Tax under RCM on services of renting of immovable property provided by director to company-Understanding the perspective through Notification and an attempt to gain an understanding on one of the most controversial subjects in GST

At the outset, would like to state that this post is specifically restricted to analyse (without going into the judgements on this subject) levy of tax on reverse charge on services of renting of immovable property provided by director to the company vis-à-vis relevant entry in notification and also surrounding entries in notification to see if any help can be sought for understanding, one of the most controversial aspects in GST. This article is intended to give a different perspective to the relevant entry relating to services provided by director to the company.

a) Provision should be construed in context of other clauses to make consistent reading of the entire enactment

Referring to judgement of Hon’ble Apex Court in the matter of Padmausundara Rao (Dead) &Ors vs State Of T.N. & Ors on 13 March, 2002 which emphasised that provision should be construed together and in context of statute and other clauses to make consistent reading of entire enactment. Relevant extract of judgement is as follows:

“for that purpose all the parts of a statute or section must be construed together and every clause of a section should be construed with reference to the context and other clauses thereof so that the construction to be put on a particular provision makes a consistent enactment of the whole statute.”

Therefore, this article is an attempt to understand the relevant entry of Service Supplied by Director vis-à-vis other similar entries in the notification to have a consistent reading of the notification.

b) Relevant Entry in the Notification

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c) Whether entry “services supplied by a director” covers only services provided by virtue of being a director or all service provided since he is a director

The entry starts with the phrase “services supplied by a director…”. The question is

1. Whether entry is relating to service being supplied by a person which can only be supplied as director or

2. Any service provided by a person which can also be supplied without being a director but since he is a director, whether all services would be covered.

d) Reference to Similar Entries in Notification No. 13/2017-Central Tax Dated 28th June 2017 (as amended from time to time)

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                                                                                                                                            (Emphasis Supplied)

e) Inference which can be taken from a combined reading of above entries

All the above entries refer not to the “person” i.e. an individual/government/firm/company, but to the capacity in which services sought from such person by the recipient could only be provided i.e. “Director”, “Insurance Agent”, “Recovery Agent” and “Direct Selling Agent”.

Now for entries standing on same footing, if we treat that all services provided by a person as director would be covered under Entry No. 6 since he is a director to the company therefore, on a corollary and same footing whether services of renting of immovable property provided by Direct Selling Agent to a Bank or NBFC carrying on insurance business would also be covered under Reverse Charge for which being a DSA is not necessary and can be provided by any person whether or not he is a DSA.

It is never interpreted in such a way and nor its the intention of the legislature while incorporating the entry in the notification. The intention of the legislature is not so in case of DSA is evident from the Agenda to 28th GST Council Meeting which is as follows:

“DSAs, who are mainly from the small and medium enterprise segments, operate on very thin margin and find it challenging to cope with the requirements of the GST compliance provisions. These DSAs consisting of several thousands in numbers are spread across the country. The commissions are paid to large majority of DSAs by the banking and financial companies (including non-banking financial companies) which are large corporations having robust teams to ensure compliances with the GST provisions. RCM would ensure that”

1. The Government receives the tax amount on such services provided by DSAs on a timely basis;

Recommendation of the Fitment Committee

3. By bringing in tax payment of DSAs under RCM, Banks / NBFCs will be required to pay the GST. There will be less defaults and evasion in payment of GST as commission / compensation payable to DSAs will be paid post adjustment of GST and will be like payment of TDS by these companies. DSAs, who are mostly small and medium enterprises, will be freed from the compliance burden of GST relating to payment, return filing and record keeping for ITC etc. and will increase their ease of doing business.

                                                                                                                                             Emphasis Supplied

Thus, as can be seen from the above that intention of the entry “Services supplied by a DSA” covers only scope of services provided as “DSA” and payment made as commission to them. If the intention of bring entry of DSA under RCM is limited only to the extent of commission payable to them for services rendered in the capacity of DSA then all similar entries referring to the services provided in a particular capacity should be restricted to services provided as such in that capacity and not to all services provided for which being a director or insurance agent or recovery agent or DSA was not at all necessary.

Conclusion-From a bare reading of the notification and the relevant entry and surrounding similar entries to the entry for services provided by director, it can be concluded that when intention for other similar entries in the notification is that only those services provided by the person for which it was necessary to be in that capacity are covered and not all services provided by such person which can also be supplied without being in that capacity, then the same principle should also be applied for the entry relating to the services provided by Director. Thus, services provided by way of renting of immovable property for which being a director is not necessary should not be covered under the scope of RCM.

Interest on Gross Liability-Even after Retrospective Amendment, Incorrect reporting of output liability may hold the taxpayer liable for paying Interest on Gross Liability even though there might be excess balance in Electronic Credit Ledger

Payment of Interest on Gross Amount has been a bone of contention for long and matter seems to have settled down subsequent to the decision in 39th GST Council Meeting wherein it was decided that taxpayers would be required to pay interest only on the liability which has been discharged through cash. The required amendment is yet to be made in the statute, but its expected that the same may be made soon.

However, there is more to the amendment, as and when made to the statute for the taxpayers to take care otherwise the simple notion that interest has to be paid on cash component may just land them in trouble and prove to be a costly affair for taxpayers. The proposed amendment and insertion of the proviso to Section 50 is being reproduced herewith-

“Provided that the interest on tax payable in respect of supplies made during a tax period and declared in the return for the said period furnished after the due date in accordance with the provisions of section 39, except where such return is furnished after commencement of any proceedings under section 73 or section 74 in respect of the said period, shall be levied on that portion of the tax that is paid by debiting the electronic cash ledger.”

Interest to be paid on cash component only in cases wherein supplies have been made and declared in the same period otherwise interest to be paid on gross amount-

The proviso provides that interest should be payable on the component which has been discharged by way of debit to electronic cash ledger provided that the supplies made during the tax period have been declared in the same return period.

Therefore, if any tax has been declared in the return for the month other than the one in which supply was made, interest would be payable on gross output liability irrespective of the fact that such liability was paid by way of debit to Electronic Credit ledger only. Other than the above, any return which has been filed after commencement of proceedings under section 73 or section 74 would again entail tax to be paid on gross amount.

Extract of 31st GST Council Meeting held in December 2018

The above principle is also evident from the extract of the Agenda of 31st GST Council Meeting is being reproduced herewith-

The issue was deliberated by the Law Committee in its meeting held on 15.12.2018. The Committee observed that the proposal to charge interest only on the net liability of the taxpayer, after taking into account the admissible credit, may be accepted in principle. Accordingly, the interest would be charged on the delayed payment of the amount payable through the electronic cash ledger. However, where invoices/debit notes have been uploaded in statements pertaining to the period subsequent to the period in which they should have been uploaded, the interest shall be calculated on the amount of tax calculated on the taxable value from the date on which the tax on such invoices was due. This would require amendment to the Law.

                                                                                                                                  Emphasis Supplied

Example of the above scenario-

Example-Supposedly, a registered person had outward supplies of Rs 100000 and tax liability of Rs 18000 in the month of July 2019. His entitlement of Input Tax Credit was Rs 25000.0 in the month of July 2019. Therefore, on an overall basis there was an excess Input Tax Credit of Rs 7000.00.

Case-1-Registered person filed his return for the month of July 2019 on 5th August 2020. He declared entire output liability of Rs 18000.00 and claimed Input Tax Credit of Rs 25000.00. Although the return has been filed after delay but in such case, the entire liability of July 2019 has been declared correctly in the return for the month of July 2019 itself (albeit the return has been filed after substantial delay). Thus, there would be no liability to pay Interest since no liability has been discharged by debiting cash ledger.

Case-2- Registered person filed his return for the month of July 2019 on 10th September 2019 but he only declared output liability of Rs 10000.00 in the return for the month of July 2019 and rest of the liability of Rs 8000.00 was shown in the return for the month of March 2020. The assessee claimed entire Input Tax Credit of Rs 25000.00 in the month of July 2019 itself. 

The assessee would not be required to pay interest on the liability of Rs 10000.00 discharged by the return for the month of July 2019, even though the same was filed after delay. However, since liability of Rs 8000 was not declared in the return for the month in which such supplies were made i.e. July 2019, therefore interest would be payable on Rs 8000 irrespective of the fact that there was sufficient credit available in the electronic credit ledger of the taxpayer or liability of entire Rs 8000 was discharged by debit to electronic credit ledger.

Conclusion Incorrect reporting of outward supplies in the return may just prove to be more costly in case of incorrect return filed with incomplete figures just for the sake of avoiding late fees. Thus care, needs to be taken while filing the return, otherwise even after having sufficient balance in the electronic credit ledger and the retrospective amendment, taxpayer may be liable to pay interest on gross amount of output liability.

#LearningtheLaw-37-Binding Precedent of Judgement of High Court- Law declared by highest court in the State is binding on authorities or tribunals under its superintendence

Case-1- Decision of one High Court is not binding on the Other High Court but has a persuasive value-Pradip J. Mehta vs Commissioner Of Income … on 11 April, 2008

Judicial decorum, propriety and discipline required that the High Court should, especially in the event of its contra view or dissent, have discussed the aforesaid judgments of the different High Courts and recorded its own reasons for its contra view. We quite see the fact that the judgments given by a High Court are not binding on the other High Court(s), but all the same, they have persuasive value. Another High Court would be within its right to differ with the view taken by the other High Courts but, in all fairness, the High Court should record its dissent with reasons therefor. The judgment of the other High Court, though not binding, have persuasive value which should be taken note of and dissented from by recording its own reasons.

                                                                                                             Emphasis Supplied

Case-2-There is nothing in the law which exalts the ratio of the decisions of the another High Court to the status of a binding law, nor could the ratio decidendi of those decisions be perpetuated by invoking the doctrine of Stare decisis-Valliamma Champaka Pillai vs Sivathanu Pillai And Ors on 24 August, 1979 Equivalent citations: 1979 AIR 1937, 1980 SCR (1) 354

There is nothing in the States Reorganisation Act, 1956 or any other law which exalts the ratio of the decisions of the Travancore High Court to the status of a binding law, nor could the ratio decidendi of those decisions be perpetuated by invoking the doctrine of Stare decisis. At best, they have a persuasive effect and not the force of binding precedents on the Madras High Court.

                                                                                                            Emphasis Supplied

Case-3-Whether Income Tax Officer refuse to modify its order of in light of decision of another high court -Consolidated Pneumatic Tool Co. … vs Commissioner Of Income-Tax on 15 September, 1993 Equivalent citations: 1994 209 ITR 277 Bom

In view of the above decision of this court, we are of the clear opinion that the Income-tax Officer was justified in holding that the decision of the Calcutta High Court is not a binding precedent for courts, authorities or tribunals outside its territorial jurisdiction and on that basis the Income-tax Officer was right in refusing to modify its order in the light of the decision of the Calcutta High Court.

                                                                                                                         Emphasis Supplied

Case-4-There is no binding precedent of decision of one high court on other High Courts or on any subordinate Courts or tribunals falling within the jurisdiction of other high court- CIT vs. Thana Electricity Supply Co. Ltd. (1994) 206 ITR 727 (Bom)

The decision of one High Court is neither binding precedent for another High Court nor for Courts or tribunals outside its own territorial jurisdiction. It is well-settled that the decision of a High Court will have the force of binding precedent only in the State or territories on which the Court has jurisdiction. In other States or outside the territorial jurisdiction of that High Court, it may, at best, have only persuasive effect. By no amount of stretching of the doctrine of stare decisis, can judgments of one High Court be given the status of a binding precedent so far as other High Courts or Courts or tribunals within their territorial jurisdiction are concerned. Any such attempt will go counter to the very doctrine of stare decisis and also the various decisions of the Supreme Court which have interpreted the scope and ambit thereof. The fact that there is only one decision of any one High Court on a particular point or that a number of different High Courts have taken identical views in that regard is not at all relevant for that purpose. Whatever may be the conclusion, the decisions cannot have the force of binding precedent on other High Courts or on any subordinate Courts or tribunals within their jurisdiction. That status is reserved only for the decisions of the Supreme Court which are binding on all Courts in the country by virtue of Art. 141 of the Constitution.

Emphasis Supplied

Case-5-Statement of the law by a Division Bench of a High Court is considered binding on a Division Bench of the same or lesser number of Judges of the same High Court-Union Of India & Anr vs Raghubir Singh (Dead) By Lrs. Etc on 16 May, 1989 Equivalent citations: 1989 AIR 1933, 1989 SCR (3) 316

There is no constitutional or statutory prescription in the matter, and the point is governed entirely by the practice in India of the Courts sanctified by repeated affirmation over a century of time. It cannot be doubted that in order to promote consistency and certainty in the law laid down by a superior Court, the ideal condition would be that the entire Court should sit in all cases to decide questions of law, and for that reason the Supreme Court of the United States does so. But having regard to the volume of work demanding the attention of the Court, it has been found necessary in India as a general rule of practice and convenience that the Court should sit in Divisions, each Division being constituted of Judges whose number may be determined by the exigencies of judicial need, by the nature of the case including any statutory mandate relative there to, and by such other considerations which the Chief Justice, in whom such authority devolves by convention, may find most appropriate. It is in order to guard against the possibility of inconsistent decisions on points of law by different Division Benches that the rule has been evolved, in order to promote consistency and certainty in the development of the law and its contemporary status, that the statement of the law by a Division Bench is considered binding on a Division Bench of the same or lesser number of Judges. This principle has been followed in India by several generations of Judges.

The Hon’ble Court further observed that

And in Mattulal v. Radhe Lal, [1975] 1 SCR 127 this Court specifically observed that where the view expressed by two different Division Benches of this Court could not be reconciled, the pronouncement of a Division Bench of a larger number of Judges had to be, preferred over the deci- sion of a Division Bench of a smaller number of Judges. This Court also laid down in Acharaya Maharajshri Narandrapra- sadji AnandprasadjiMaharaj etc. etc. v. The State of Gujarat & Ors., [1975] 2 SCR 317 that even where the strength of two differing Division Benches consisted of the same number of Judges, it was not open to one Division Bench to decide the correctness or other-wise of the views of the other. The principle was reaffirmed in Union of India & Ors. v. Godfrey Philips India Ltd., [1985] 4 SCC 369..

                                                                                                             Emphasis Supplied

Case-6-Law declared by highest court in the State is binding on authorities or tribunals under its superintendence-East India Commercial Co. Ltd. v. Collector of Customs (AIR 1962(SC) 1893 (at p.1905)

We, therefore, hold that the law declared by the highest court in the State is binding on authorities or Tribunals under its superintendence, and they cannot ignore it…….

Case-7-It is implicit in the power of supervision conferred on a superior Tribunal that all the Tribunal subject to its supervision should conform to the law laid down by it- Baradakanta Mishra v. Bhimsen Dixit (AIR 1972 SC 2466)

It would be anomalous to suggest that a Tribunal over which the High Court has superintendence can ignore the law declared by that court and start proceedings in direct violation of it. If a Tribunal can do so, all the subordinate courts can equally do so, for there is no specific provision, just like in the case of Supreme Court, making the law declared by the High Court binding on subordinate courts. It is implicit in the power of supervision conferred on a superior Tribunal that all the Tribunal subject to its supervision should conform to the law laid down by it. Such obedience would also be conducive to their smooth working; otherwise there would be confusion in the administration of law and respect for law would irretrievably suffer.

                                                                                                            Emphasis Supplied

Case-8-Requirement of Judicial Decorum-Mahadeolal Kanodia v. Administrator General of West Bengal(AIR 1960 SC 936) (at p.941)

“Judicial decorum no less than legal propriety forms the basis of judicial procedure. If one thing is more necessary in law than any other thing, it is the quality of certainty. That quality would totally disappear if judges of co-ordinate jurisdiction in a High Court start overruling one another’s decisions. If one Division Bench of a High Court is unable to distinguish a previous decision of another Division Bench, and holding the view that the earlier decision is wrong, itself gives effect to that view, the result would be utter confusion. The position would be equally bad where a judge sitting singly in the High Court is of opinion that the previous decision of another single judge on a question of law is wrong and gives effect to that view instead of referring the matter to a larger Bench.”

Case-9-Binding Precedent of Judgement of another high court in case of provisional assessment rather than regular assessment-Siemens India Ltd. And Another vs K. Subramanian, Ito, Companies … on 30 March, 1982 Equivalent citations: (1983) 34 CTR Bom 23, 1983 143 ITR 120 Bom, 1983 13 TAXMAN 146 Bom

Where a High Court of another State has decided a point and the same point arises in the making of a provisional assessment, in my opinion, it is not open to the ITO to ignore that decision, whatever may be the position in the making of a regular assessment, for, in a provisional assessment, an assessee has no opportunity to satisfy the ITO about the correctness of that decision.

The High Court further observed that

The question is of the extent and nature of the powers of an ITO while making a provisional assessment in a summary manner. If the Tribunal has decided a case in a particular way and the same point arises in a provisional assessment, it is implicit from the nature of a provisional assessment that the ITO should not take a different view, because there is no opportunity to the assessee to convince the ITO why he should not take a view different from that taken by the Tribunal and no remedy is open to him to correct the view taken by the ITO. Whether what has been stated in Salmond on Jurisprudence would apply to regular assessments is not a question with which I am concerned, but it is not open to the ITO while making a provisional assessment to depart from the view taken by the Tribunal and strike out on a line of his own to the prejudice of the assessee.

                                                                                                            Emphasis Supplied

Case-10-Where section was already declared ultra vires by a competent High Court in the country and an authority like an Income-tax Tribunal acting anywhere in the country has to respect the law laid down by the High Court, though of a different State, so long as there is no contrary decision of any other High Court on that question-

In view of this clear pronouncement of the Supreme Court, it is not controverted by Mr. Joshi on behalf of the revenue that an Income-tax Tribunal sitting at Madras is bound to proceed on the footing that section 140A(3) of the Act is non-existent in view of the pronouncement of the Madras High Court in the case of A.M. Sali Maricar [1973] 90 ITR 116. Actually, the question of authoritative or persuasive decision does not arise in the present case because a Tribunal constituted under the Act has no jurisdiction to go into the question of constitutionality of the provisions of that statute. It should not be overlooked that the Income-tax Act is an All-India statute and if an Income-tax Tribunal in Madras, in view of the decision of the Madras High Court, has no proceed on the footing that section 140A(3) was non-existent, the order of penalty thereunder cannot be imposed by the authority under the Act. Until contrary decision is given by any other competent High Court, which is binding on a Tribunal in the State of Bombay, it has to proceed on the footing that the law declared by the High Court, though of another State, is the final law of the land. When the Tribunal set aside the order of penalty it did not go into the question of intra vires or ultra vires. It did not go into the question of constitutionality of section 140A(3). That section was already declared ultra vires by a competent High Court in the country and an authority like an Income-tax Tribunal acting anywhere in the country has to respect the law laid down by the High Court, though of a different State, so long as there is no contrary decision of any other High Court on that question. It is admitted before us that at the time when the Tribunal decided the question, no other High Court in the country had taken a contrary view on the question of constitutionality of section 140A(3). That being the position, it is not possible for us to take the view that the Tribunal in Bombay, when it set aside the order of penalty, went into the question of the constitutionality of that section and gave a finding that it is ultra vires following the decision of the Madras High Court. What the Tribunal really did was that in view of the law pronounced by the Madras High Court it proceeded on the footing that section 140A(3) was non-existent and so the order of penalty passed thereunder cannot be sustained.

                                                                                                            Emphasis Supplied

#LearningtheLaw-38-Effect on operation of order when further appeal has been filed- The mere fact that order is a subject a matter of further appeal can furnish no ground for not following it unless its operation has been suspended by a competent court; Mere filing of an appeal does not operate as a stay or suspension of the order appealed against; Question of applicability of provisions struck down by another High Court unless the Supreme Court upsets the order or stays the operation of Order

Case-1-The mere fact that order is a subject a matter of further appeal can furnish no ground for not following it unless its operation has been suspended by a competent court-Union Of India And Others vs Kamlakshi Finance Corporation … on 24 September, 1991-Equivalent citations: AIR 1992 SC 711, 1994 (46) ECC 129, 1991 ECR 486 SC, 1991 (55) ELT 433 SC, JT 1992 (1) SC 85, 1991 (2) SCALE 635, (1992) 1 SCC 648, 1992 Supp (1) SCC 443, 1991 (2) UJ 617 SC

The principles of judicial discipline require that the orders of the higher appellate authorities should be followed unreservedly by the subordinate authorities. The mere fact that the order of the appellate authority is not “acceptable” to the department – in itself an objectionable phrase – and is the subject matter of an appeal can furnish no ground for not following it unless its operation has been suspended by a competent court. If this healthy rule is not followed, the result will only be undue harassment to assessees and chaos in administration of tax laws.

                                                                                                            Emphasis Supplied

Case-2- As is well-known, mere filing of an appeal does not operate as a stay or suspension of the order appealed against-Collector Of Customs, Bombay vs M/S. Krishna Sales (P) Ltd. on 9 September, 1993 Equivalent citations: AIR 1994 SC 1239, 1994 (73) ELT 519 SC, 1993 (4) SCALE 228, 1994 Supp (3) SCC 73

According to the said para 4, the goods will not be released even where the party succeeds in cases where the customs authorities decide to go in appeal before the Tribunal or the Supreme Court. They will consider the issuance of such certificate only after the decision of the Tribunal or the Supreme Court, as the case may be. The learned Counsel for the respondent characterises the said direction as arbitrary and contrary to law. We see the force in his submission. If the authorities are of the opinion that the goods ought not to be released pending the appeal, the straight-forward course for them is to obtain an order of stay or other appropriate direction from the Tribunal or the Supreme Court, as the case may be. Without obtaining such an order they cannot refuse to implement the order under appeal. As is well-known, mere filing of an appeal does not operate as a stay or suspension of the order appealed against. Moreover, such detention is likely to create several complications relating to the demurrage charges besides the possible deterioration of the machinery and goods. We hope and trust that the Collector of Customs, Bombay shall appropriately revise the said public notice in the light of the observations made herein. If he does not do so, there is a likelihood of the customs authorities being themselves made liable for demurrage charges in appropriate cases.

Emphasis Supplied

Case-3-The mere filing of an appeal against the order of the appellate authority, and the pendency of the said appeal, cannot be shown as sufficient grounds for not giving effect to the order of the Commissioner of Customs (Appeals), dated 16.9.2011. M/S. Supra Bio-Tech vs 3 The Additional Commissioner on 24 January, 2012-(Mad HC)

17. The mere filing of an appeal against the order of the appellate authority, and the pendency of the said appeal, cannot be shown as sufficient grounds for not giving effect to the order of the Commissioner of Customs (Appeals), dated 16.9.2011. Even though the National Centre for Mass Spectrometry, Indian Institute of Chemical Technology, Hyderabad, had by its communication, dated 9.12.2010, had opined that the samples of the goods imported sent to it, did not show any presence of pesticides or Oxymatrine, the refusal of the respondents to release the goods in question cannot be held to be valid in the eye of law.

Emphasis Supplied

Case-4-Order of CESTAT to be followed unless stay obtained by the Department against the order-Pushpanjali Silks Private Ltd., Vs. CC of Customs and another- W.P.No.9284 of 2006 (Mad HC)

Considering the above submissions made by the learned counsel for the petitioner as well as the Additional Solicitor General, I am of the view that the third respondent is duty bound to implement the orders passed by the Appellate Authority and he cannot flout the orders by not releasing the goods covered by the Bill of Entry in question. As laid down by the Hon’ble Supreme Court in 1991 (55) E.L.T. 433 judicial discipline would require that the authorities are bound by the decision of the Tribunal or the Appellate Authority. Admittedly, though the CESTAT pronounced Final Order No.174/2006 dated 20.3.2006, the Revenue has not so far obtained any order from the CESTAT suspending the operation of the said order. It is not the case of the Revenue that the order of the CESTAT has been stayed by the Hon’ble Supreme Court of India. Therefore, I am of the view that the principle laid down by the Apex Court of the land in 1991 (55) E.L.T. 433 has to be applied and the third respondent should follow unreservedly the orders of the CESTAT, Chennai.

Emphasis Supplied

Case- Question of applicability of provisions struck down by another High Court unless the Supreme Court upsets the order or stays the operation of Order-Dr.T.Rajakumari vs The Government Of Tamil Nadu on 3 August, 2016-(Mad HC)

The accepted undisputed position is that the Hon’ble Supreme Court has not stayed the operation of the Delhi High Court order dated 17.02.2016 striking down Section 2(p) of Pre-natal Diagnostic Techniques (Prohibition of Sex Selection) Act, 1994, Act (hereinafter called ”PNDT Act”). Consequently, Rule 3(3)(1)(b) of the PNDT Act have also been struck down as ultra vires the Act.

3.In view of the aforesaid position, it is accepted that the law would be finally laid down by the Hon’ble Supreme Court and thus there is no point in keeping this petition pending and whatever the declaration of law by the Hon’ble Supreme Court would be equally applied. The only question is as to what would happen till the Hon’ble Supreme Court examines the issue. In this behalf, if the Hon’ble Supreme Court had stayed or would stay the operation of the Judgment, then only could those provisions struck down again come in force.

4. It is trite to say that once a High Court has struck down the provisions of the Central Act, it cannot be said that it would be selectively applied in other States. Thus, there is no question of applicability of provisions struck down by the High Court as of now until and unless the Hon’ble Supreme Court upsets the Judgment or stays the operation of the Judgment.

Emphasis Supplied

#GSTCase-213- N.M. Goel & Co vs Sales Tax Officer (SC) 1989 AIR 285-Material Supplied by Awarder of Contract to the Contractor-Whether property in goods in question passed to appellant or continued to remain with PWD although PWD had in final bill debited prices of goods so supplied to appellant under the contract-How Far relevant in GST

The judgement although related to Sales Tax Regime but lays down a significant principle for arriving at the valuation of supply in GST wherein goods are being supplied to the contractor and are being debited from the final bill.

Facts

The appellant-company is a building contractor at Rajnandgaon in Madhya Pradesh and is registered as a dealer under the Madhya Pradesh General Sales Tax Act. The appellant’s tender for construction of foodgrains godown and ancillary buildings at Rajnandgaon was accepted by the Central Public Works Department. It was an item rate tender.

Contract for construction included cost of iron, steel and cement however subsequently the same was agreed to be supplied by awarder and to be deducted from the billing raised by contractor-In the tender so submitted by the appellant the prices of the materials to be used for the construction including cost of iron, steel and cement were included. The PWD, however, had agreed to supply from its stores the said iron, steel and cement for the construction work and to deduct the prices of materials so supplied and consumed the construction from the final bill of the appellant.

Reference to Clause 10 of the Contract by the Supreme Court-

Clause 10. If the specification or Schedule of terms provides for the use of any special description of materials to be supplied from Engineer-in-charge’s Stores, or if it is required that the Contractor shall use certain stores to be provided by the Engineer-in-charge as shown in the Schedule of materials hereto annexed, the contractor shall be bound to procure and shall be supplied such material and stores as are from time to time required to be used by him for the purposes of the contract only, and the value of the full quantity of materials and stores to supply at the rates specified in the said Schedule of materials may be set off or deducted from any sums then due or thereafter to become due to the contractor under the contract or otherwise, or against or from the Security deposit, or the proceeds or sale thereof if the same is held in Government securities, the same or a sufficient portion thereof being in this case sold for the purpose.

It further provided

All materials so supplied to the contractor shall remain the absolute property of Government and shall not be removed on any account from the site of the work, and shall be at all times open to inspection by the Engineer-in-charge. Any such materials remaining unused and in perfectly good condition at the time of the completion or determination of the contract shall be returned to the Engineer-in-charge at a place directed by him, if by a notice in writing under his hand he shall so require; but the contractor shall not be entitled to return any such materials unless with such consent and shall have no claim for compensation on account of any such materials so supplied to him as aforesaid not being used by him or for any wastage in or damage to any such materials. Provided that the contractor shall in no case be entitled to any compensation or damage on account of any delay in supply or non-supply thereof all or any such materials and stores. Provided further that the contractor shall be bound to execute the entire work it the materials are supplied by the Government within the scheduled time for completion of the work plus 50 per cent thereof (scheduled time plus 6 months if the time of completion of the work exceeds (12 months) but it a part only of the materials has been supplied within the aforesaid period, then the contractor shall be bound to do so much of the work as may be possible with the materials and stores supplied in the aforesaid period. For the completion of the rest of the work, the contractor shall be entitled to such extension of time as may be determined by the Engineer-in-charge whose decision in this regard shall be final”

Observation by the Supreme Court on the above Clause-As mentioned hereinbefore, under the said clause, all materials supplied to the contractor remained the absolute property of the Government and could not be removed on any account from the site of the work and were at all times open to inspection by the Engineer-in-charge. Any such materials remaining unused and in perfectly good condition at the time of completion or determination of the contract were to be returned to the Engineer-in-charge at a place directed by him by a notice in writing in his hand if he so required but the contractor was not entitled to return any such material unless he was required to do so. There was no dispute that for the construction the appellant was supplied iron, steel and cement by the PWD and it had purchased other materials from the market. The prices of iron, steel and cement supplied to the appellant for the work were deducted from its final bill.

Question before the Supreme Court

The question, therefore, is whether there was sale and whether the property in the goods in question passed to the appellant or continued to remain with the PWD although the PWD had in the final bill debited the prices of the goods so supplied to the appellant under clause (10) of the contract. The question, therefore, is whether there was sale of goods in view of the contract between the parties whereunder the custody and control of the goods remained with the PWD and goods were only used in the construction under the contract.

Reference by the Supreme Court to the judgement in Government of Andhra Pradesh v. Guntur Tobaccos Ltd.

Even if property of some goods might get transferred to the recipient but that in itself would not be the only reason for holding that goods have been sold by the supplier-The majority of the judges in a Bench of three learned Judges, viz., Justice Shah and Justice Sikri held that although in the execution of a contract for work some materials were used and property in the goods so used passed to the other person, the contractor undertaking the work would not necessarily be deemed, on that account, to sell the materials.

Contract for work in the execution of which goods were used might take three forms which are enumerated as under-

  • The contract might be for the work to be done for remuneration and for supply of materials used in the execution of the works for a price- It is composite contract for work and sale of goods
  • The contract for work in which the use of the materials was necessary and incidental to the execution of the work- It is a contract for execution of work not involving sale of goods.
  • The contract for work and use and supply of materials, though not accessory to the execution of the contract, was voluntary or gratuitous- There is no sale because though the property passed, it did not pass for a price.

Facts of the Case- In that case, the assessee company was a dealer carrying on the business of redrying in its factory raw tobacco entrusted to it by its customers. The assessee redried the tobacco, packed it in packing materials purchased from the market and delivered it to the customers. For redrying each bale of tobacco the assessee had charged the customers a certain sum but there was no separate charge for the value of the packing materials used. The assessee was assessed to sales tax under the Madras General Sales Tax Act, 1939, on the value of the packing materials on the ground that there was a sale of the packing materials.

Held by the High Court-The High Court found that the packing of the redried tobacco and its storage for the requisite period was an integral part of the redrying process and held that there was no sale of packing materials.

Held by the Supreme Court-On appeal in that case, the Supreme Court by majority held that finding recorded by High Court that it was intended by the parties that the packing material should form an integral part of the process of redrying the without the use of the “packing material” redrying process could not be completed, and that there was no independent contract for sale of “packing material”. It was only as an incident of redrying process and as a part thereof that the assessee had to seal up the package of tobacco, after it had emerged from the reconditioning chamber, with a view to protect it from atmospheric action. In the absence of any evidence from which contract to sell “packing material” for a price might be inferred, the use of the “packing material” by the assessee must be regarded as all execution of the works contract and the fact that the tobacco delivered by the constituent was taken away with the “packing material” would not justify an inference that there was an intention to sell the “packing material”.

Reference to Hindustan Steel Ltd. v. The State of Orissa, 25 STC 21

Where company supplies to the contractor for use in its construction coal, steel and cement etc. for a consideration, it amounts to a “sale” and the company becomes a “dealer” for the purpose of sales tax.

Distinguishing Judgement in the case of Brij Bhushan Lal Parduman Kumar etc. v. Commissioner of Income- Tax, Haryana, Himachal Pradesh and New Delhi-III, 115 ITR 524

The Court distinguished the judgement in the above case since it pertained to Income Tax and Income-Tax Officer sought to estimate the profits of the appellant at a percentage of the net cash payments received by the appellants against the contracts as well as the cost of the materials supplied by the Government.

The Court distinguished it by holding that Since no element of profit was involved in the turnover represented by the cost of the materials supplied by the Government to the appellant, the income or profits derived by the appellant from such contracts had to be determined on the basis of the value of the contracts represented by the cash payments received by the appellant from the Government exclusive of the cost of the materials received for being used, fixed or incorporated in the works. There the question was whether there was profit taxable to income-tax on the sale of the materials. There was none and it was so held.

Observation and Decision by the Court

For the purpose of performance, the contractor was bound to procure materials. But in order to ensure that quality materials are procured, the PWD undertook to supply such materials and stores as from time to time required by the contractor to be used for the purpose of performing the contract only. The value of such quantity of materials and stores so supplied was specified at a rate and got set off or deducted from any sum due or to become due thereafter to the contractor. Though, in a transaction of this type there is no inherent sale; a sale inheres from the transaction. Clause (10) read in the proper light indicates that position. In the instant case, by use or consumption of materials in the work of construction, there was passing of the property in the goods to the assessee from the PWD. By appropriation and by the agreement, there was a sale as envisaged in terms of clause (10) set out hereinbefore. Therefore, in our opinion, there was a sale which was liable to tax.

#GSTCase-214-Whether entire Villa having multiple rooms inside would be treated as “per unit” or individual room inside the villa would be treated as “per unit” for HSN 9963

Case-ISPRAVA Hospitality (P.) Ltd.2020] 117 taxmann.com 982 (AAR – MAHARASHTRA)

Facts of the Case-

Applicant was proposing to give out entire Luxurious Villas, consisting of multiple rooms, on rent to various customers in the State of Maharashtra. The question is whether, as per Notification No. 11/2017-Central Tax (Rate) dated 28 June 2017, as amended, the entire Villa will be treated as ‘per unit’ or the individual rooms inside the Villas will be treated as ‘per unit’.

The applicant will be charging rent for the entire Villa and not as per room basis. Further, at any given point of time only one customer will be entitled to take the Villa on lease.

Observations by AAR

It was observed by AAR that applicant was treating entire Villa as one unit and therefore will give the same on rent to only one customer for any particular given date. In other words, two different clients will not be able to book the same Villa for the same period i.e. if the particular Villa is booked by one client at a given date then another client will not able to book the same Villa on the same day.

Further the applicant had no intention to rent out rooms inside the Villa, individually and therefore there was no question of the individual rooms being treated as ‘per unit’ as per the above said Notification.

The ‘pattern of renting’ in relation to usage of the property provides the context’ or ‘perspective’ in determination of unit of accommodation. In a hotel, a room constitutes ‘a unit’ whereas in a hostel, a bed may constitute ‘a unit’, as tariff is also declared accordingly.

In the present case applicant, themselves have mentioned that, rent is proposed to be offered to clients on per day basis for entire villa. The two different clients will not be able to book the same villa and there will be no option of booking particular room of the villa. Interested clients need to book the entire villa. Thus, it is crystal clear that villa per say is ‘indivisible unit’ in applicant’s business parlance, and the declared tariff is only for the villa as a whole. Hence, the expression “per unit” in the present case will be the entire villa.

Held

In the applicant’s case the entire Villa will be treated as “per unit” as specified under Entry no. 7 of the Notification No. 11/2017-CT’. (Rate) dated 28.06.2017

Comment The judgement is considering whether Entire Villa having multiple rooms inside would be treated as “per unit” or individual room inside the villa would be treated as “per unit”. The judgement holds that since the intention of the applicant is to give the entire villa as one unit, therefore entire villa would be considered as “per unit”. Further, if the intention of the applicant would have been to give per room in the villa or per bed, then per unit would have been different. The same has been held in the case of Srisai Luxurious Stay LLP, [2020] 116 taxmann.com 399 (AAR – KARNATAKA). The link to the judgement is https://gst-online.com/gstcase-116-exemption-to-sub-contractor-composite-supply-composition-scheme-separate-registration-accommodation-services/

#GSTCase-215-Whether applicant is eligible for refund in case of Job Work falling under export of service wherein goods which are sent outside India after Job Work are subjected to export duty.

Case-Chowgule & Co (P.) Ltd. [2019] 107 taxmann.com 294 (AAR – GOA)

Query-1-Whether IGST at 5% of assessable value is applicable on import of iron ore for conversion into pellets and export the resultant product (Iron ore pellets) back to the same supplier in view of the fact that import duty is not applicable in view of the exemption under General Exemption No. 66 (Exemption Notification No. 32/97-Cus dated 01st April, 1997) for job work.”.

Query-2-If answer to question 1 is yes, whether the applicant as recipient of the imported iron ore will be liable to pay the IGST under applicant GSTIN as the applicant in any case is the consignee of the imported iron ore.

Query-3-If answer to question 2 is yes, whether the applicant can avail the input Tax Credit for the IGST so paid as per section 16 of the CGST Act, 2017.

Query-4-Whether the applicant can claim refund of unutilized input tax credit on export of services as per section 16(3)(a) of IGST Act and 54(3) of CGST Act.

Facts-

The applicant intended to enter into a contract with a non-resident party for rending service of conversion of iron ore into pellets. The non-resident was to arrange for iron ore from abroad and the same was to be imported in India by the applicant using its own GSTIN, though the iron ore shall always remain the property of the non-resident.

The applicant will carry out the job work of conversion of the iron ore into pellets at their plant in Shiroda Goa by adding necessary condiments such as lime stone, Bentonite, coke breeze etc. All these items will be purchased by the applicant locally on their own account. The applicant will export the pellets to the non-resident or to any other non-resident parties as nominated by the non-resident. The applicant will raise the invoice for the conversion charges from the non-resident at the agreed rate in Foreign Exchange. The applicant will be receiving the proceeds for conversion of iron ore fines into iron ore pellets in foreign exchange.

Observation-

Query-1 and Query-2-Theapplicant is liable to pay IGST on iron ore imported into India in accordance with the provisions of Section 3 of the Customs Tariff Act, 1975 on the value as determined under the Customs Act, 1962 at the point when duties of customs are levied on the goods under section 12 of the Customs Act, 1962 read with Section 5(1) of IGST Act, 2017.

Regarding applicability of Exemption Notification no. 32/97-Cost dated 1st April 1997 referred by the applicant which is not issued under the Goa Goods and Service Tax Act 2017 or under the Central Goods and Service Tax Act 2017 or under the Integrated Goods and Service Tax Act 2017, hence this Authority has no jurisdiction.

Query-3-It was observed by AAR that imported goods are used in the furtherance of business, the applicant is eligible to take input tax credit of IGST paid on import of the iron ore.

Query 4-: AAR observed that goods are temporarily imported into India for the process of conversion into pellets and are exported after such process, therefore the exclusion clause provided under Section 13(3) of the IGST Act, 2017 is applicable. Hence the place of supply of service is determined as per Section 13(2) of the IGST Act, 2017 which is the location of the recipient of the service i.e. outside India. Since the place of supply of service is outside India, condition (iii) under Section 2(6) of the IGST Act, 2017 is also fulfilled. Hence the service provided by the applicant falls within the definition of export of service as defined under Section 2(6) of the IGST Act, 2017.

However, Government of India vide Notification No. 1-2016/Customs dated 04th Jan 2016 reduced the rate of export duty on Iron Ore Pellets from 5% to Nil. It is a settled law that NIL rate of tax is also a rate of tax. Since the goods exported are covered under Second Schedule of the Export Tariff appended to the Customs Tariff Act, 1975 the same goods are to be considered as subjected to tax. In view of the above, the exclusion clause provided under Section 54(3)(ii) is applicable in the instant case. Hence, the applicant is not eligible for the refund of unutilized input tax credit.

Held-:

Query 1 & Query 2- The applicant is liable to pay IGST on import of iron ore.

Query 3-The applicant is eligible to avail the input tax credit towards payment of IGST under Section 16 of the IGST Act.

Query 4-The applicant is not eligible for refund of unutilized input tax credit on export of goods or services as per the second proviso to Sub Section 3 of Section 54 of the CGST Act.

Comment:

The case presents a very interesting fact wherein IGST being paid on Iron Ore at the time of Import of Goods but which are property of the principle. The services rendered by the applicant is in the nature of Job Work. Therefore, even though he has not exported goods but provided services, his refund has been held to be ineligible since the goods on which the job work was undertaken were subjected to export duty. Whether applicant is eligible for refund in case of Job Work falling under export of service wherein goods which are sent outside India after Job Work are subjected to export duty. The restriction for claim of refund is pertaining to refund of unutilised input tax credit where the goods exported out of India are subjected to export duty and applicant did not exported goods but was engaged in export of services.

#GSTCase-216-Section 15(2)(b)-Valuation of Supply-Compilation of Judgment/Circular on “any amount that the supplier is liable to pay in relation to such supply but which has been incurred by the recipient of the supply and not included in the price actually paid or payable for the goods or services or both”

Case-1- Circular No. 47/21/2018-GST Dated 8th June 2018

Whether moulds and dies owned by Original Equipment Manufacturers (OEM) that are sent free of cost (FOC) to a component manufacturer is leviable to tax and whether OEMs are required to reverse input tax credit in this case?

It is further clarified that while calculating the value of the supply made by the component manufacturer, the value of moulds and dies provided by the OEM to the component manufacturer on FOC basis shall not be added to the value of such supply because the cost of moulds/dies was not to be incurred by the component manufacturer and thus, does not merit inclusion in the value of supply in terms of section 15(2)(b) of the Central Goods and Services Tax Act, 2017 (CGST Act for short).

However, if the contract between OEM and component manufacturer was for supply of components made by using the moulds/dies belonging to the component manufacturer, but the same have been supplied by the OEM to the component manufacturer on FOC basis, the amortised cost of such moulds/dies shall be added to the value of the components. In such cases, the OEM will be required to reverse the credit availed on such moulds/ dies, as the same will not be considered to be provided by OEM to the component manufacturer in the course or furtherance of the former’s business.

Case-2- Tejas Constructions & Infrastructure (P.) Ltd.[2019] 109 taxmann.com 311 (AAR – MAHARASHTRA)

Where applicant (contractor) was awarded works contract by contractee for construction of a factory building and as per agreement cement, etc. required for work will be supplied by contractee and further applicant will be paid GST on entire value of contract and after payment of GST, value of materials supplied by contractee would be deducted and balance amount will be paid.

As per section 15- any amount that the supplier is liable to pay in relation to such supply but which has been incurred by the recipient of the supply and not included in the price actually paid or payable for the goods or services or both shall be included in the value of taxable supply. In such case, tax is payable on entire contract value without deducting value of cement, etc. provided by contractee. Followed-M/s. N.M. Goel & Co. v. STO 1990 taxmann.com 1352 (SC) on 28 October, 1988 Equivalent citations: 1989 AIR 285, 1988 SCR Supl. (3) 657

Case-3- [2019] 110 taxmann.com 189 (AAR – KARNATAKA) Hical Technologies (P.) Ltd., In re

Facts-The applicant a private limited company is engaged in the supply of goods and services and are basically a job worker. They are proposing to undertake a job work activity for WIPL based on the purchase orders. The job work involves assembly, integration and testing of converters. Contract is to supply a manufactured product, for purpose of which, certain physical inputs of ‘critical components’ are provided ‘free of cost’ by WIPL, while non-critical (ancillary) components are to be arranged by applicant and that both these components are to be assembled together using labour of applicant to get the final product.

Held: The value of the goods provided by WIPL would not form the part of the value of the supply and must be excluded while valuing the supply.

Case-4- [2019] 103 taxmann.com 91 (AAAR-KARNATAKA) Nash Industries (I) (P.) Ltd.

Facts-Applicantis a manufacturer of sheet metal pressed components and supplies to industrial customers like Automotive, Banking Hardware, Power Protection, Alternate Energy etc. The tools required to manufacture these components were designed and manufactured by Appellant. Such manufactured tools are billed to the customer and the payment is received for the same but the tools are retained by the Appellant for the manufacture of components.

Observation-. We need to examine whether the price paid by the customers is the sole consideration for the supply made by the Appellant. For this purpose, it is necessary to understand the contractual arrangement between the Appellant and their customers to see whether the scope of the supply mandates that, the Appellant is to incur a cost for the manufacture and use of the tool but the same has been supplied by the customer free of charge.

Held: On going through the above terms and conditions of the contract between the Appellant and DICV, it is evident that the Appellant is required to use DICV Owned Tools concerning the part to be manufactured with the tool. In such a case, the value of the tools, which has already suffered tax and supplied FOC to the Appellant, is not required to be added to the value of the components supplied by the Appellant.

Case-5- [2019] 104 taxmann.com 420 (AAR – CHHATTISGARH) Navodit Agarwal

Facts-The Applicant, Shri Navodit Agrawal is a transporter in few cement companies and is engaged in transporting Cement/Clinkers of Shree Raipur Cement, Baloda Bazaar. Pursuant to the oral agreement between the aforesaid parties, Shree Raipur Cement proposed that while transporting their cement/clinkers, diesel required would be provided by Shree Raipur Cement. Applicant seeks clarification as to whether diesel cost in respect of transportation is to be included or excluded while charging GST on freight amount.

Held: Diesel so provided by the service recipient to the applicant for use in trucks/vehicles of the applicant forms an important and integral component of this business process, without which the process of supply of cement can never get materialized. Thus from the above legal provisions discussed above, it gets amply clear that any amount that the supplier is liable to pay in relation to such supply but which has been incurred by the recipient of the supply and not included in the price actually paid or payable for the goods or services or both is includible in value.

Case-6-GVS Projects (P.) Ltd., [2020] 117 taxmann.com 911 (AAR – ANDHRA PRADESH)

The applicant stated that they are receiving materials such as Power Transformers 100 Sqmm Conductor & Station Transformer from the Contractee and the value of such materials is recovered from their RA bills issued on cost recovery basis by the Contractee. Since APSPDCL and APEPDCL being the Contractees are recovering the cost of the materials that are used/consumed in the services provided to them by the applicant from the R.A. Bills issued, such cost recovered is to be included in the taxable value of the supply.

Case-7-Lear Automotive India (P.) Ltd. [2018] 100 taxmann.com 311 (AAR – MAHARASHTRA)

In the present case, the Applicant and its customers are not related parties. The only question which requires examination is whether price paid by the customers is the sole consideration for the supply of parts made by the Applicant. In this regard, providing of the tool which is in the domain of the receiver of the supply as per the contractual terms cannot said to be non-monetary consideration provided by the receiver of the supply to the provider of the supply since upon paying the tool development charges/ the customers are not incurring any expenses, which the Applicant was liable to incur. Further, the ownership in the tool remains with the customers and the development of tool was always meant to be borne by the customers. Thus, Section 15(2)(b) of the CGST Act 2017 will not be applicable in the facts of the present case and the value of the supply of final goods should be based on transaction value as provided under Section 15(1) of the CGST Act 2017.

Case-8-Pulluri Mining & Logistics (P.) Ltd., [2020] 117 taxmann.com 917 (AAR – ANDHRA PRADESH)

Contention of Applicant

The applicant’s claim is that as per the work order issued by the service recipient, HSD oil is required for heavy equipment & vehicles will be under the scope of the service recipient and issued on free of cost basis from service recipient’s storage tank.

Held

In the instant case, the service recipient i.e., M/s. Sree Jayajyothi Cements Private Limited is providing diesel to the equipments and vehicles used by the applicant for executing the mining contracts at different places stipulated in the work order. Diesel so provided by the service recipient to the applicant for use in the equipments and vehicles of the applicant forms an important and integral component of this business process, without which the process of excavation of limestone at different mines, transportation and delivery of Limestone to Yanakandla Limestone Hopper belonging to the recipient. As per Section 15(2)(b) of CGST Act, the value of supply includes any amount that the supplier is liable to pay in relation to such supply but which has been incurred by the recipient of the supply and not included in the price actually paid or payable for the goods or services or both;

Case-9-Rajasthan Rajya Vidyut Prasaran Nigam Ltd. [2019] 108 taxmann.com 516 (AAR- RAJASTHAN)

In the present case where the deposit work is undertaken by the consumer/intending agency under supervision of the applicant, the cost is directly incurred by the consumer/intending agency, still the applicant is exclusively liable and responsible for modification/alteration of the transmission infrastructure as per Electricity Act, 2003 so as to comply with the grid standards and that’s why the work is mandatorily to be executed under the supervision of applicant. Thus as per the above discussions, since the applicant is liable and responsible for such work, therefore, according to section 15(2)(b) of GST Act, 2017, the cost of such asset/infrastructure incurred by the consumer/intending agency is to be included in the value of supply.

Comment-A Concept which has been a bone of contention and yet to settle down but a process which might help in understanding the issue can be as follows:

  1. Analyze the Contract between the two parties for the work to be executed
  2. Arrive at the scope of work of the contract and the activities to be carried out by the supplier
  3. Arrive at the activities integral for the work to be executed.
  4. Ascertain who’s i.e. supplier or recipient, is responsible to carry out which activity out of the above activities as per the contract. If nothing specific has been mentioned in the contract, then it would be deemed that all such activities are to be executed by the supplier himself.
  5. Once ascertained, identify whether amount for such activities has been incurred by the person responsible to execute the same and if not then give appropriate treatment as per the provisions of section 15(2)(b).

#GSTCase-217-Section 15(2)(a)-Whether GST is payable on Mandi Fees collected by the Supplier; Mandi Fees is a tax on buyer and collected by the seller; Whether Scope of Value of Supply in GST should be limited to statutory levy which are on the supplier and collected by the Supplier and would not extend to levy on the recipient but only collected by the supplier.

Mandi Fees is a levy generally on agriculture produces levied under the Agriculture produce Marketing Act. Mandi Fee is payable by the purchaser to the market Committee and not the seller albeit accounted for through him Agricultural Produce Marketing Rules. There has been lot of confusion in both pre-GST Regime and post GST Regime as well whether the same is to be added in the Sales Price/Value of Supply since it is a fees being collected by the seller/supplier.

Relevant Section-Section 15(2)(a) of CGST Act, 2017 provides that

The value of supply shall include—

any taxes, duties, cesses, fees and charges levied under any law for the time being in force other than this Act, the State Goods and Services Tax Act, the Union Territory Goods and Services Tax Act and the Goods and Services Tax (Compensation to States) Act, if charged separately by the supplier.

Relevant Judgement by AAR-Parvatiya Plywood (P.) Ltd [2020] 115 taxmann.com 62 (AAR- UTTARAKHAND)

As per the provisions of Section 15(2)(a) of the CGST/SGST Act, 2017, value of supply also includes any fee levied under any law other than CGST/SGST/UTGST Act. Therefore, fee levied under Agricultural Produce Marketing (Development and Regulation) Act, 2011 (Uttarakhand Act No. 9 of 2011) will become the part of the value of supply and will attract GST rate specified for a particular goods under the relevant chapter/Heading/sub-heading irrespective of the fact that whether GST is paid on forward charge basis or reverse charge basis.

The above judgement clearly provided that Mandi Fees would be falling under the provisions of Section 15(2)(a) and therefore would be added to the value of Supply.

Relevant Judgement Pre-GST Regime-CTO Circle-D Jaipur vs M/S Britannia Dairy Pvt Ltd on 28 February, 2014-Rajasthan High Court

  • Definition of Sale Price-Before moving on the judgement, relevant definition of “Sale Price” is being reproduced hereinbelow for reference that the provisions of Section 15(2)(a) and Definition of “Sale Price” under the provisions of RVAT Act, 2003 were similar-

Section 2(36)-Sale price-means the amount paid or payable to a dealer as consideration for the sale of any goods less any sum allowed by way of any kind of discount or rebate according to the practice normally prevailing in the trade, but inclusive of any statutory levy or any sum charged for anything done by the dealer in respect of the goods respect of goods or services rendered at the time of or before the delivery thereof, except the tax imposed under the VAT Act.

Therefore, the definition of Sale Price also provides that it should include “Statutory Levy” within its scope.

  • Scope of “Statutory Levy” in Section 2(36) of RVAT Act, 2003 to construe sale price have of necessity to be construed as a statutory levy payable by the seller and not by the purchaser

To my mind the word statutory levy in the aforesaid definition of the sale price have of necessity to be construed as a statutory levy payable by the seller and not by the purchaser. Moreso the levy should relate to the sale transaction per se between the seller and purchaser and be part of the consideration passing from the buyer to the seller. To my mind for a statutory levy to be included within sale price as defined in Section 2(36) of the 2003 Act it has to be a charge by the seller on any ground whatsoever and not a charge by a third party from a purchaser for general facilities in the area of sale (here the Mandi Samiti).

  • Observation by Rajasthan High Court that Mandi Fees is a tax on Buyer and is merely collected by the Seller

Mandi fee is to be paid by the purchaser under the Rules of 1963 to the Mandi Samiti for the infrastructure created by it for facilitating a transaction i.e. it is a charge independent of the privity of contract between the seller to the purchaser and not a part of the consideration paid to the seller by the buyer. The market fee charged by the Mandi Samiti is not a levy on the seller.

  • Reference to Judgement of Constitution Bench of Supreme Court in the case of M/s. George Oakes (Private) Ltd. Vs. State of Madras [AIR 1962 SC 1037] wherein it was said that where tax is on the buyer and seller merely a collecting agency, it would remain outside the scope of selling price. Also relied upon of State of Punjab Vs. M/s. Chhabra Rice Mills (SC) and State of Punjab Vs. M/s Guranditta Mal Shrauti Prakash (SC)

“Further in case of M/s. George Oakes (Private) Ltd. Vs. State of Madras [AIR 1962 SC 1037] a Constitution bench of the Hon’ble Supreme Court has observed that where in law tax is on the buyer and the dealer a mere collecting agency, it would remain outside the sale price.”

The Rajasthan High Court also observed that

Aside of the aforesaid, in my considered opinion the issue agitated in the instant revision petition is wholly covered by the judgments of the Hon’ble Supreme Court in case of State of Punjab Vs. M/s. Chhabra Rice Mills (supra) and State of Punjab Vs. M/s Guranditta Mal Shrauti Prakash (supra) wherein it has been categorically held on principle that where the market fee is payable by the buyer and the seller merely deposits the said fee on behalf of the buyer and reimburses himself, the market fee cannot form part of the sale consideration or sale price.

  • Held by the Rajasthan High Court

The market fee charged by the Mandi Samiti is not a levy on the seller and thus cannot constitute statutory levy within the meaning of Section 2(36) of the RVAT Act, 2003 liable to be included in the sale price.

Consequently, I find no substantial question of law as warranted under Section 84 of the RVAT Act, 2003 made out in the present revision petitions. There is no force in the revision petitions particularly in view of the judgment of Hon’ble Supreme Court in cases of State of Punjab Vs. M/s. Chhabra Rice Mills (supra) and State of Punjab Vs. M/s Guranditta Mal Shrauti Prakash (supra) and M/s. George Oakes (Private) Ltd. Vs. State of Madras (supra).

Impact in GST

Therefore, two principles can be culled out in GST Regime from the principle laid down in above decision with reference to the decisions of Apex Court-

  • The scope of value of supply should be seen in the context of principle that it would include statutory levy which are on the supplier and collected by the Supplier and not on the recipient but only collected by the supplier. The decision by AAR might need reconsideration
  • Mandi Fees should not be part of value of supply in GST.

#GSTCase-218-Rule 33-Compilation of Judgements of AAR on Pure Agent in GST

Case-1- Arivu Educational Consultants (P.) Ltd [2019] 110 taxmann.com 426 (AAR – KARNATAKA)

The applicant is collecting the exact: amount payable to institute or college or universities as exam fee from the students (service recipient) and remits the same amount to the respective institute or college or universities (third party) without any profit element or additions, on the authorization of the student. This payment is separately indicated in the invoice issued to the respective students. The applicant providing this kind of services to the student in addition to the services as training and coaching institute. Hence the applicant satisfies all the conditions of the pure agent as narrated in the Rule 33 of the CGST Rules, 2017. Therefore amount of fee collected by the applicant from the student as exam fee which is remitted to the respective institute or college or universities is excluded from the value of supply.

Case-2-DRS Marine Services (P.) Ltd., [2018] 100 taxmann.com 323 (AAR – MAHARASHTRA)

From the above provisions of Rule 33 and the facts of the proposed transaction explained by the applicant, we find that the applicant will be acting as a pure agent of RMS inasmuch as the entire amount received by them as Crews’ Salary will be disbursed to the Crew and no amounts from the said receipt will be used by the applicant for his own interest. In fact, for performing as a pure agent they will also be receiving compensation separately in the form of fixed fees to be charged as service charges. In view of the above we are of the opinion that the applicant will not be liable to pay GST on Salary amount received from RMS and disbursed to the Crew.

Case-3- E-Square Leisure (P.) Ltd., [2019] 104 taxmann.com 121 (AAR – MAHARASHTRA)

The applicant has installed main electric connection and has different sub connections at each location for reading actual consumption of electricity. Applicant has also installed DG sets for generation of electricity in case of power failure. The water required is also provided through RO system. All these goes to show that these supplies are on their own account and is for effective enjoyment of activities related to the Theatre. Further, we find that the provision of supply is made by the applicant to comply with the mandatory requirements of the local body and the Licensing Authority under Cinema Act and Cinema Rules 3 to operate the Theatre. Further, from the terms of the agreement and the transaction, we do not find any authorization, obtained by the applicant from the recipient of the services, to act as pure agent and to make payment to third parties. In view of the above, we accept the contention of the jurisdictional officer that the applicant has failed to establish themselves as a pure agent as defined under the GST Valuation Rules and therefore the expenditure or cost incurred by the applicant and subsequent reimbursement thereof cannot be excluded from the value of supply.

Case-4- Logic Management Training Institutes (P.) Ltd [2020] 119 taxmann.com 49 (AAR – KERALA)

As per Section 15 of the CGST Act, 2017 the entire consideration received by the applicant from the recipient of services is liable to GST. However, if in respect of the amount collected as examination fees/other fees the conditions prescribed in Rule 33 of the CGST Rules, 2017 are satisfied then such amount can be excluded from the value of taxable supply as expenditure incurred by the applicant as a pure agent of the recipient of services.

Case-5- Premier Vigilance & Security (P.) Ltd [2018] 99 taxmann.com 79 (AAR-WEST BENGAL)

Vehicles were owned by applicant and toll has been charged for providing service by way of access to a road or bridge. Therefore, applicant admittedly was the beneficiary and liable to pay toll, which is compulsorily levied on vehicles. Bank never acknowledged payment of toll charges as their own liability but only acknowledged that toll charges would be reimbursed on actual basis. Expenses so incurred are, therefore, cost of service provided to Banks and reimbursement of such expenses is recovery of a portion of value of supply made to Banks. Toll charges paid are not, therefore, to be excluded from the value of supply under Rule 33. GST, therefore, be payable at applicable rate on entire value of supply, including toll charges paid.

Case-6-Flyer issued by CBEC on “Pure Agent”

“Introduction The GST Act defines an Agent as a person including a factor, broker, commission agent, arhtiaa, del credere agent, an auctioneer or any other mercantile agent, by whatever name called, who carries on the business of supply or receipt of goods or services or both on behalf of another. So, who is a pure agent and why is a pure agent relevant under GST? Broadly speaking, a pure agent is one who while making a supply to the recipient, also receives and incurs expenditure on some other supply on behalf of the recipient and claims reimbursement (as actual, without adding it to the value of his own supply) for such supplies from the recipient of the main supply. While the relationship between them (provider of service and recipient of service) in respect of the main service is on a principal to principal basis, the relationship between them in respect of other ancillary services is that of a pure agent.

Let’s understand the concept by taking an example. A is an importer and B is a Custom Broker. A approaches B for customs clearance work in respect of an import consignment. The clearance of import consignment and delivery of the consignment to A would also require taking service of a transporter. So A, also authorises B, to incur expenditure on his behalf for procuring the services of a transporter and agrees to reimburse B for the transportation cost at actuals. In the given Illustration, B is providing Customs Brokers service to A, which would be on a principal to principal basis. The ancillary service of transportation is procured by B on behalf of A as a pure agent and expenses incurred by B on transportation should not form port of value of Customs Broker service provided by B to A. This, in sum and substance is the relevance of the pure agent concept in GST.

Case-7- Udayan Cinema (P.) Ltd., [2019] 103 taxmann.com 219  (AAR-WEST BENGAL)

The Contract does not specify CDIVF as the Applicant’s pure agent. It merely refers to bills for some of the services procured will bear the name of the feature film and will be paid on an actual cost basis. The crucial test is whether these services are a charge on the Applicant or CDIVF. If CDIVF is liable to pay the suppliers of these services no matter what the Applicant does, it will be treated as a charge on CDIVF. As CDIVF holds the production rights, even though as security, all procurements of goods and services will be a charge on him unless specifically excluded. That the bills for such services bears the name of the feature film and not raised on the Applicant corroborates to the above conclusion. No deduction is, therefore, available in terms of the contract with CDIVF from the value of the supply of motion picture production service even if payment is made on an actual cost basis.

Case-8- Maansmarine Cargo International LLP [2019] 109 taxmann.com 372 (AAR – MAHARASHTRA)

The reimbursement received by the applicant pertains to establishment costs which would be incurred by them for running their office in India. In any normal business such expenses are borne by the supplier of service and it is but natural that they would include such costs in the value to be received from the recipient of their services. In the subject case the said costs, are termed as reimbursements and are recovered in addition to management fees from their clients and therefore it is nothing but additional consideration charged for the supply in this case. The provisions of Section 15 of the CGST Act, which deals with the transaction value are very clear and as per the said provisions the valuation of supply will include all costs, including the employee cost provided by one distinct entity to the other distinct entities.

Case-9- K. K. Polymers, [2018] 100 taxmann.com 17 (AAR- RAJASTHAN)

Transaction made between DCA and customer for passing on specified bonus given by principal is nothing but an additional discount given for early payment made by the customer to the Principal through DCA. In this case there is only one supply made by the principal to the customer of the goods supplied. The additional discount relates to supply already made by the principal and passing on such bonus to the customers by DCA is in the nature of pure agent. However, any amount retained by the DCA on account of early payment is in the nature of supply made to the principal as business support services on which the DCA has already paid GST.