with. It has been clearly mentioned that ” relating to” has been held to be equivalent to or synonymous with as to “concerning with” and “pertaining to”. The expression “pertaining to” is an expression of expansion and not of contraction.” (emphasis supplied)

Thus, Hon’ble Apex Court has observed that the words “in relation to” have both direct as well as indirect significance. It is a very broad expression and the wordings have to be given meaning of expansion rather than contraction.

b) Meaning of the Words “Directly in relation to”

Educational Guide issued by CBEC in the month of June 2012 in para 5.5.2 highlighted the meaning of the words “directly in relation to the immovable property” and provided that

“There must be more than a mere indirect or incidental connection between a service provided in relation to an immovable property, and the underlying immovable property. For example, a legal firm’s general opinion with respect to the capital gains tax liability arising from the sale of a commercial property in India is basically advice on taxation legislation in general even though it relates to the subject of an immovable property. This will not be treated as a service in respect of the immovable property.”

Thus, what this education guide provided that although the services of a legal counsel with respect to the capital gain tax liability arising out of sale of commercial property in India relates to the subject of an immoveable property but it does not have a direct or an incidental connection.

It further goes on to provide that

“The place of provision of services rule applies only to services which relate directly to specific sites of land or property. In other words, the immovable property must be clearly identifiable to be the one from where, or in respect of which, a service is being provided. Thus, there needs to be a very close link or association between the service and the immovable property. Needless to say, this rule does not apply if a provision of service has only an indirect connection with the immovable property, or if the service is only an incidental component of a more comprehensive supply of services.”

CBEC Educational Guide itself provides that indirect relation to the immovable property would not be sufficient for the application of the specific rule and therefore, there must be a direct or a proximate relation to the immovable property. Another example given in the educational guide is as follows:

For example, the services of an architect contracted to design the landscaping of a particular resort hotel in Goa would be land-related. However, if an interior decorator is engaged by a retail chain to design a common décor for all its stores in India, this service would not be land related. The default rule i.e. Rule 3 will apply in this case.

Thus, with the use of word “directly”, merely an indirect link to the price would not be sufficient for an amount to be included in the value of supply. The ensuing paragraph details out the factors which would constitute an amount received as subsidy “directly linked to price”.

c) Necessary Factors to constitute amount received as subsidy “Directly linked to price”:

Expression “Directly Linked to Price” does not have an independent meaning but aims to narrow the scope of the provision in the sense that it contemplates that there should be a very close, clear and obvious link or association between the subsidy and its impact on the price thereof. This very close, clear and obvious link or association is considered to exist only when the impact of the subsidy is clearly identifiable.

There must be more than a mere indirect or incidental link between the subsidy and its impact on the price of the product. The impact of the subsidy must be clearly identifiable to be the one which has directly impacted the price of the product. The link of subsidy with price must be at the heart and must have predominant impact over the price of the supply.

For example, Distributor “A Ltd.” has announced a scheme wherein “B Ltd.” has to sale the goods at a discount of Rs 500/- during a month and “A Ltd” would reimburse the discount of Rs 500/- to “B Ltd.”. Therefore, Rs 500/- received by “B Ltd.” from “A Ltd.” would be termed as as an amount directly linked to selling price.

d) Example of “Directly linked to Selling price”- Section 7 of Kerala VAT Act serves as a great example:

Just to give an example of what can constitute an amount which can be termed as “directly linked to selling price, it would be apt to quote Explanation VII to the definition of turnover under Section 2(lii) of the KVAT Act as an example.

I have refrained from giving any further examples, as my further series of articles would be covering them in detail and impact of Section 15(3) cannot be ignored before assessing the taxability of such amount. Therefore, reading of example given needs to be restricted only to understand what can be termed as “directly linked to price.

Explanation VII: Where a dealer sells any goods purchased by him at a price lower than that at which it was purchased and subsequently receives any amount from any person towards reimbursement of the balance of the price, the amount so received shall be deemed to be turnover in respect of such goods.

“Emphasis Supplied”

Although the provision consists of a rider that the dealer should have sold the goods purchased by him at a price lower than that at which it was purchased. However, there is no such condition attached to Section 15(2)(e) of CGST Act, 2017. Therefore, one needs to ignore this condition while interpreting the words highlighted above in Explanation VII and it’s only for reference that what can constitute an amount “directly linked to price”.

The rationale of the above provision has been explained in the matter of State of Kerala v. Syed Muhammed[O.T. Rev. (VAT) No. 164 of 2015, dated 26-10-2015 by Hon’ble Kerala High Court as follows:

In the case at hand, even though the respondent claims that the amounts that it had received from the suppliers were in the nature of a ‘trade discount’, in the uncontroverted and virtually admitted position that without receiving such discounts, the business of the respondent would have been in loss, would clearly indicate that the ‘discounts’ that the assessee had received are in the nature of reimbursements of the loss that it had suffered on account of it having had to sell the goods at a price lower than the purchase price. No evidence to the contrary was found attempted to be led by the assessee before any of the authorities except to make a claim that the discounts received by it are incentives in the usual course of business.

In the matter of Cement House v. State of Kerala [(2010) 18 KTR 329 (Ker.)] Hon’ble Kerala High Court stated the relevant law as under:

It is obvious from the above that the purpose of the Explanation is to levy tax on the actual sale price irrespective of whether it is received by the dealer at the time of sale of goods or from the purchaser itself. In other words, any amount received by a dealer by way of consideration for sale of goods whether it is received from the purchaser or not is assessable as turnover in respect of the goods sold.

Hon’ble Kerala High Court in the matter of Vettathil Agencies v.Commercial Tax Officer, Cherthala [2017] 81 taxmann.com 56 (Kerala) referred to the Judgement of Single Judge in Writ Petition No. 27088/14 as follows::-

An incidental question had also arisen for consideration as to whether the amount offered by way of discount through credit notes issued by the supplier of the goods at a point in time subsequent to the sale of goods to the petitioners can be added as sales turnover of the petitioners by invoking provisions of Explanation VII to the definition of turnover under Section 2(lii) of the KVAT Act. In Para 10 of the Judgement, it was held that

Secondly, if the discount amounts received by the petitioners from their suppliers, can be demonstrated to be amounts received by them towards balance of the sale price of the goods, then the sales turnover of the petitioners can be enhanced to that extent alone and the output tax payable by the petitioner computed accordingly. Against this output tax found to be payable by the petitioners, the input tax availed by them would have to be set off to the extent possible. In this event, the assessing authorities would be acting in accordance with Explanation VIIto Section 2 (lii) to determine the output tax payable by the petitioner on the enhanced sales turn over.

Subsidy provided by Central Government and State Government excluded from the purview value of Taxable Supply:

Subsidies which are granted by the Central Government or the State Government would be out of the purview of Section 15(2)(e) of CGST Act, 2017. Therefore, even though such subsidies might be directly linked to price but would be outside the purview of the provision.

Value of subsidy to be included in the value of supply of the person who receives the subsidy:

Explanation to Section 15(2) provides that once it is ascertained that value of a subsidy received has to be included for the purpose of arriving at the value of taxable supply, amount of subsidy would be included in the value of supply made by the supplier who receives the subsidy.

For example, Distributor “A Ltd.” has announced a scheme wherein “B Ltd.” has to sale goods at a discount of Rs 500/- during a month and discount of Rs 500/- given to customer would be reimbursed to “B Ltd.” by “A Ltd.”. “B Limited” in the above scenario would be receiving Rs 5500 i.e. Rs 5000/- from “C” and Rs 500 from “A Limited”.

“B Limited” sold the goods to “C “at Rs 5000/- after giving discount of Rs 500. “In the given scenario, value of supply for “B Ltd” to “C” would be Rs 5500 as Subsidy received by “B Ltd” from “A Ltd” is a price linked subsidy and assuming that other conditions are satisfied for the purpose of including such subsidy in the value of supply, “B Ltd” would have to levy and collect tax from “C” on Rs 5500 and once tax is collected at Rs 5500/-, “B Ltd” can thereafter allow discount of Rs 500 to “C”.

The next series of article would analyse when different nature of discounts like discount on offtake, retail, cash discount,trade discount, special discount etc. would be included in the value of supply and therefore supplier would be liable to include such amount in the value of supply and charge tax thereof and when such amounts received would be outside the purview of value of supply. Further, whether an incentive received on retail price can be termed as a subsidy as it goes on to reduce the cost of the product or whether it’s a supply in terms of provision of CGST Act, 2017.

Tough Times:-Agony of Exporters in GST set to increase many-fold

Case 1:- A trader recovers his tax paid on Purchases by charging to the customer and exporter recovers his tax paid on purchases from the government. Exporter is made to wait for recovering back the tax after detailed verification of credit with the period running into months and trader gets the credit of tax just by filing of return and verification taking place after two years.

Case 2: Can the Government tout construction of a “Kachi Road” in one year as achievement for walking of people when they had assured of world class road to be constructed in six months. It is nothing but hiding of Inefficiency of Government in the name of relief to the Taxpayers.

Case 3: What does a person having turnover of Rs 3 Crore do when Rs 50 Lakh are stuck GST Refund. Howsoever implementation of GST was difficult, but does that gives a right to the government to bring businesses closer to extinction due to blockage of working capital. Does the person whose business is stuck asked the government to bring GST and let his business be closed down.

Case 4: In an era wherein, United States is in a battle with India for their business community, exporters in India are still licking their wounds after 9 months of implementation of GST. With the GST Ball rolling out, they find themselves in midst of a full blown storm with no immediate relief in sight.

During the last three months, slowly the issues were getting resolved and things were trickling back to normal with refunds starting to come to the place where they belong i.e. to the bank accounts of the exporters.

But Circular No. 37/11/2018 dated 15^th March 2018 which eased certain compliances for the exporters has made their life difficult and would increase the agony of exporters multifold and what’s more circular comes on the day when Special Refund Drive for Exporters is being observed. In a high handed statement circular mandates for submission of copy of all invoices for which refund is being claimed as follows:

“For processing of refund claims of input tax credit, verifying the invoice details is quintessential. In a completely electronic environment, the information of the recipients’ invoices would be dependent upon the suppliers’ information, thus putting an in-built check-and-balance in the system. However, as the refund claims are being filed by the recipient in a semi-electronic environment and is completely based on the information provided by them, it is necessary that invoices are scrutinized. “

Let’s start with a clear line of thought that for refund to be processed, verification of Input Tax Credit is a must. The wrong doers shall not get the refund amount and as grant of refund involves outgo of funds for the exchequer and more importantly public money, there should be checks and balances for the grant of refund. Let’s deliberate in brief that how submission of invoices alongwith the application of refund raises many questions rather than settling them down:

a) Refund amount set to be blocked for a longer period: As per provisions of Sub-Rule (2) of Rule 90 of CGST Rules, 2017 proper officer shall within a period of fifteen days of filing of application for refund, scrutinize application for its completeness and where application is found to be complete, he shall issue acknowledgement for refund application. Further, he shall make an order for sanctioning the amount of refund on a provisional basis within a period not exceeding seven days from the date of the acknowledgement.

Now the question arises, in case of exporters having substantial refund claim and submitting say 2000 invoices in a month, who is going to verify invoices within 15 days and issue acknowledgement. Will it possible for an officer to verify those invoices and issue the acknowledgement. Further, such officer would be having at least hundred such applications which would be filed on a monthly basis. Further, if an error remains for incorrect refund, such officer would be held responsible for non-verification. Therefore, officer would also not be in a hurry to process the refund without verification. So who and from where time would be culled out by a single officer for such detailed verification This would result in unending delays in issue and acknowledgement and in turn grant of refund.

The manual refund applications are set to be pending for a longer periods and the queue of exporters waiting for their refund is set to increase. With limited staff force which present tax offices have coupled with the increase in the taxpayers, it’s impossible that each invoice can be verified by the tax officers in such a short span of time. It’s a rewind back of times wherein in an era of digitization, government is taking us back to era of copies and photocopies.

b) Different Yardsticks for Export without payment of tax and with payment of Tax: In case of Export without payment of tax, invoices are required to be submitted alongwith refund application. However, there is no such requirement in case of export with payment of tax as the refund application is going to be processed by the custom port from where the exports have been made. When refund to the exporters exporting the goods against payment of IGST can be given without verification of invoices, why can’t the same yardtsick be adopted for exporters exporting the goods without payment of taxes. Why two different yardsticks for exporters and can this discrimination be justified on any ground.

This makes the goods of exporters making export without payment of tax more costly than the exporters exporting goods against payment of taxes as their working capital is blocked for a longer period.

c) Trader vis-à-vis Exporter: Is it possible and if at all, ask a person who has deposited Tax of Rs 1 Lakh after taking credit of Rs 2 Crore that he has to deposit entire Input tax credit of Rs 2.00 Crore and then after verification of credit with some thousands of invoices running into months, he would be given the credit. If it’s not possible, then question arises, why yardsticks changes for the exporters with only difference being that a normal trader recovers his tax by charging to the customer and exporter recovers his tax from the government. Exporter is made to wait for recovering back the tax after detailed verification of credit with some thousands of invoices running into months and trader gets the credit of tax just by filing of return.

All things agreed that checking of invoices is quintessential, incorrect refund casts a burden upon the exchequer etc. But who stopped GSTN to bring robust system in place on day 1 of implementation of GST and why even after 9 months of implementation of GST, exporters are made to suffer for their inefficiency.

The answer does not lies in the fact that government is relaxing the conditions. The relaxation is not because of request from the taxpayers but it’s the government whose system has failed big time in catering to the needs of the taxpayers and its not a relief but an obligation upon the government to grant relaxations.

Request is to bring a robust system and do not let businesses be closed down due to inefficiency of the system. This article does not favour incorrect grant of refund but then does checks and balances can go to such an extent that they discriminates not only between two different nature of businesses but also between exporters. Can such checks and balances bring the businesses to the brink of extension in the wake of inefficiency of government. Does anybody stopped the government to bring in a more robust system and why should a honest taxpayer suffer for the wrong doings of dishonest taxpayers.

It’s need of the hour to understand that an exporter is not only competing with the competitors within the country but more importantly from the players outside the country as well. Government needs to understand that blocked refunds have casted a serious question over the sustenance of businesses. Businesses would go extinct if there are any further delays in the refunds being processed for the exporters

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