Alfa Group v. Assistant State Tax Officer [2020] 113 taxmann.com 222 (Kerala)

Issue-Detention on ground that value quoted in E-Way bill is less than MRP is not valid since no provision in GST mandates that goods cannot be sold on a value less than MRP

Facts of the Case- Goods belonging to petitioner were detained in a parcel godown, on the ground that value quoted in invoice that accompanied goods was low when compared to Maximum Retail Price (MRP) of goods. There was a further averment therein that HSN code of goods was wrongly entered.

Held: None of the reasons justify detention of goods. There is no provision under GST Act which mandates that goods shall not be sold at prices below the MRP declared thereon.  There is nothing that shows that, on account of alleged wrong classification of the goods there was any difference in rate of tax that was adopted by the assessee.

In the view of Court, statutory scheme of GST Act is such as to facilitate a free movement of goods, after self-assessment by assessee concerned. Respondents cannot resort to an arbitrary and statutorily unwarranted detention of goods in the course of transportation. Such action on the part of department officers can erode public confidence in the system of tax administration in our country and, as a consequence, the country’s economy itself.

Detention order was quashed and respondents were directed to forthwith release goods belonging to petitioner. Commissioner, Kerala State Taxes Department, Thiruvananthapuram was directed to issue suitable instructions to field formations so that such unwarranted detentions are not resorted to in future.

V. Muhammed Rasheed v. Assistant State Tax Officer [2020] 114 taxmann.com 472 (Kerala)

Issue-Goods to be released on furnishing bank guarantee of tax and penalty

The goods were detained as during transportation of goods, they were not accompanied by valid documents as prescribed under the GST Act.

It was held by the Court that detention was prima facie justified and therefore writ petition was disposed, by directing respondent to release goods and vehicle to petitioner on petitioner furnishing bank guarantee for tax and penalty amount determined by the respondent and the respondent shall, thereafter, proceed to adjudicate the matter in terms of section 130 of the GST Act, after hearing the petitioner.

Sanjaybhai Laxmanbhai Gogara v. State of Gujarat [2020] 114 taxmann.com 371 (Gujarat); Raj Chamunda Roadlines v. State of Gujarat [2020] 115 taxmann.com 35 (Gujarat)

Facts and Contention of Petitioner-The vehicle in question together with goods came to be detained for the purpose of verification. By an order made in Form GST-MOV-03, time for inspection came to be extended for a further period of three days. It was pointed out that accordingly physical verification of the goods came to be carried and Form GST-MOV-04 came to be issued wherein no discrepancy was found in respect of the goods in question. Despite the aforesaid position, respondents proceeded under section 130 of “CGST Act” by issuing notice in Form GST-MOV-10 on the ground that after checking the dealers record according to the GST system, dealer appears to be involved in bogus billing practice or making false claim of ITC for the period of August, 2019 and September, 2019. It was submitted that thereafter, on the same ground an order has been passed under section 130 of the CGST Act confiscating the goods and the vehicle in question. It was submitted that in the absence of any discrepancy in the documents and the goods, it is not permissible for the respondents to confiscate either the vehicle or the goods.

Held: Having regard to the submissions advanced by the learned advocate for the petitioner, issue notice.

Vivan Steel (P.) Ltd. v. State of Gujarat [2020] 113 taxmann.com 346 (Gujarat)

Issue-Goods to be released on payment of tax and penalty

It was stated by counsel to the petitioner that petitioner was ready and willing to pay amount of tax and penalty in terms of impugned notice issued under section 130 of the Central Goods and Services Tax Act, 2017. Therefore, respondents were directed to forthwith release Truck number GJ-02-Y-6566 together with goods contained therein upon petitioner paying the tax and penalty as reflected in the column number 4(1) (2) of the impugned notice issued under section 130 of the CGST Act.

Bright Road Logistics v. Commercial Tax Officer (Enforcement – 09) [2020] 113 taxmann.com 204 (Karnataka)

Issue-Once a Notice has been issued to transporter to file objections then proper officer cannot turn around and take a decision that transporter has no locus standi either to file objections or to put forth dispute on behalf of the consignor/consignee or owner of conveyance

Petitioner a transporter, registered under provisions of GST Act was engaged in business of transportation of goods. It was submitted that petitioner was approached by M/s. Bhima Trading Company for transporting certain scrap goods to consignee, M/s. Rajendra Traders. Thus, role of petitioner was only a transporter to transport goods from Salem to New Delhi. Accordingly, petitioner used its conveyance to transport and during the transit from Salem to New Delhi. Respondent intercepted said conveyance for verifying genuiness of transaction and veracity of accompanied documents. Driver of conveyance furnished lorry receipts, E-way Bill and Tax Invoice. A show-cause notice dated 11.10.2019 was issued to the petitioner under Section 129(1)(b) of the GST Act on the premise that the consignor is non-existent. Respondent proceeded to pass the order under Section 129(1)(b) of the Act holding that petitioner has no locus to dispute or raise issue either on behalf of the consignor/consignee or the person in charge of the conveyance.

Contention of the Petitioner– Respondent having issued show-cause notice to petitioner, in arriving at a decision that petitioner has no locus standi to either file objections or raise dispute on behalf of consignor/consignee or person in charge of the conveyance is wholly illegal.

Contention of Respondent- Petitioner is neither consignor nor consignee for release of the goods. Proceedings under Section 130(2)(iii) and the proviso thereof is applicable to the release of the conveyance. It is not mandatory for the petitioner to make the payment towards penalty determined under Section 129(1)(b) of the Act.

Held: The Court was of considered opinion that order impugned cannot be held to be justifiable for reason that respondent having issued show-cause notice calling upon petitioner to file objections, cannot turn around and take a decision that petitioner has no locus standi either to file objections or to put forth dispute on behalf of the consignor/consignee or owner of conveyance. The order impugned was held to be against principles of natural justice which is the fundamental parameter required to be observed by the quasi- judicial authority. The impugned order dated 22.10.2019 was quashed and proceedings were restored to the file of respondent. The respondent were directed to provide a reasonable opportunity of hearing to petitioner and after considering the objections filed/to be filed by the petitioner shall decide the matter in accordance with law in an expedite manner.

“Since Demo vehicles would be further supplied in future, and there is no time limit prescribed in GST Act for making such further supplies, applicant held to be eligible to avail ITC on Demo Vehicle”-(AAR-Mah)-Equally Applicable for other Motor Vehicles??

Case: Chowgule Industries (P.) Ltd., [2020] 113 taxmann.com 365 (AAR – MAHARASHTRA)

1. Query:

Whether applicant is entitled to avail and utilize ITC on inward supply of Demo Cars which have been capitalized in books of accounts

2. Facts:

Applicant is authorized dealer for Maruti Suzuki India Limited for supply of motor vehicles and spares and for servicing as also for some other commercial vehicle manufacturers. The Applicant as per the dealership norms has made purchases of demo cars, used for providing trial run to customers to understand features of vehicle, against tax invoice which are reflecting in books of account of Applicant as capital goods.

3. Contention of the Assessee:

As per section 17(5)(a) input tax credit shall not be available on motor vehicles except when they are used for making further supply of such motor vehicles. Further supply of such demo motor vehicle is made after one or two years and constitutes a taxable supply and GST is paid thereon. GST Act does not prescribe the time within which further supply is to be affected. Hence, impugned tax credit is available. This activity does not come under negative clause, as after a limited period of use as demo car, the vehicles are sold at the written down book value. Relied Upon Chowgule Industries (AAR-Kerala) and A.M. Motors, [2018] 98 taxmann.com 157/70 GST 484 (AAR – Kerala).

4. Observation by AAR:

a) Demo Vehicle to be Capitalized in Books of Account: It was observed by AAR that demo vehicles are capital goods for applicant and will be capitalized and accounted under Fixed Assets of Company excluding GST component. Applicant have/will not claim depreciation on tax component of said demo cars nor will claim such expenses incurred as business expenditure u/s. 37 of Income Tax Act. They are accounting for fixed assets, excluding GST which is accounted as input credit separately. They have also stated that the depreciation is claimed only on cost of car and not on GST.

b) Eligibility under Section 16 of CGST Act, 2017-Section 16 does not make any distinction between capital goods and other goods for allowing credit of ITC. Hence, ITC in respect of capital goods, is available and can be taken, since ITC credit for capital goods is in parity with other goods. In applicants line of business, it is of utmost necessity to have vehicles for providing trial run to customers to understand features of vehicle. These vehicles, known as Demo Vehicles are an important and essential requirement for marketing and promoting sale of motor vehicles. Thus, we find that these Demo Vehicles are being used to further their business i.e. sale of motor vehicles and further, purchases of such Demo Vehicles are capitalized in their books of accounts.

c) Provisions of Section 17(5)(a) does not blocks credit in instant case-In the subject case, applicant has submitted that every model of demo cars is used by them for demonstration only for a limited period i.e. every two years or 40,000 Kms whichever is earlier and thereafter, the said vehicles are sold after paying the applicable taxes on sale value at that point of time. Since the applicant will be making further supplies of the Demo vehicles, and there is no time limit prescribed in the GST Act for making such further supplies, we are of the opinion that they will be eligible to avail ITC in the subject case.

d) Utilization of ITC of Demo Vehicles for discharging Output Tax Liability-The manner of utilization of ITC is provided as per provisions of Section 49 of the CGST Act. Section 18 of the CGST Act, deals with availability of credit in special circumstances. As per Section 18(6) of the CGST Act, when there is a supply of capital goods on which ITC has been taken, as in the subject case then the applicant shall pay an amount equal to the ITC taken on the said Demo Vehicles reduced by such percentage points as maybe prescribed or the tax on the transaction value of such Demo Vehicles, whichever is higher.

5. Held:

ITC is available for demo car and the same can be utilized for payment of output tax payable under this Act.

6. Comment-

Decision by AAR supports a valid point that since applicant will be making further supplies of Demo vehicles even though capitalized in books of accounts, and there is no time limit prescribed in the GST Act for making such further supplies, applicant was eligible to avail ITC in the subject case. This view cannot be held to beyond the scope of interpretation of law.

Can the same principle be applied in case of motor vehicles purchased by taxpayer for use in their business. In an earlier article published in July 2017 on our website, similar view was articulated.

The link of the article is as follows: Does 17(5)(a)(i) allows ITC only to persons engaged in buying and selling of of motor vehicles -Part II

Few Excerpts of the Article are as under:

Section 17(5) only allows claim for ITC when such motor vehicles are used for making further taxable supply of such vehicles. The key word used here is “further supply” which has been used without any further condition of whether or not such supply of motor vehicle is from stock in hand or capital asset. Thus, if section 7 treats sale of capital assets as “supply”, then any motor vehicle sold as capital asset would also be treated as taxable supply on sale of such motor vehicle.

Further, if such would have been the intention that registered person who makes supply of motor vehicle from his stock would only be allowed the credit, then in such case, provisions of section 17(5)(a)(i) would have specifically detailed out that credit would only be allowed on the inputs held in stock just as they have done in section 18 and section 140 for reference.

The provisions of section 17(5)(a)(i) nowhere restricts credit only to motor vehicles sold out of stock in hand. The section only provides that input tax credit of motor vehicle would be available when they are used for making taxable supplies namely further supply of such vehicles. Thus, attaching any other condition linked with usage of the product or supply of vehicle out of stock in hand would be adding language to the law, which has not been provided in the law.

Therefore, when law has treated both sale of motor vehicle out of stock in hand or out of capital asset as supply and section 17(5)(a)(i) also does not makes any specific exclusion out of the two, then in such case, input tax credit on motor vehicle whether capitalized or not should be allowed.

Levy of Service Charges/Tips for the distribution amongst the staff is a common practice in case of hotels/restaurants. In this matter, it would be apt to highlight that Department of Consumer Affairs Food and Public Distribution, New Delhi issued Guidelines No. J-24/9/2014-CPU(pt.) on dated 21^st April 2017 provided that the levy of service charges would be subject to consent of the customers and no customer can be forced to pay the service charges. They would be voluntary in nature.

This article tries to analyse the taxability of the service charges in view of the guidelines issued by the Department of Consumer Affairs on the matter of collection of service charges by hotel/restaurant. Since the guideline seems to be binding on the hotel/restaurant therefore, they play a major role in deciding the taxability of the service charges in GST regime. Let’s try to analyse the issue which has been a bone of contention for long and has been disputed by the department for inclusion in sales price.

Part–I-When Service Charges are Voluntary in Nature and Entry of the Customer to the Restaurant/Hotel is not considered as an implied consent to pay the service charges (Scenario Contemplated by the guidelines issued by the Department of Consumer Affairs)

1.What are Service Charges and how does the transaction takes place:

a) Component of Service to be provided by the hotel/restaurant is inherent in supply of Food, thus anything over and above the price of the product displayed on the menu card cannot be collected from the customer in name of service provided to the customer: “A component of service is inherent in provision of food and beverages as ordered by the customer. Pricing of the product therefore is supposed to cover both the goods and service components.”

The guidelines clarifies that pricing of product is supposed to cover both goods and services components. That’s the final price charged by the hotel/restaurant for the supply of the goods alongwith the delivery thereon. The price towards the service portion is already included in the price of the product displayed in the menu card therefore no other amount can be charged in the guise of service portion of the food or beverages. 

This is also the most common contention laid down by the hotels/restaurants for service charges that amount of service charges has been collected towards service portion of the product being supplied and price displayed on the menu card is only towards cost of the food or beverages. The guidelines clearly negate this contention.

b) Placing of Order by the customer amounts to agreement to pay the price displayed on the menu card alongwith applicable taxes: “Placing of an order by a customer amounts to his/her agreement to pay the prices displayed on the menu card alongwith applicable taxes. Charging for anything but the aforementioned, without express consent of the consumer, would amount to unfair trade practice under the Consumer Protection Act, 1986.”

Once a customer places an order, it’s an agreement to pay the price displayed on the menu card and applicable taxes thereon for the provision of food and beverages. Hotel/Restaurant is supposed to charge the same price displayed on the menu card alongwith the taxes thereon. The circular further clarifies that charging anything excess but for the price displayed on the menu card, without express consent of the consumer, it would amount to unfair trade practice under the Consumer Protection Act, 1986.

Therefore, any other charges in the name of service charges firstly are not connected with the provision of foods and beverages by the hotel/restaurant and secondly when a customer places an order he only agrees to pay the price of the product displayed on the menu card and any other charges in excess of the price of the product cannot be collected from him except for his consent.

c) Tip or Gratuity paid is a transaction between the Customer and staff of the hotel/restaurant: Tip or Gratuity paid by the customer is towards hospitality received by him/her, beyond the basic minimum service already contracted between him/her and the hotel management. It is a separate transaction between the customer and the staff of the hotel or restaurant, which is entered into, at the customer’s discretion.

The basic minimum service is contracted between the hotel/restaurant and the customer. The charges for basic minimum service to be provided by the hotel/restaurant have already been included in the price of foods and beverages as displayed on the menu card alongwith the applicable taxes.

The tip or gratuity paid by the customer is a contract between the customer and staff of the hotel/restaurant towards the hospitality received by him beyond the basic minimum service assured by the hotel/restaurant. This transaction of tip/gratuity is entered into between the staff and the customer at customer discretion and hotel/restaurant has nothing to do with it as it has already displayed its price of the food and beverages for the goods and service part on the menu card.

d) Time at which the tip becomes payable: “The point at which the customer decides to give a tip/gratuity is not when he/she enters the hotel/restaurant, and also not when he/she places an order. It is only after completing a meal that the customer is in a position to assess the quality of service, and decide whether or not to pay a tip/gratuity, and if so, how much. Therefore, if a hotel/restaurant considers that entry of a customer amounts to his/her implied consent to pay a fixed amount of service charge, it is not correct. Further, any restriction of entry based on this amounts to a trade practice which imposes an unjustified cost on the consumer, forcing him/her to pay service charge as a condition precedent to placing order of food and beverages, and as such it falls under restrictive trade practice as defined under Section 2(1)(nnn) of the Consumer Protection Act, 1986.”

 The circular further clarifies that when a customer decides to pay the tip. The following situations have been spelt out by the circular alongwith the point at which the customer decides to pay the tip.

Thus, the point of determination of the tip/gratuity to be paid to the staff of the hotel/restaurant is only after completion of the service by the hotel/restaurant. The tip/gratuity does not becomes payable as soon as he enters into the hotel/restaurant.

The guidelines also clearly specify that payment of service charges cannot be made a pre-condition for placing the order otherwise it would be violation of the provisions of Consumer Protection Act, 1986. It’s an amount decided after completion of service of foods and beverages looking to the nature of service and an amount decided between the consumer and the staff.

2.Whether service charges collected by the hotel/restaurant are part of Transactional Value for the purpose of levy of GST: Clause (c) of Section 15(2) of Central Goods and Services Tax Act, 2017 provides that

“(c) incidental expenses, including commission and packing, charged by the supplier to the recipient of a supply and any amount charged for anything done by the supplier in respect of the supply of goods or services or both at the time of, or before delivery of goods or supply of services;”

The above clause can be divided into two parts i.e.

• Incidental expenses, including commission and packing, charged by the supplier to the recipient of a supply.
• Any amount charged for anything done by the supplier in respect of the supply of goods or services or both at the time of, or before delivery of goods or supply of services.

It is the second part of the clause (c), wherein service charges collected by the hotel/restaurant are sought to be treated as part of sale price on the premise that it’s an amount charged for anything done by the supplier at the time or before the delivery of the goods or supply of services. The above contentions can be argued to be not valid contention on the basis of following arguments:

The basic premise upon which the said service charges were to be included in the transactional value has been clarified to be non-existent by the guidelines issued by the Department of consumer Affairs.

a) Whether service charges collected by the hotel/restaurant can fall into the limb of Section 15(2)(c) of CGST Act, 2017 of “any amount charged for anything done by the supplier at the time of, or before delivery of goods or supply of services”

 The charges towards provision of food and beverages are included in the price shown on the menu card. Hotel/Restaurant cannot charge anything in excess of the price displayed for the food and beverages on the menu card. The hotel/restaurant is bound to provide the basic minimum services as assured on the basis of price displayed on the menu card.

The guideline issued by the Department Of Consumer Affairs clearly provides that question for payment of tip/gratuity comes into question on completion of the meal. Any amount is includible in the transaction value if it is for “any amount charged for anything done by the supplier at the time of, or before delivery of goods or supply of services”. The Price paid as service charge is not towards service provided by the hotel/restaurant but the services provided by the staff to the customer over and above the basic services assured by the hotel/restaurant and it’s a contract between the customer and the staff and hotel/restaurant has nothing to do with it.

Therefore, service charges paid by the customer is not an amount to be paid to the supplier for anything done by him at the time of or before the delivery of goods or supply of services but amount payable to the staff by the customer.

b) Whether merely collection of service charges would result in them being added to the transaction value:

 The next contention can be that as the amount is collected by the hotel/restaurant thus it forms part of price collected by the hotel/restaurant, therefore it has to be included in the transaction value. The amount charged from the customers can be excluded from the transactional value if it satisfies the conditions laid down under Rule 33. Rule 33 of the Central Goods and Service Tax Rules, 2017 enunciates principal of Pure agent and amount to be excluded from the purview of transactional value. A supplier has to first satisfy the condition of pure agent and once he satisfies those conditions then he has to satisfy the conditions as provided in Rule 33 for exclusion of charges from the purview of transactional value.

c) Whether hotel/restaurant can be considered as a pure agent for the purpose of collection of service charges: The definition of pure agent as provided under the said rules is as follows:

Condition-1:-Pure Agent enters into a contractual agreement with the recipient of supply to act as his pure agent to incur expenditure or costs in the course of supply of goods or services or both.

Although there is no written agreement between customer of the restaurant and the restaurant but it can be said that when the hotel/restaurant charges service charges from the customer with the consent of the customer, then there is an implicit contract between the customer and the hotel/restaurant that this amount would be paid to the staff. Further as the guidelines issued by the department of consumer affairs clearly specify that payment of the tip/gratuity is a contract between the customer and the staff. Therefore even if the hotel/restaurant charges the amount from the customer, legally it is on or behalf of the staff of the restaurant. The hotel/restaurant or the restaurant can only charge upto the price of the food or beverages supplied as displayed on the menu card and tax applicable on the price thereon and the service charges are purely upon the consent of the customer and that too towards the services of the staff of the hotel/restaurant.

Taking one step ahead to conclusion, guidelines issued by the department of consumer affairs only allow the restaurant to charge from the customer price of the product and tax applicable thereon. When the guidelines do not allow the restaurant to charge amount in addition to the price of the product then going one step ahead it cannot also charge any tax additional to the tax applicable on the product. The guidelines significantly provide that

“In view of the above, the bill presented to the customer may clearly display that service charge is voluntary, and the service charge column of the bill may be left blank for the customer to fill up before making payment.”

The guidelines can be deciphered for a better understanding as follows: 

• The bill is to be prepared by the restaurant.
• The bill should clearly display that the service charges are voluntary.
• The column in the bill for service charges may be left blank.
• The blank column can be filled by the customer, if he wants to pay service charges.

Therefore, the theory goes that when an amount has to be decided for

• a transaction between the customer and staff of the restaurant,
• a transaction for which hotel/restaurant is not entitled to charge anything from the customer without his consent, and
• a transaction for which hotel/restaurant has been suggested to leave the space blank only to be filled by the customer, therefore, when a customer is asked to fill the consideration and that too after the preparation of the bill, it clearly shows that the amount is collected by the restaurant with an express consent of the customer that restaurant would act as the pure agent and pay the amount directly to the staff.

Further guidelines also admit that agreement of the customer to pay service charges is in no way related to the provision of food and beverages. Service of hotel/restaurant comes to an end with the provision of food or beverages to the customer and consideration for services rendered by the hotel/restaurant is the price shown on the menu card. Therefore, when a hotel charges amount as service charge it is nothing but an agreement with the customer to act as his pure agent to pay the amount to the staff of the hotel.

Condition-2:- Pure Agent neither intends to hold nor holds any title to the goods or services or both so procured or supplied as pure agent of the recipient of supply:-

In this regard guidelines clearly specify that payment of the tip/gratuity by the customer to the staff is decided once provision of food and beverages is complete. Therefore, any transaction payment of which is decided subsequent to the provision of food and beverages and is between persons other than the hotel/restaurant, then it is implied that restaurant or the hotel/restaurant does not have any role to play for in the transaction and once there is no role to play by the restaurant or the hotel/restaurant except for collection of the service charges, therefore no question arises for the holding of any title thereof of the services. The services are purely provided by the staff directly to the customer over and above the basic services assured by the hotel.

 Condition-3:-Pure Agent does not use for his own interest such goods or services so procured:-

Tip/Gratuity is a consideration given by the customer to the staff for the services received over and above the basic standard as assured by the restaurant or hotel/restaurant. The guidelines also admit that

 “Tip or Gratuity paid by the customer is towards hospitality received by him/her, beyond the basic minimum service already contracted between him/her and the hotel management”

In this regard the guidelines clearly specify that payment of the tip/gratuity is a transaction between the customer and the staff which is decided once the provision of food and beverages is complete. Therefore, in such case there is no question of the services for which amount is charged as service charges are used by the hotel/restaurant in their own interest. The services are purely provided by the staff directly to the customer over and above the basic services assured by the hotel.

Condition-4:-Pure Agent receives only the actual amount incurred to procure such goods or services in addition to the amount received for supply he provides on his own account:-

This is the most important condition which has to be fulfilled by the restaurant or the hotel/restaurant. It should receive only that much amount as service charges which would be distributed between the employees. The customer gives his consent for the amount to be paid as service charges to the staff. Therefore, if the hotel/restaurant retains that amount of service charges collected from the customer, then it would be charging from the customer over and above the price of the product which is prohibited by the guidelines issued by the department of consumer affairs. Once the entire amount collected is distributed between the staff, the given condition is fulfilled. However, if the entire amount collected is not distributed, then firstly it’s the violation of the guidelines issued by the Department of consumer Affairs and secondly it might be leviable to tax.

Conclusion: Thus, it can be concluded that the hotel/restaurant acts as a pure agent in the case of collection of service charges. However for the purpose of the amount of service charges collected by the hotel/restaurant from the purview of transactional value, it would have to satisfy additional conditions laid down in Rule 33 of CGST Rules, 2017. The same has been discussed herein below:

d) Conditions Laid down in Rule 33 of CGST Rules, 2017:

Following conditions have been laid load down for the purpose of exclusion of such amount from the transaction value of supply

• the supplier acts as a pure agent of the recipient of the supply, when he makes the payment to the third party on authorisation by such recipient;
• the payment made by the pure agent on behalf of the recipient of supply has been separately indicated in the invoice issued by the pure agent to the recipient of service; and
• the supplies procured by the pure agent from the third party as a pure agent of the recipient of supply are in addition to the services he supplies on his own account.

All the three conditions are being fulfilled by the hotel/restaurant it acts as a pure agent when he makes payment to the staff of the hotel/restaurant, payment made or to be made to the staff is separately indicated in the invoice and the supplies procured by the hotel/ restaurant are in addition to the basic services assured by them to the customer.

Conclusion: Therefore any amount collected by the hotel/restaurant has to be excluded from the purview of transaction value as the same is being collected as a pure agent by the supplier.

Part–II- Service Charges are not Voluntary in Nature and Entry of the Customer to the Restaurant/Hotel is considered as an implied consent to pay the service charges

In most of the cases till then, service charges were levied mandatorily upon the customers. It can very well be argued that the amount to be paid in the nature tip/gratuity became payable as soon as the customer enters the hotel/restaurant as it was a pre-condition by many of the hotel/restaurant at that time. As the customer entered the hotel/restaurant, he was bound to pay the service charges along with the price of the product and only the food would be served to them. It was not a contract between the customer and the waiter but a contract between the customer and the hotel/restaurant. Therefore, as an assumption it has been taken that it was mandatory for every consumer to pay the service charges.

Conclusion: As has been discussed in detail and held by Hon’ble Bombay High Court in the matter of Sun-N-Sand Hotel Private Ltd. vs The State Of Maharashtra on 2 December, 1968, once the service charges are mandatorily payable by the customer then it difficult to dissociate this part of the bill from the total contract which a customer enters into with the assessee when ordering any food. Therefore, service charges in such case would be treated as part of transaction value and thus tax would be leviable thereon. However, if the hotel/restaurant or the restaurant is able to prove that the service charges collected were subject to consent of the customer and payable to the staff, then service charges can be sought to be excluded on the same premise as discussed earlier in scenario subsequent to the issue of guidelines by department of consumer affairs.

 3.Legal decisions for inclusion of service charges in the transaction value:

a) Sun-N-Sand Hotel Private Ltd. vs The State Of Maharashtra on 2 December, 1968:-Hon’ble Bombay High Court in the given matter upheld that

 “16. In view of the conclusion which we have arrived at that the 10 per cent of the service charges charged to the customers are properly included in the sale price.”

However, it would be apt that before reading into the conclusion we go into the observation made by the court which only further strengthens the conclusion that service charges which are not mandatory for every customer and are only voluntary contribution would not form part of selling price.

In the case of service charges, the customers have no option but to pay these charges when demanded by the assessee, irrespective of the fact whether the employees were serviceable or had rendered useful service.

The Hon’ble High Court further observed that

We are unable to accept the contention of the petitioner that what is charged to the customer in the hotel by the assessee inclusive of 10 per cent by way of service charges is really not the “sale price” for the goods which are offered and consumed by the customer in the establishment. Once it is found that there is no option to the customer whether to pay or not to pay the service charges at the rate of 10 per cent over and above the tariff, we find it difficult to dissociate this part of the bill from the total contract which a customer enters into with the assessee when ordering any food.

It was clearly observed that as there was no option before the consumer to not to pay the amount of service charge, therefore it was not possible to disassociate the amount payable by the customer from the sales price. The Hon’ble court further provided that

“It is not as if the sale price of food or articles supplied in the hotel has been statutorily fixed. It is all a matter of agreement between the customers and the assessee; accordingly when the assessee tells the customer the moment he (the customer) enters the hotel, that for the purposes of goods supplied, the customer will have to pay not only the tariff rates which are fixed but also over and above it 10 per cent, by way of service charges, the sale price quoted must include service charges. We have already observed that so far as the customer is concerned, he has to note by virtue of the tariff card that he has to pay the tariff rates plus 10 per cent, as service charges plus 5 paise as sales tax per rupee; and all this is part of the contract or agreement between the customer and the assessee in respect of the price the customer has to pay for the food that is supplied to him. In other words, all this constitutes and goes into the formulation or fixation of the price for the goods supplied, and, therefore, it must be treated as “sale price” within the meaning of section 2(29) of the Bombay Sales Tax Act, 1959.”

Thus, Hon’ble High Court clearly observed that the service charges in the given case were told to the customer the moment he enters into the hotel. The customer has to be pay for the purpose of goods supplied not only the amount fixed as tariff but also the service charges thereon. This has been clearly struck down by the Department of consumer affairs in their guidelines issued on dated 23^rd April 2017 whereon they have clarified that

“The point at which the customer decides to give a tip/gratuity is not when he/she enters the hotel/restaurant, and also not when he/she places an order. It is only after completing a meal that the customer is in a position to assess the quality of service, and decide whether or not to pay a tip/gratuity, and if so, how much. Therefore, if a hotel/restaurant considers that entry of a customer amounts to his/her implied consent to pay a fixed amount of service charge, it is not correct.”

 b) Madras High Court in the matter of Hotel Ashoka vs The State Of Tamil Nadu on 28 October, 1976 Equivalent citations: 1977 40 STC 347 Mad

 The facts of the case were similar to the case in the matter of Sun-N-Sand Hotel Private Ltd. vs The State Of Maharashtra on 2 December, 1968.

The case of the petitioner was that previously the workers were collecting tips from customers, that subsequently under an agreement entered into between the management and the employees under Section 12(3) of the Industrial Disputes Act, 1947, it was agreed that the employees would not collect tips from the customers and instead the management would collect 5 per cent of the tariff value of the articles served as service charges and utilise the service charges so collected byway of paying 50 per cent thereof immediately to the employees and appropriating the other 50 per cent to increase the wages and food allow-ance of the employees and also to introduce a provident fund scheme for the employees, that, therefore, the service charges so collected do not stand on a footing different from the tips previously collected by the employees and that, consequently, the same cannot be included in the taxable turn-over.

The Hon’ble High Court after referring to the various parts of the decision of Hon’ble Bombay High Court

“If we may say so, with respect, we entirely agree with the above reasoning and conclusion of the Bombay High Court. In view of this,we are of the opinion that the conclusion of the Tribunal in this case in including the service charges in the taxable turnover of the assessee is correct.”

In the both the above cases, payment of service charge was mandatory. The situation might be different wherein Service Charges are payable after the consent of customer (is not mandatory in every case) and does not become payable on the entry of the consumer to the hotel/restaurant on the goods ordered by him.

 c) Delhi High Court Commissioner Vat vs India International Centre on 19 November, 2010

In the given matter, Hon’ble High Court held that service charges collected by the organization are not part of the selling price following that the judgement as laid down by the Hon’ble Bombay High Court and Madras High Court were not applicable in the instant matter. This meant that the Hon’ble High Court did not refuted the conclusion of the earlier judgments given by the two high courts but only distinguished the facts of the case. The relevant extract of the judgement are as follows:

“No doubt, the proposition of law that whatever is charged from the customers becomes the sale price and therefore, the dealer is liable to pay sales tax thereon is unquestionable but at the same time it cannot be treated as absolute principle of law, which is to be applied in all circumstances, irrespective of the nature of the charge.

The Hon’ble High Court further observed that

Normally, what happens is that whatever services in a restaurant or club are utilized by a member, a member may give tip to the waiter/employee voluntarily. This may be given in cash to such an employee by a person utilizing service while making payment of bill. In these circumstances,  naturally component of that tip would not be reflected in the bill. However, in order to ensure that there is no heart burning in a situation where some of the employees are luckier enough as compared to another collecting more tips than the other, the employees may decide that all these tips be pooled so that the same are distributed among them equally. In order to facilitate this move on the part of the employees, management comes to their aid by collecting those tips on behalf of these employees. In these circumstances, we find force in the submission of Mr. Sangal that the respondent assessee is naturally a trusty who collects the amount on behalf of the employees and then distributes the same amongst them.

                                                                                                                                     “Emphasis Supplied”

It can be clearly observed that the emphasis of the Hon’ble High Court was on the word voluntarily and once it is established that the charges are voluntary then the same would not form part of the sales price.

Conclusion: In view of the discussion we can conclude for the scenario subsequent to the issue of the Guidelines by the Department of Consumer Affairs dated 21^st April 2017 which is also the period subsequent to the implementation of GST that :

a) Pricing of the product therefore is supposed to cover both the goods and service components.

b) Placing of an order by a customer amounts to his/her agreement to pay the prices displayed on the menu card alongwith applicable taxes.

c) Charging for anything but the aforementioned, without express consent of the consumer, would amount to unfair trade practice under the Consumer Protection Act, 1986.

d) Tip or Gratuity paid by the customer is towards hospitality received by him/her, beyond the basic minimum service already contracted between him/her and the hotel management.

e) Tip or Gratuity is a separate transaction between the customer and the staff of the hotel /restaurant, which is entered into, at the customer’s discretion.

f) The point at which the customer decides to give a tip/gratuity is not when he/she enters the hotel/restaurant, and also not when he/she places an order. It is only after completing a meal that the customer is in a position to assess the quality of service, and decide whether or not to pay a tip/gratuity, and if so, how much. Therefore, if a hotel/restaurant considers that entry of a customer amounts to his/her implied consent to pay a fixed amount of service charge, it is not correct.

g) Further, any restriction of entry based on this amounts to a trade practice which imposes an unjustified cost on the consumer, forcing him/her to pay service charge as a condition precedent to placing order of food and beverages, and as such it falls under restrictive trade practice as defined under Section 2(1)(nnn) of the Consumer Protection Act, 1986.

h) In view of the above, the bill presented to the customer may clearly display that service charge is voluntary, and the service charge column of the bill may be left blank for the customer to fill up before making payment.

Therefore, if service charges were to be paid mandatorily by the customers and pre-decided at the entry point of the customer, then as per the principle laid down by Hon’ble Bombay High Court in the matter of Sun-N-Sand Hotel Private Ltd. vs The State Of Maharashtra on 2 December, 1968, it would be difficult to dissociate this part of the bill from the total contract which a customer enters into with the assessee when ordering any food. Therefore, service charges in such case would be treated as part of transaction value and thus tax would be leviable thereon. However, if the point of decision for payment of service charge arises after completion of service of hotel/restaurant to customer and is subject to the consent of customer thus voluntary in nature; service charges cannot be considered as part of the transaction value for the purpose of levy of tax. How does one proves it is a matter to be taken care of.

1. Pact Machines (P.) Ltd.v. Assistant State Tax Officer (Intelligence) [2020] 113 taxmann.com 221 (Kerala)

Opportunity of Hearing to be provided before passing order confirming demand of tax and penalty

Facts: The challenge in the writ petition is against order of detention, and adjudication order that followed, imposing a liability to tax and penalty on the petitioner under the CGST and SGST Acts. The detention was made on the ground that incharge of the goods had failed to produce e-Way Bill as per Rule 138 of the CGST and SGST Rules, 2017, at the time when the vehicle was intercepted by the authorities, and further it was found that the vehicle was plying in a wrong direction when compared with the destination shown in the invoice.

Contention of Petitioner-E-Way Bill was actually available with the driver of the vehicle and the findings in the detention notice are contrary to facts. Simultaneous with issuance of detention notice, order confirming demand of tax and penalty was also passed, without affording petitioner an opportunity of being heard.

Held: It was held by the Court that at the time of detention, driver of vehicle did not produce any e-Way Bill, either manual or electronic, corresponding to goods that were carried on in vehicle. It was further pointed out that a statement was given by the driver before the authorities wherein he had stated that there was no e-Way Bill with him. Therefore, prima facie there appeared to be a justification to the Court for detention of the vehicle.

However, there was no opportunity granted to petitioner to rebut inferences drawn by authorities while detaining goods, through a hearing afforded to petitioner before passing order confirming demand of tax and penalty on petitioner. Therefore, order was quashed and respondent was directed to pass fresh orders.

2. Smeara Enterprises v. State Tax Officer [2019] 111 taxmann.com 511 (Kerala)

Deposit of 10% of disputed tax as a condition for maintaining appeal cannot be a basis for direction to release goods without any security

Facts: An appeal had been preferred by the petitioner against the order of penalty stating that 10% of disputed tax was paid as a condition for maintaining appeal. It was further prayed, for release of goods pending disposal of appeal.

Held: It was held by the Court that mere pendency of an appeal cannot be basis for a direction to release goods without any security, since non-payment of security in respect of the goods can independently lead to a confiscation of goods under Section 130 of CGST Act. Accordingly, writ petition was disposed of by directing to consider and pass orders on appeal within a period of three months, after hearing the petitioner. The petitioner may seek a release of goods by furnishing the necessary Bank guarantee for the tax and penalty amounts confirmed against him, pending disposal of the appeal or in the alternative, await the outcome of the confiscation proceedings under the Act.

3. Kesar Farm v. Additional Commissioner of Commercial Taxes (Enforcement Bengaluru) [2019] 112 taxmann.com 374 (Karnataka)

Order passed for detention of goods and vehicle under section 129 is appealable under Section 107

Facts: The petitioner assailed order of demand of tax and penalty under section 129(1)(b) of CGST Act and, KGST Act read with section 20 of IGST Act as well as detention order dated 23.09.2019 passed under section 129(1) of CGST Act read with section 20 of IGST Act and the demand notices inter alia seeking for other consequential reliefs.

Held: An attempt was made by petitioner to contend that order impugned is not appealable under provisions of the Act bur the same was  negated by the Court for reason that section 107 of Act explicitly makes it clear that, any person aggrieved by any decision or order passed under the Act or the State Goods and Services Tax Act or the Union Territory Goods and Services Tax Act by an adjudicating authority may appeal to such Appellate Authority as may be prescribed within three months from the date on which the said decision or order is communicated to such person. It was further clarified by section 121 which deals with non-appealable decisions and orders. In terms of Section 121, no appeal shall lie against any decision taken or order passed by an officer of central tax if such decision taken or order passed relates to any one or more of the following matters, namely:—

• an order of the Commissioner or other authority empowered to direct transfer of proceedings from one officer to another officer; or
• an order pertaining to the seizure or retention of books of account, register and other documents; or
• an order sanctioning prosecution under this Act; or
• an order passed under section 80.

It is not in dispute that the case on hand would not fall in any of the aforesaid clauses mentioned in section 121 of the Act. Hence, without going into merits or demerits of the case, court relegated the petitioner to the Appellate Authority to avail the alternative remedy of appeal.

4. Insha Trading Company v. State of Gujarat [2019] 112 taxmann.com 175 (Gujarat)

Preparation of Reports in Part A of Form GST EWB-03, Form GST MOV-04 or Part B of Form EWB-03 imperative to prove physical inspection being carried out, No confiscation under section 130 of CGST Act be carried out on reasons which are not in any way connected with the transportation of goods and independent actions can be taken in other provisions

Facts: The petitioner was registered under GST and Ramgarhia Trading Company, which was located at New Delhi and was registered under GST Act, placed an order for brass electrical parts through Jay Gujarat Goods Carrier. Truck was intercepted by State Tax Officer on 14.01.2019 at 00:30 a.m. at Soyal Toll Gate. The driver of the truck had produced documents relating to goods which were being transported; however, State Tax Officer detained truck on the ground that genuineness of goods in transit (its quantity etc.) and/or tendered documents requires further verification. Accordingly, on 14.01.2019, the State Tax Officer issued an order in Form GST MOV-01 recording statement of driver as well as an order for physical verification/inspection of conveyance and goods and documents in Form GST MOV-02. Thereafter, by an order dated 14.01.2019, passed under section 129(1) of CGST Act, the truck as well as goods contained therein was ordered to be detained. The ground stated in order of detention as translated into English reads thus: “On a perusal of the details in bilty No.15615, it prima facie being disproportionate, vehicle has been detained for verification of the same”. Order of physical verification in Form GST MOV-02 and the order under section 129(1) of the CGST Act have been passed on the same day, that is, on 14.01.2019.

Thereafter, by an order dated 29.01.2019, passed in Form GST MOV-09; the petitioner was called upon to pay the tax and penalty as computed therein. Thereafter, a notice came to be issued in Form GST MOV-10 under section 130 of the CGST Act for confiscation of the conveyance and goods in question on the grounds that on a perusal of the details in bilty No.15615, it prima facie being disproportionate, the same required verification; and that upon primary examination of the dealer online, it is found that in December 2018, he has generated 42 e-way bills wherein IGST of Rs. 3,64,30,800/- is shown, and that it appears that either the dealer has not paid such amount or the purchases are not genuine. Thereafter, by the impugned order dated 08.04.2019, the goods and conveyance are ordered to be confiscated in exercise of powers under section 130 of the CGST Act.

Contention by Respondent- After conveyance in question was intercepted, State Tax Officer had conducted search at business premises of the petitioner on 21.01.2019 as well as on 22.01.2019 and found that the petitioner did not maintain any stock or books of accounts at his business premises. It was further submitted that the petitioner and the transporter – Jay Gujarat Goods Carrier are working in collusion with each other and that, the petitioner is stated to have purchased the goods which were being transported from parties located at Kolkata, West Bengal; however, upon verification by the GST Department, it was found that such parties are not in existence. It was submitted that, therefore, it appears that the petitioner has purchased the goods from the local market without paying any local tax and is selling the same to the dealers in New Delhi mentioning State tax in the invoice and thereby, claiming input tax credit. It was submitted that the authority under the GST Act had issued DRC-1 under section 74 of the GST Act on 25.04.2019 and the petitioner is facing prosecution for wrongfully availing the benefit of input tax credit and a charge-sheet has been filed against the petitioner on 05.10.2019 for the offence punishable under sections 132(1)(c) as well as 132(1)(d) of the GST Act. It was submitted that in the light of what has been unearthed during the course of investigation, the order of confiscation is justified. It was submitted that the petitioner has no other property except residential premises, the value whereof, is not commensurate with the amount involved in the entire fraud that has been committed by the petitioner in collusion with Jay Gujarat Goods Carrier. It was submitted that, therefore, the respondents are wholly justified in confiscating the conveyance with the goods contained therein and that, the petition being devoid of any merits, deserves to be dismissed.

Held:

1. No Discrepancy in the Documents carried along with the Vehicle-It was held by the Court that conveyance in question was transporting goods being brass electrical parts from Jamnagar to Delhi. The consignor, viz. the petitioner, and the consignee are duly registered under the relevant GST Acts. On 14.01.2019, when the conveyance came to be intercepted, the driver of the conveyance had duly produced the e-way bill as well as the invoice in connection with the goods that were transported. On behalf of the respondents, nothing has been pointed out to show that there was any discrepancy in the e-way bill or the tax invoice. Under the circumstances, in the light of the instructions issued by the Board in the Circular dated 13.04.2018, since, upon verification of the documents no discrepancies were found, the conveyance was required to be allowed to move further.

2. Even though No discrepancy found in Documents, but still officer can detain the vehicle for physical verification- If the officer desired to carry out physical verification of conveyance, goods and documents, it was still permissible for him to detain the conveyance, and accordingly, third respondent issued an order in Form GST MOV-02 for physical verification/inspection of the conveyance, goods and the documents. The said order passed on the ground that the genuineness of the goods in transit (its quantity etc.) and/or tendered documents requires further verification.

However, when conveyance was detained for the purpose of inspection, it was incumbent upon the officer to prepare a report in Form GST EWB-03 and upload the same on the common portal within twenty four hours from issuance of Form GST MOV-02 and upon completion of physical verification, he was further required to prepare a report in Form GST MOV-04 and serve a copy of the said report to the person in charge of the goods and conveyance and thereafter record the final report of the inspection in Part B of Form GST EWB-03 within three days of such physical verification.

3. No Compliance by Officer of procedure laid down for EWB-03, MOV-04, Part B of EWB-03- It was observed by the Court thatin facts of present case, no such reports in Part A of Form GST EWB-03, Form GST MOV-04 or Part B of Form EWB-03 have been prepared. Thus, court observed that though vehicle was detained for the purpose of carrying out inspection, no such inspection was carried out or that upon physical verification no discrepancy was found in the conveyance/goods or documents. In facts of case, despite the fact that no discrepancy appears to have been found after the inspection of the goods and conveyance, the proper officer has not issued a release order in Form GST MOV-05. Further, despite the fact that Form GST MOV-02 was issued, without verification/inspection of the goods and conveyance, State Tax Officer issued an order of detention in Form GST MOV-06 on the same day, that is, on 14.01.2019, on the ground that upon a perusal of the details in bilty No.15615, the same being disproportionate, the vehicle is required to be detained for verification of the same.

4. Affidavit submitted by Respondent does not in any way contain details about the discrepancy observed after verification-The Court observed that in affidavit-in-reply, there was not even a whisper regarding any discrepancy having been found in bilty No.15615 after verification, despite the fact that conveyance had been detained for that purpose.

Thus, Court held that there was no valid ground for detention of vehicle in question on the part of respondents. Under the circumstances, question of calling upon petitioner to pay tax, penalty and fine, as computed by the respondent in the order of demand of tax and penalty in Form GST MOV-09 dated 29.01.2019 does not arise.

5. Reason to Confiscate the Goods has nothing to do with the Transportation of Goods-It was observed by Court thatreason for passing order for confiscation has got nothing to do with reasons for which, goods and conveyance were initially detained. The reasons for issuance of the notice for confiscation under section 130 of the CGST Act in Form GST MOV-10 are that upon preliminary verification of the dealer online, 42 e-way bills have been generated in December 2018, wherein, IGST has been shown to Rs. 3,64,30,800/- and it appears that, dealers has not paid the same or that the purchases are not genuine. The Court observed that if that was the case, nothing prevented respondents from taking appropriate action against petitioner in accordance with law under the relevant provisions of the CGST Act. However, when conveyance in question was carrying goods which were duly accompanied by documents and no discrepancy was found in connection therewith, there was no reason for the officer to confiscate the same. The impugned order of confiscation passed by the third respondent under section 130 of the CGST Act, therefore, cannot be sustained.

For the forgoing reasons, the petition was held to be succeeded and therefore allowed.

5. Livguard Energy Technologies (P.) Ltd. v. State of Uttarakhand [2019] 112 taxmann.com 176 (Uttarakhand)

When provisions of CGST 2017 provide for release of goods only on furnishing a bank guarantee, it would be wholly inappropriate to issue any direction contrary thereto

Facts: The appeal under Chapter VIII Rule 5 of Allahabad High Court Rules, was preferred against order passed by Single Judge in Livguard Energy Technologies (P.) Ltd. v. State of Uttarakhand [Writ Petition (MS) No.3178 of 2019, dated 15-10-2019] whereby it was held that invoking jurisdiction of Writ Petition by the appellant-writ petitioner against show-cause notice was premature and appellant should give a reply to show-cause notice to concerned authorities furnishing valid reasons as to why delay had been caused.

Held: The respondents were directed to consider the original reply, and additional reply submitted by the petitioner, and pass a reasoned order. Further, when the court asked whether the writ petitioner is willing to deposit an unconditional bank guarantee, from a nationalized Bank, for the said amount; it was submitted that such a condition is stipulated in the provisions of the 2017 Act itself, and it is only because the appellant-writ petitioner is not in a position to do so, has he invoked the jurisdiction of this Court seeking its indulgence to direct release of the detained vehicle and stock on the appellant-writ petitioner furnishing an indemnity bond.

It was further held by the Court that since it is admitted that GST 2017 provides for release of goods only on furnishing a bank guarantee, it would be wholly inappropriate for them to issue any direction contrary thereto. Therefore, appellant-writ petitioner’s request for release of the vehicle and the goods on merely furnishing an indemnity bond was not acceded by the Court. It was further observed that interference in an intra-court appeal would be justified only if order under appeal suffers from a patent illegality and there was no such infirmity in order under appeal.

Case-Kandla Port Trust (GST AAR Gujarat)

1. Facts: M/s. Kandla Port Trust (Deendayal Port Trust), CDC Section, Sewa Sadan- III, Kandla, Kachchh (hereinafter referred to as the “Applicant” for the sake of brevity), is engaged in port service to various clients. The Applicant, vide Annexure-I of their application dated 23.03.2018, has sought for advance ruling for eligibility of Input Tax Credit (ITC) with respect of below mentioned specific expenses occurred by the applicant:-

A) Purchase of medicines for employees as prescribed by their doctor from outside on contractual basis.

B) Purchase of movable medical equipment at hospital.

C) AMC for repair and maintenance of residential colony and hospitals and school (other than new constructions, ITC for which is blocked u/s 15 of CGST Act, 2017).

D) Telephones & Mobiles at residence of officers and at hospitals.

E) Caretaking /housekeeping services at Guest House.

2. Contention by the Applicant–The employees are backbone for any organization for providing output services to customers/clients. It is not possible for any organization to do business activities without employees. Accordingly, expenses are incurred in the course and furtherance of business. Further, as directed during the personal hearing held on 12.07.2018, they have submitted the copy of the Chapter V of Major Port Trust Act, 1963 (Object clause). They further submitted that as the “Deendayal Port Trust” is carrying out its activities as per the provisions of the Major Port Trust Act, 1963 and as per the directions of ministry of shipping, there is no any Memorandum and Article of Association like in case of other organizations.

3. Observation by AAR- Applicant is engaged in supply of port services to various clients. Said expenses are for providing common facilities to their employees within the residential colony and the same are not relates to furtherance of their business/output service i.e. “Port Service”. It is very clear from the provisions of Sub Section (1) of Section 16 and Sub section (1) of Section 17 of the CGST Act, 2017, that a registered person is entitled to take credit of input tax charged on supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business only. In view of the above, the applicant is not entitled to take credit of input tax charged in respect of above-mentioned expenses as the same is not used in furtherance of their business.

4. Held-

The applicant is not entitled to take credit of input tax charged in respect of above-mentioned expenses, as the same is not used in the course or furtherance of his business.

5. Comment-

1. Other Judicial Pronouncements on similar Matter-: There are three other cases on the above matter which have been provided as below-

• National Aluminium Company Ltd. [2019] 102 taxmann.com 371 (AAAR-ODISHA) –Similar view was taken in the matter of National Aluminium Company Ltd. [2019] 102 taxmann.com 371 (AAAR-ODISHA) wherein in addition to holding that these services are not in the course or furtherance of business, it was also observed that provision of housing to its employees by Appellant is nothing but a perquisite. As clarified by the CBIC vide its Press Release dated 10.10.2017, referred to by the Appellant-I, perquisites are not subjected to GST. Therefore, since the perquisites are outside the scope of GST, input tax credit shall not be available to the Appellant-I in respect of tax paid on goods and services procured by it for management, repair, renovation, alteration or maintenance services (including watch and ward services, security services, Plantation/Gardening/Landscaping services, etc.) pertaining to residential accommodation for its employees in township/colony.
• General Manager Ordnance Factory Bhandara [2019] 106 taxmann.com 246 (AAR – MAHARASHTRA)-Similarly, in this case, it was held thatprovision of guest houses is a perquisite for their employees and therefore tax paid on maintenance and upkeep of guest houses cannot be allowed as ITC. Guest houses are generally used for temporary accommodation of employees as well as outsiders. Such provision of guest house cannot be treated as an activity in course or furtherance of its business and related to the applicant’s business. Further, it is found that the goods or services, or both pertaining to Guest House are used for personal consumption of the employees/guests and are not used or intended to be used in the course or furtherance of business. As such in view of the provisions of section 17(5)(g), no ITC is available to the applicant. Hence, it is held that they are not eligible for ITC on taxes paid for maintenance and upkeep of guest houses
• Posco India Pune Processing Center (P.) Ltd., [2019] 102 taxmann.com 21 (AAR – MAHARASHTRA)-In this case, it was held thatHotel Accommodation is being used by applicant as a residential premises of their MD/GM which is for personal comfort of both and therefore in view of the provisions of Section 17(5)(g) we hold that they are not eligible to claim the ITC for the same.

On a perusal of the above cases and the case discussed in detail today, it can be seen that out of the four cases, all the four cases have held that provision of Residential and similar services is not in the course or furtherance of business and only one of them i.e. AAAR Odisha referred to the aspect of perquisites to the employees.

2. Eligibility of ITC in case of Perquisites or otherwise: While these services are treated as perquisites and therefore part of salary, there would be question mark over the Input Tax Credit part and might result in denial of ITC and if these services are not provided as part of perquisites, they might be subject to Para 2 of Schedule I of CGST Act, 2017. Therefore, in either way taxability or reversal of ITC might have to be considered by the taxpayer.

3. Restricted Meaning of “used in the Course or furtherance of Business” being taken by AAR: Irrespective of the allowability of Input Tax Credit in the above cases, it can be observed that restricted meaning of term “in the course or furtherance of business” is being taken by Authorities. While assessing Output Tax Liability, even PPF and savings bank account Interest has bene considered (Shree Sawai Manoharlal Rathi (GST AAR Gujarat)) as in the course of business and therefore part of supply but while assessing the Input Tax Credit eligibility, restricted meaning of “In the course or furtherance of business” is being considered. One might say that this is no different then the past. Even ITC on Guest Houses are being disallowed treating the same as not in the course or furtherance of its business and not related to the applicant’s business.

Let’s take an example, wherein there is an outstation posting for a month and company has to provide residence to their employees. Whether such provision of accommodation would not be treated as “in the course or furtherance of business”.

It has to be seen that term used in Section 37 of Income Tax Act “laid out or expended wholly and exclusively for the purpose of the business or profession” is similar to “in the course or furtherance of business”. Hon’ble Gujarat High Court in the matter of Commissioner Of Income-Tax, … vs Navsari Cotton & Silk Mills Ltd. on 23 March, 1981 Equivalent citations: 1982 135 ITR 546 Guj laid down following test to arrive at commercial expediency of any expenditure under section 37 of Income Tax Act. The test are as follows:

The tests can be divided into two categories, namely, (1) positive tests, (2) negative tests. One (at least one) of the positive tests must nod its head and none (not even one) must do so in order to affirmatively hold that the expenditure is a business expenditure – inter alia, incurred on account of commercial expediency.

Positive tests

If the expenditure incurred :-

1. with a view to bring profits or monetary advantage either today or tomorrow.
2. to render the assessee immune from impending or reasonably apprehended litigation.
3. in order to save losses in foreseeable future.
4. for effecting economy in working which may pay dividends to-day or to-morrow.
5. for increasing efficiency in working
6. for removing inefficiency in the working.
7. where the expenditure incurred in such as a, (i) wise, (ii) prudent, (iii) pragmatic, (iv) ethical, man of the world of business would conscientiously incur with an eye on promoting his business prospects subject to the expenditure being genuine and within reasonable limits.
8. where it is incurred solely by way of a civil duty owed by the assessee to the society having regard to the nature of his business which brings him profits but results in some detriment to the public at large either by way of health hazard or ecological pollution or serious inconvenience to the citizens with a view to mitigate the aforesaid evil consequences and consequences of a like nature, subject to its being genuine and within reasonable limit.

Negative tests :

If it is incurred :-

1. for a mere altruistic consideration.
2. mainly in order to satisfy his philanthropic urges.

Explanation – Factors (1) and (2) are laudable but the altruistic or philanthropic urges can be satisfied at one’s own cost or sacrifice. Not at the cost of public exchequer or other taxpayers and those living below the poverty line. mainly in order to win applause or earn garlands or public appreciation.​

• for illegal, immoral or corrupt purposes or by any such means or for any such reasons.
• mainly in order to oblige a relative or an official.
• mainly in order to earn the goodwill of a political party or a politician.
• mainly in order to show off or impress others with his affluence or for ostentatious purposes.
• Apparently for a factor listed as a positive factor in the left side column but in reality for one of the obnoxious purposes listed hereinabove.
•  On a nebulous plea or pretext by way of an alibi in the name of winning profits in remote future or promoting business prospects by really for one or the other of the above-mentioned purposes.
• it must not be a bogus, fictitious or sham transaction.
• it must not be unreasonable and out of proportion.
• it must not be an expenditure merely with a view to avoid tax liability without any genuine purpose or reason in good faith.
• the advantage to be secured by incurring the expenditure must not be of the nature of a remote possible advantage depending on “ifs” and “buts”, and if at all, to be secured at an uncertain future date which may be considered too remote.

As we pointed out earlier :

One of the positive tests must be attracted whereas, (2) none of the negative tests should be attracted. 

There is plethora of judgements over this and broader views needs to be taken for the meaning of the term “in the course or furtherance of business”. Any restricted meaning might defeat the intention of the law.

GST CASELAW

Alfa Group v. Assistant State Tax Officer 113 taxmann.com 222 (Kerala) Issue-Detention on ground that value quoted in E-Way bill is less than MRP is not valid since no provision in GST mandates that goods cannot be sold on a value less than MRP Facts of the Case- Goods belonging to petitioner were detained in a parcel godown, on the ground that value quoted ..

Sawariya Traders v. State of Gujarat [2020] 114 taxmann.com 497 (Gujarat)

Issue-Discrepancies in the notice issued under Section 130 of CGST Act

Petitioner brought to notice of Court about order of detention made under section 129(1) of CGST Act that same is totally silent as regards discrepancy noticed after physical verification of goods and conveyance. Referring to notice issued under section 130 of CGST Act in Form GST MOV-10, it was pointed out that

a) Grounds set out in notice have got nothing to do with goods which were in transit.

b) There is no allegation as regards any contravention in respect of the goods in transit. Reference was made to section 130 of the CGST Act to point out that the same contemplates five contingencies in which the action can be taken thereunder. It was submitted that, in the impugned notice, it has not been specified as to which of the five clauses of sub-section (1) of section 130 of the CGST Act has been infringed in the present case.

c) Notice under section 130 of the CGST Act has to be issued to the person who contravenes the provisions of the CGST Act whereas, in the facts of the present case, such notice has been issued to the driver, who would not be the proper person to answer such show-cause notice.

Held-Having regard to the submissions advanced by the learned advocate for the petitioners, issue Notice.

Kalpana Stores v. State of Tripura [2020] 113 taxmann.com 616 (TRIPURA)

Issue- Order U/sec 129 without giving proper opportunity of Hearing

Facts of the Case- The petitioner in the course of his business, purchased 3(three) bars of different measurements weighing approximately 25.990 Metric Tons for a sale consideration of Rs. 10.59 lakhs (rounded off). On such purchase according to the petitioner IGST of Rs. 1.90 lakhs (rounded off) was paid. Tax invoice to this effect was also generated. The seller had also generated e-Way bill dated 06.10.2018 for transport of the goods. According to the petitioner, along with all legal documents the consignment was being transported on 15.10.2018 when respondents intercepted transport vehicle, detained vehicle and seized goods. On 25.10.2018 the official respondents raised a demand of sum of Rs. 5,10,066 lakhs comprising of basic tax with penalty. The petitioner was under compulsion to deposit the said amount since failing which the State respondents would not release the goods or the vehicle. The petitioner made the payment and got the same released on 26.10.2018 after which the present petition came to be filed.

Contention of Petitioner- Action of State authorities are totally illegal and unlawful. Goods in question were fully covered by necessary documents of payment requisite taxes. The respondents raised an unlawful demand of tax with penalty without affording any opportunity of hearing to the petitioner.

Contention of Respondent- Order dated 25.10.2018 is an appealable order. The petitioner has directly approached the Court without availing such appeal.

Held: The determination of payable tax and interest in terms of clause (a) or (b) of sub-section (1) of section 129 upon payment of which goods or transport vehicle would be released or upon furnishing security in terms of clause (c), has to be after a notice to the person concerned and granting an opportunity of being heard in this respect as provided in sub-sections (3) and (4) of Section 129 of the said Act. In the present case, no such steps were taken. The State authority straightway passed the order dated 25.10.2018 which is titled as “Order of Demand of Tax and Penalty”. This order thus clearly breaches the requirement of sub-sections (3) and (4) of Section 129 of the said Act. In view of such facts despite availability of appellate remedy, present petition should be entertained. The said order is, therefore, quashed.

Since petitioner has already deposited amount indicated in said order dated 25.10.2018 and goods along with the transport vehicle are already released, High Court moulded the relief as under:

a) The respondents shall give a notice of hearing to the petitioner why the said tax with penalty demand should not be confirmed giving clear 4(four) weeks time to respond;

b) The petitioner will file written opposition to such demand with documents as may be found necessary within the said stipulated period;

c) The competent authority shall thereafter pass a speaking order within a period of 4(four) months from today;

d) The amount of Rs. 5,10,066 which is already deposited by the petitioner shall be adjusted towards the final crystallized tax/penalty if any as per such order. If the demand is dropped partially or fully, refund shall be made with statutory interest.

Anil Bapulal Patil v. State of Gujarat [2020] 114 taxmann.com 473 (Gujarat)

Issue: Release of Conveyance on payment of fine levied in lieu of confiscation of conveyance

Petitioner had sought direction to respondent department to release conveyance bearing No.MH-18-M-8155 on payment of fine of Rs.60,795/- in lieu of confiscation of conveyance. Respondents were directed to release Truck No.MH-18-M-8155 belonging to the applicant petitioner upon the petitioner depositing a sum of Rs.60,795/- proposed to be levied by way of fine in lieu of confiscation of conveyance in the notice issued by the respondents under section 130 of the CGST Act. Rule is made absolute accordingly with no order as to costs.

Suleman Valji Dayma V. State of Gujarat [2020] 114 taxmann.com 327 (Gujarat)

Issue: Release of Conveyance on payment of fine levied in lieu of confiscation of conveyance

Petitioner had sought direction to respondent department to release conveyance bearing No. GJ-01-DZ-8549 on payment of fine of Rs. 17,962/- in lieu of confiscation of conveyance. Respondents were directed to release Truck No. GJ-01-DZ-8549 belonging to the applicant petitioner upon the petitioner depositing a sum of Rs. 35,924/- proposed to be levied by way of fine in lieu of confiscation of conveyance in the notice issued by the respondents under section 130 of the CGST Act.