Expenses incurred on CSR - Not so GST friendly?
One of the major advantages under the GST regime is the unlocking of tax credits, a lot of which was not available in the erstwhile Indirect tax regime. While the earlier legislations imposed
numerous restrictions on credits, such conditions
are now a lot relaxed with Section 17(5) of the
CGST Act mentioning a list of supplies for which
credit is not available.
ITC provisions under CGST Act
We will now discuss ITC implications of
expenses incurred for meeting obligations under
certain other laws. According to Section 16(1) of
the CGST Act, every registered person is entitled
to take input tax credit on supplies of goods or
services or both used in the course or
furtherance of business. This is unlike the
erstwhile Cenvat credit regime where credit was
available only if the goods/ services were
covered by the definition of inputs, input services
or capital goods. Further, according to Section
17(5) of the CGST Act, input tax credit is not
available in respect of supplies listed therein,
notwithstanding anything contained in Section
16(1) of the CGST Act.
Therefore, based on the above-mentioned
provisions it can be said that input tax credit is
available for any inward supply which is used in
the course or furtherance of business, unless it is
covered by the negative list mentioned under
Section 17(5) of the CGST Act. The expression
‘course or furtherance of business’ appears to be
very wide in scope and therefore, it is said that
the a lot of tax credits are now available under
GST which were not available earlier. Let us now
discuss whether credit can be availed for
expenses incurred in meeting various statutory
obligations.
Mandatory nature of CSR and business purpose
One such obligation is that of corporate
social responsibility (‘CSR’). According to Section
135 of Companies Act, 2013, every company
subject to a specified threshold has to spend
atleast 2% of its net profit for CSR. Companies
may incur expenses either on procurement of
goods or services for distribution. Given that GST
regime is that of minimum exemptions, most of
such procurements involve a GST component as
well. Therefore, if credit is not available for any
such expense, it will amount to an additional cost
on account of CSR.
CSR is mandatory under Companies Act,
2013 and accordingly, non-compliance with such
requirements can have implications for
businesses. Therefore, one may argue that such
expenses are incurred in the course or
furtherance of business.
Cenvat credit on CSR under earlier regime
In the case of Essel Propack v.
Commissioner [2018-TIOL-3257-CESTAT-
Mumbai], CESTAT observed that CSR is not in
the nature of charity as it has got a direct bearing
on the manufacturing activity of the company
which is largely dependent on smooth supply of
raw materials. Further, it augments the credit
rating of the company and its standing in the
Article
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corporate world. The Tribunal thus held that such
expenses are incurred to win the confidence of
the stakeholders and shareholders. It also noted
that CSR which was a mandatory requirement for
the public sector undertakings, has been made
obligatory also for the private sector and unless
the same is to be treated as input service in
respect of activities relating to business,
production and sustainability of the company
itself would be at stake. Hence, Cenvat credit
was allowed to the appellant.
Advance ruling on CSR in GST regime
The authorities have however not been so
generous under GST. In the case of Polycab
Wires Pvt Ltd reported at 2019-VIL-100-AAR, the
applicant had distributed electrical goods to
people affected by flood in Kerala against
discharge of its CSR obligations. The Kerala AAR
held that the applicant distributed electrical items
on free basis without collecting any money and
for these transactions input tax credit would not
be available as per Section17(5)(h) of the
KSGST Act and CGST Act. Therefore, it can be
seen that the provisions of Section 17(5)(h) of the
CGST Act are invoked to deny ITC of goods
distributed free of cost for meeting CSR
obligations.
ITC on services used for CSR
Let us now discuss the provisions of Section
17(5)(h) of the CGST Act. According to this sub-
section, ITC is not available for “goods lost,
stolen, destroyed, written off or disposed of by
way of gift or free samplesâ€. It is to be seen that
the said sub-section merely places ITC restriction
on free distribution of goods and does not restrict
ITC on provision of services for free. In the case
of CIT v. Ajax products Ltd reported at (1965) 55
ITR 741, the Apex Court had held that there was
no scope for intendment where the words used
by the legislature were clear and unambiguous.
Therefore, the restriction under Section 17(5)(h)
cannot be made applicable on free provision of
services.
Therefore, two different tax treatments
appear to apply for the very same nature of
expense - goods and services. The scope of ITC
was already wide in GST and has been further
widened under the CGST (Amendment) Act. It is
time that the government brings in benevolent
amendment to ensure that ITC is allowed for
distribution of goods and services alike for CSR.
This will encourage the industry to come forward
for taking up similar projects of CSR which
otherwise requires government support.
[The author is a Senior Associate, GST
Practice, Lakshmikumaran & Sridharan, New
Delhi]
Notifications and Circulars
New regime for residential realty sector
implemented: CBIC has issued notifications,
effective from 1-4-2019, for the implementation of
GST rate of 1% in case of affordable houses and
5% on construction of houses other than
affordable houses. The new rates are
mandatorily applicable for new projects
commencing from 1st April. For on-going projects
which had commenced before 1st April,
promoters will have to exercise option by 10th
May if they wish to continue to pay tax at the old
Goods and Services Tax (GST)
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rate. It may be noted that otherwise, it will be
deemed that they have opted to adopt the new
rate. Few conditions however, must be adhered
to if the new lower rate is chosen. While ITC is
not available in case of new rates, promoters are
also required to purchase from GST-registered
suppliers and if such purchases fall below 80% of
the value of inputs and input services, GST will
be required to be paid by the promoter under
reverse charge mechanism at the rate of 18%.
GST at rate of 28% is however required to be
paid by the promoter if cement is procured from
unregistered suppliers, even in case where
condition of 80% inputs and input services from
registered suppliers is fulfilled. A promoter is also
required to maintain project wise account of
inward supplies from registered and unregistered
suppliers and calculate tax payments on the
shortfall at the end of the financial year.
Further, Transfer of Development Rights (TDR)
and payment of upfront amount payable in
respect of grant of long term lease, on or after 1st
of April by the landowner to the developer will be
exempt. Such exemption, however, is not
available on the part of the value of such rights
attributable to units remaining un-booked at time
of receipt of completion certificate. In these
cases, GST will be payable on TDR and upfront
amount for lease, on proportionate basis under
RCM by the promoter. Notification Nos. 3 to
8/2019-Central Tax (Rate), all dated 29-3-2019
and effective from 1-4-2019 have been issued in
this regard.
Composition scheme for suppliers of goods
or services or both – Reversal of ITC availed:
As per Notification No. 2/2019-Central Tax
(Rate), suppliers of goods or services or both
upto an aggregate turnover of Rs. 50 lakh, can
opt to pay GST @ 6% (3% CGST + 3% SGST)
and not collect any tax from the recipient on such
supplies. Benefit of ITC is also not available to
suppliers taking benefit of this notification. Now
this notification has been amended by
Notification No. 9/2019-Central Tax (Rate), dated
29-3-2019 (effective from 1-4-2019) to provide for
payment of tax equivalent to the credit of input
tax in respect of inputs held in stock and inputs
contained in semi-finished or finished goods held
in stock and on capital goods. New clause 8 also
states that the balance of input tax credit, if any,
lying in the electronic credit ledger will lapse.
Further, as per new clause (iii) in the Explanation,
CGST Rules, 2017, as applicable to a person
paying tax under CGST Section 10, shall apply to
a person paying tax under Notification No.
2/2019-Central Tax (Rate). Also, as per Circular
No. 97/16/2019-GST, dated 5-4-2019, a
registered person who wishes to opt for benefit of
said notification shall file intimation in Form GST
CMP-02 by selecting the category of registered
person as “Any other supplier eligible for
composition levyâ€. Such person would also be
required to furnish a statement in Form GST ITC-
03.
Refund of accumulated ITC to merchant
exporter clarified: Refund of accumulated input
tax credit to merchant exporter where supplies
are received by him after availing benefit under
Notification No. 40/2017-Central Tax (Rate) or
41/2017-Integrated Tax (Rate) has been clarified
by CBIC. According to Circular No. 94/13/2019-
GST, dated 28-3-2019, this refund of
accumulated ITC under CGST Rule 89(4B) must
be applied under the category ‘any other’ instead
of ‘refund of unutilized ITC on account of exports
without payment of tax’. Refund claim shall be
filed in the Form GST RFD-01A.
E-way Bill – New forthcoming system for
extension: Provision to extend e-way bill, when
goods are in transit, are being incorporated in the
next version of e-way bill system. According to an
update on website ewaybill.nic.in, during the
extension, user will be prompted to answer
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whether the consignment is in transit or in
movement. On selection of in transit, address
details of transit place are required, while place
and vehicle details are required on selection of in
movement. In both scenarios, destination pin
code will be considered from Part-A for
calculation of distance for movement and validity
date.
E-way Bill – Auto calculation of distance:
Government has released an update on
forthcoming changes in e-way bill system. The
system is being enabled to auto calculate route
distance for movement of goods, based on postal
pin codes of source and destination. User would
however be allowed to enter actual distance,
which will be limited to 10% more than displayed
distance. According to update released on 25-3-
2019 on website ewaybill.nic.in, in case, source
PIN and destination PIN are same, the user can
enter up to 100 km. If the PIN entered is
incorrect, the system would alert the user.
Transfer of ITC in case of death of sole
proprietor – Clarification: CBIC has clarified
that transfer or change in the ownership of
business will include transfer or change in the
ownership of business due to the death of the
sole proprietor. It is also stated that the
transferee / successor shall be liable to pay any
tax, interest or any penalty due from the
transferor in cases of transfer of business due to
death of sole proprietor. Circular No. 96/15/2019-
GST, dated 28-3-2019 further clarifies that in
case of transfer of business on account of death
of sole proprietor, the transferee / successor shall
file Form GST ITC-02 in respect of the
registration which is required to be cancelled on
account of death of the sole proprietor, before
filing the application for cancellation of such
registration by the legal heirs.
Ratio decidendi
Confiscation when case on search validity
pending before HC, not correct: Observing that
CGST Section 130(4) prescribes grant of hearing
opportunity prior to confiscation, Allahabad High
Court has remanded the matter for fresh
adjudication. The assessee in this case had
requested the authorities to defer adjudication on
confiscation as issue of validity of search was
engaging High Court’s attention. The High Court
held that the authorities should have awaited
outcome of the challenge. It also observed that
substantive due process under Section 67 is
essential before a search and that the Court in
exercise of powers under Article 226 of the
Constitution cannot go on sufficiency of reasons.
[Rimjhim Ispat v. State of UP - Writ Tax No. 619
of 2018, decided on 15-3-2019, Allahabad High
Court]
Fraudulent availing of ITC - Summon justified
on MD: Rajasthan High Court has upheld the
summons issued to MD of a company in a case
of ITC availment on the basis of fake invoices.
Plea of residing in USA and not involved in day-
to-day activities was rejected, observing that
petitioner was receiving managerial remuneration
from the company since 2012 and became its
MD in 2018. Dismissing the petition with costs,
the High Court also observed that allegation of
fraudulent ITC was not controverted, and that
determination of tax was not required in an
offence under Section 132. Delhi High Court
decision in Make My Trip, was distinguished.
[Bharat Raj Punj v. Commissioner – 2019 VIL
113 RAJ]
No GST on interest free deposit if not
withheld at completion of lease: In a case
involving interest free security deposit, taken from
lessee as security against damages during lease
of premises, Maharashtra AAR has held that
deposit received is not a consideration for supply
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made by assessee-applicant and hence no GST
is payable. It observed that applicant will not
apply such deposit as consideration as entire
amount is returned back to the lessee. The AAR,
however, observed that if at time of completion of
lease tenure, the amount or part of it is withheld
as charge against damages, then that amount
would be liable to GST. [In RE: E-Square Leisure
Pvt. Ltd. – 2019 TIOL 121 AAR GST]
Exemption available only to clinical
establishments providing healthcare: Madhya
Pradesh AAR has held that exemption provided
under S.No.74 of Notification No.12/2017-Central
Tax (Rate) is service specific and service
provider specific, therefore to qualify an
establishment must satisfy the dual condition of
providing healthcare services as well as being a
clinical establishment. The applicant had pleaded
that it is ancillary to other clinical establishment
accredited by National Accreditation Board for
Testing and Calibration Laboratories (NABL).
However, the AAR held that mere involvement in
sophisticated testing and consultancy will not be
sufficient to qualify as a clinical establishment. It
was also observed that applicant was functioning
as sub-contractors to the said accredited
companies and not as an independent clinical
establishment. [In RE: J C Genetic India Pvt. Ltd.
– 2019 VIL 108 AAR]
Exemption from GST on reverse charge basis
under Section 9(4) not retrospective:
Maharashtra AAR has held that Notification No.
38/2017-Cental Tax (Rate), dated 13-10-2017
exempting supply of goods and services received
from unregistered person, which are liable under
reverse charge mechanism under CGST Section
9(4), is not available for the period prior to 13-10-
2017. It was held that RCM is applicable on the
transactions effected from 1-7-2017 till 12-10-
2017. The AAR observed that if the notification
does not clearly stipulate that it is retrospective, it
shall be considered as prospective. Supreme
Court’s decision in Garikapatti Veeraya v. N
Subbiah Choudhury was relied on. [In RE:
Famous Studios Ltd. – 2019 VIL 109 AAR]
Works contract pertaining to railways – Lower
tax rate for sub-contractor: In a case involving
works contract services provided by a sub-
contractor to the main contractor in respect of
work relating to railways, AAAR has held that
benefit under Sl. No. 3(v) of Notification No.
11/2017-Central Tax (Rate) as amended by
Notification No. 1/2018-Central Tax (Rate) is
available to the sub-contractor. AAAR
Maharashtra held that composite supply of works
contract is ultimately going to the use of railways
without being subjected to any change or
modification, and thus said works contracts is
‘pertaining to the railways’. The work was hence
held as eligible for concessional rate of GST.
Department’s contention that there is no specific
mention of sub-contractor providing services in
Sr. 3(v), was rejected. [In RE: Shree Construction
– 2019 VIL 33 AAAR]
ITC available only on discounted invoice
value: In a case involving post-invoice discount
where discount cannot be pre-determined or
recorded in invoices and supply of goods is made,
AAR Tamil Nadu has held that buyer can avail ITC
only on proportionate GST as applicable on
invoice value less the discounts. Proviso to CGST
Section 16 on payment towards value of supply
along with tax amount to supplier within 180 days
was relied on. The Authority in this regard held
that Section 15(3) will not apply where discount is
given after invoices are raised and supply of
goods is made. The AAR observed that if ITC is
availed on full tax amount, difference should be
reversed to avoid liability. The applicant had
argued that since the discount was not eligible for
exclusion from taxable value and tax would be
paid on full invoice value, no credit was reversible
and the entire tax amount would be available as
credit. [In RE: MRF Ltd. – 2019 VIL 71 AAR]
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IGST liable on hospitality services provided in
SEZ to visitors from DTA: Gujarat AAAR has
upheld the AAR ruling on GST liability of a hotel
located in non-processing zone of SEZ in respect
of hospitality services provided to visitors from
DTA. Plea that IGST is not applicable since SEZ
is deemed to be outside the territory of India, was
hence rejected. Rejecting the appeal, Appellate
AAR observed that clarification with regard to
SEZ being deemed as port under Section 7 of
the Customs Act will not be applicable as it was
issued for customs bonded warehouse. Reliance
placed by the appellant on Section 53(2) of the
SEZ Act, 2005 and Circular Nos. 46/2017-Cus.,
dated 24-11-2017 and 3/1/2018-IGST dated 25-
5-2018 in their appeal, was not accepted. [In RE:
Sapthagiri Hospitality (P) Ltd. - 2019 VIL 19
AAAR]
No ITC if goods supplied under CSR activity
on FOC basis: Referring to Section 17(5)(h) of
the CGST Act, 2017 which restricts ITC with
respect to goods that are disposed of by way of
gift or free samples, Kerala AAR has held that
ITC will not be available to the manufacturer on
supply of electrical items to the flood affected
people under CSR activity on FOC basis. The
Authority, however, held that the distributors of
the applicant-manufacturer who had supplied
goods to Kerala State Electricity Board on the
instructions of the applicant will be entitled to
avail ITC on such goods as the goods were
supplied to KSEB and GST was paid to the
Government by the distributors with respect to
the goods. [In RE: Polycab Wires Pvt. Ltd. – 2019
VIL 100 AAR]
No ITC on goods supplied free under sales
promotion scheme: Maharashtra AAR has held
that ITC is not available to the assessee on
procured gold coins to be distributed to its
customers for free of cost under a sales
promotion scheme at the end of scheme period
for achieving the stipulated lifting or payment
criteria. It was held that only use of goods in the
course of furtherance of business as mentioned
in Section 16(1) of CGST Act does not entitle one
to avail ITC since Section 17(5) starts with
“Notwithstanding anything contained in sub-
Section (1) of Section 16â€. The Authority was of
the view that considering the bar to avail credit by
virtue of Section 17(5)(h), even in a case where
the goods are used in the course or furtherance
of business, ITC shall not be available on
distribution of gold coins for free as gifts under a
sales promotion scheme. It also elaborated on
the meaning of “gifts†as assigned under the Gift
Tax Act, 1958 and observed that gift was a
transfer of property without consideration which
was given voluntarily. [In RE: Biostadt India
Limited – 2019 VIL 60 AAR]
Job work – Dispatch of consumables to job
worker is not ‘supply’: The question before the
Authority was whether dispatch of consumable
materials (zinc, furnace oil, nickel, etc.) for
galvanization, would be treated as supply from
the principal to the job worker, if they were not
returned within the time allowed under Section
143(1)(a) of the CGST Act, 2017. Answering this
question, the AAR West Bengal held that as the
goods were consumed in the process, the return
of the galvanized goods to the applicant would
satisfy the condition of receiving back the inputs
in accordance with Section 143(1)(a). It was also
held that as the goods were consumed in the
process of galvanizing and became inseparable
from the galvanized goods, they shall not be
treated as supply in terms of Section 143(3)
provided they have been entirely used up in the
process of galvanizing. [In RE: Ratan Projects &
Engineering Co. Pvt. Ltd. – 2019 VIL 91 AAR]
ITC available on cars further leased out:
Madhya Pradesh AAR has held that applicant,
providing cars on lease and charging outward
GST, is eligible to claim ITC as it falls under
exception of ‘further supply of such vehicles or
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conveyance’ under CGST Section 17(5) and
satisfies the conditions before and after
amendments from February 2019. It held that the
term ‘further’ prefixed to ‘supply’ does not
differentiate it from the term ‘supply’ as construed
under GST, making the applicant eligible for
availing ITC on supply of tax paid motor vehicles
on monthly lease. It was, however, held that held
that at the termination of lease agreement, if the
vehicle is not further leased to same or other
customer, the applicant will be liable to reverse
the ITC so availed as per the law. [In RE:
Narsingh Transport – 2019 VIL 107 AAR]
ITC of Compensation Cess paid on motor
vehicles not available for supply of rental
service: The applicant was engaged in supply of
renting of motor vehicles and then their disposal
after some time. The Kerala AAR has held that
such applicant was eligible to claim ITC of
Compensation Cess paid at the time of purchase
of motor vehicles but would be required to
reverse proportionate amount of ITC of such cess
every month based on the turnover of rental
service as the same was an exempt supply, not
being liable to cess under GST (Compensation to
States) Act, 2017. It held that such ITC can be
utilized for discharging liability of Compensation
Cess arising at the time of sale of such vehicles.
The Authority in this regard relied on Section 2(p)
of the GST (Compensation to States) Act which
defines the term “taxable supply†under the said
Act and referred to definition of ‘exempt supply’
as provided in CGST Act. [In RE: Orix Auto
Infrastructure Services Limited – 2019 VIL 98
AAR]
Fabrication of body on chassis supplied by
principal is supply of service: Kerala AAR has
held that the activity of fabrication of a body is in
the nature of adding a structure (any treatment
done) on the chassis owned by the customer,
and hence even when the job worker used his
own material to do the fabrication on the chassis,
it will be considered as supply of service and will
be classified under SAC Code 9988, thereby
attracting 18% GST. The Authority observed that
chassis was a semi-finished good owned by the
principal and any treatment done by any other
party on the chassis of the principal was in the
nature of job work activity. [In RE: Kondody
Autocraft (India) Pvt. Ltd. – 2019 VIL 97 AAR]
EU VAT - Place where educational course
takes place is ‘place of supply’: CJEU has held
that the place where educational courses were
organised will be considered as actual place of
supply for VAT purposes, irrespective of place
where registration and payments for said course
took place. The Court held that the expression
‘services in respect of admission to events’ with
respect to five-day course on accountancy will be
included in the meaning of common system of
VAT as per which place where educational event
is held will be considered as place of supply.
[Skatteverket (Swedish Tax Authorities) v. Srf
Konsulterna AB – Judgement dated 13-3-2019 in
Case C‑647/17, CJEU]
UK VAT – Supply of skates along with right to
admission, separate supply: UK’s Upper
Tribunal (Tax and Chancery Chamber) has set
aside the First-tier Tribunal (Tax Chamber)
decision which had held that supply of ‘skating
with skates’ package involved two separate
supplies, the standard-rated supply of admission
to ice rink and a separate zero-rated supply of
hire of children’s skates. The assessee provided
various options where all constituents of the
package could be purchased separately,
however a single unbroken price was charged for
the package. The matter was remitted to FTT for
reconsideration. [Commissioner HMRC v. Ice
Rink Company Limited – Decision dated 8-4-
2019 in Appeal number: UT/2017/0180, UK’s
Upper Tribunal (Tax and Chancery Chamber)]
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Notifications and Circulars
Customs duty reduced on import of specified
goods from Japan: Rate of Customs Duty on
specified goods imported from Japan has been
considerably reduced with effect from 1-4-2019.
The new rates will be applicable to goods falling
under 806 tariff lines as specified in Notification
No. 69/2011-Customs. Notification 10/2019-
Customs, dated 28-03-2019 has been issued for
this purpose. This concessional rate is available
only if the importer proves that the goods for
which exemption is being claimed are of the
origin of Japan as per the rules notified for this
purpose.
Rebate of State and Central Taxes and Levies
scheme – FTP and HoP amended: Scheme for
Rebate of State and Central Taxes and Levies
(RoSCTL), as notified by the Ministry of Textiles
Notification No. 14/26/2016-IT(Vol II), by
issuance of scrips to support textile sector
(garments and made-ups) has been incorporated
in the FTP and Handbook of Procedures Vol.1.
As per Paras 4.95 and 4.96 inserted in HoP by
DGFT Public Notice No. 83/2015-20 dated 29-03-
2019, rates of RoSCTL are notified as Schedules
to Notification dated 8-3-2019 of the Textile
Ministry. Duty credit scrips with a validity of 24
months, if registered at EDI port, can be used at
any EDI port.
Transport and Marketing Assistance for agri.
products – FTP and HoP amended: Provisions
relating to Transport and Marketing Assistance
for specified agricultural products to specified
destinations have been notified by the DGFT
through Chapter 7(A) in FTP and HoP Vol.1.
Aayaat Niryaat Form 7A(A) has also been
notified. As per chapters inserted by Notification
No. 58/2015-20 and Public Notice No. 82/2015-
20, both dated 29-03-2019, assistance will be
paid only to exporter who receives payment in
foreign currency. Application shall be filed online
on DGFT website and will not be maintainable
after completion of one year from the quarter in
which exports were made.
Physical copies of MEIS/SEIS scrips phased
out for EDI ports: Physical copies of MEIS or
SEIS duty credit scrips will not be issued by the
DGFT from 10-4-2019 onwards, in cases where
the port of registration is an EDI port. As per
CBIC Circular No. 11/2019-Cus. dated 9-4-2019,
the scrips will continue to be transmitted
electronically by the DGFT to the Customs
system and would be visible to concerned
officers involved in imports. While no TRA shall
be issued in respect of these paperless scrips
issued electronically, DGFT will continue to issue
scrips in physical form as per current practice for
non-EDI ports.
Advance authorisation, EPCG and EOU - IGST
and Cess exemption extended: Exemption
from Integrated tax and Compensation Cess for
imports under Advance authorisation, EPCG
scheme and by EOUs has been extended again.
This time the exemption has been extended for
full one year, and would now be available till 31st
of March 2020, instead of 31st March 2019.
Amendments have been made in Paras 4.14,
5.01(a) and 6.01(d)(ii) of the Foreign Trade Policy
by DGFT Notification No. 57/2015-20, issued on
20-3-2019. Ministry of Finance has also issued
notifications to amend the Customs notifications.
Peas and pulses - Import of certain quantities
relaxed from 1-4-2019: Ministry of Commerce
has relaxed import of Moong, Urad and Peas.
Such products will be subject to annual (fiscal
Customs
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year) quota of 1.5 Lakh Metric Tonne. Import of
Toor Dal shall be subject to an annual quota of 2
Lakh MT as per procedure notified by DGFT.
Import of these products was earlier fully
restricted. As per DGFT Trade Notice dated 1-4-
2019, Ministry of Commerce Notifications S.O.
1478(E), 1479(E), 1480(E) and 1481(E) amend
the import policy conditions of certain items in
Chapter 07, and are effective from 1-4-2019.
Ratio decidendi
Rectification in Bill of Entry under Customs
Section 154 on error by importer: In a case
where the importer accidently paid duty twice on
same invoice, Madras High Court has remanded
the matter to assessing officer to pass order after
exercising power under Section 154 of the
Customs Act. The High Court observed that the
error was apparent on the face of the order and
the bill of entry should have been verified to
avoid litigation. It observed that powers of
Section 154 can be exercised by the authority
when error is pointed out by an importer/exporter
for reasons attributable to latter, but only in
respect of clerical/arithmetical error.
[Commissioner v. Symrise (P) Ltd. - 2019-VIL-
141-MAD-CU]
Advance authorisation – Use of surplus
inputs for goods cleared in DTA: In a case
where actual use of inputs in export goods was
less than SION norms and surplus was used in
the manufacture of domestic goods, CESTAT
Ahmedabad has allowed benefit of advance
authorisation. Observing that export obligation
was fulfilled and off-grade goods, considered as
waste, were cleared in DTA, the demand on
ground of use of inputs being less than that
prescribed in SION was set aside. The Tribunal
placed reliance on Para 4.1.5 of FTP and the
Tribunal decision in the case of Areva T & D India
Ltd. [K L J Organics Ltd. v. Commissioner - 2019-
VIL-208-CESTAT-AHM-CU]
DFIA scheme – Import of popcorn maize –
Word ‘maize’ is not generic: Bombay High
Court has allowed the benefit of DFIA scheme for
import of popcorn maize against export of maize
starch powder. The Court accepted the
contention that SION entry for import inputs
mentioned only ‘maize’, and hence any quality of
maize was importable. It noted that actual user
condition was absent. Department’s view that
non-mentioning of specific input in shipping bill
violated FTP Para 4.12(i), was rejected, noting
that term ‘maize’ was not generic but specific,
and that popcorn was capable of use in
manufacture of export goods. [Shah Nanji Nagsi
Exports v. UoI – Judgement dated 29-3-2019 in
Writ Petition No. 8268/2017, Bombay High Court]
Demurrage charges are justified unless
waiver mandated by Rules: Delhi High Court
has held that the warehousing service provider
was justified in not waiving and returning
demurrage charges deposited in a case where
detention was held justified, even when penalty
and confiscation by Customs were set aside. The
High Court held that fee payable for duration for
which warehousing was done cannot be removed
by the court unless rules or relevant policy
provided for the same. It observed that even
otherwise warehousing is a commercial activity
for which service provider invests in resources,
deploys manpower and creates infrastructure.
[International Lease Finance Corp. v. UoI - Order
dated 27-3-2019 in W.P.(C) No. 6490/2018, Delhi
High Court]
Skin barrier Micropore Surgical Tapes -
Customs exemption: CESTAT Chennai, by a
majority order, has allowed benefit of Notification
No. 21/2002-Cus. (Sl. 363A, List 37, Entry 22) to
skin barrier Micropore Surgical Tapes which are
not exclusively used as Ostomy products.
Department’s argument on non-availability of
exemption on the ground that surgical tapes were
general purpose tapes and not exclusively for
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11
TAX AMICUS April 2019
Ostomy use, was rejected by Tribunal. It noted
that notification does not refer to end-use of
tapes, and that exemption is not deniable merely
because the tapes are being used as multiple
use items. [Sutures India P. Ltd. v. Commissioner
- 2019-VIL-221-CESTAT-CHE-CU]
Difference between ‘wrench’ and ‘plier’ –
Classification in USA: US Court of Appeals for
the Federal Circuit has affirmed US CIT’s
interpretations of the term ‘wrenches’ in
8204.12.00 and ‘pliers’ in 8203.20.6030.
According to CIT, wrenches are hand tools
having a head with jaws or sockets having
surfaces adapted to snugly or exactly fit and
engage the head of a fastener and a singular
handle with which to leverage hand pressure to
turn the fastener. Plier was held as a hand tool
with two handles and two jaws on a pivot, which
must be squeezed together to enable it to grasp
an object. [Irwin Industrial Tool Company v.
United States – Decision dated 9-4-2019 in 2018-
1215, United States Court of Appeals for the
Federal Circuit]
Ratio decidendi
Excise valuation – Dharmada charges not
includible: Larger Bench of the Supreme Court
has held that ‘Dharmada’ collected as optional
payment from buyer, cannot be part of
transaction value for goods. It held that the
amount to be credited to charity and not forming
part of income was not includible. The Court held
that no amount not paid as consideration for
goods can go to make transaction value and if an
amount paid at the time of sale transaction was
for a purpose other than the price of the goods, it
cannot form part of transaction value as such
payment is not for transaction of sale i.e. for
transfer of possession of goods. Observing that
payment of dharmada was meant for charity and
was received and held in trust by the seller, the
Court was of the view that if such amounts were
meant to be credited to charity and did not form
part of the income of the assessee they cannot
be included in the transaction value or
assessable value of the goods. [D.J. Malpani v.
Commissioner – Judgement dated 9-4-2019 in
Civil Appeal No. 5282 of 2005, Supreme Court]
NCCD exemption available to units exempted
from Excise duty: Supreme Court has held that
manufacturing units in special category States
which were exempt from Central Excise duty
would also be exempt from National Calamity
Contingent Duty (NCCD), since NCCD was of the
nature of an excise duty. The Court held that
same view on this exemption would apply as
taken for Education Cess and Secondary &
Higher Education Cess by the Court in the case
of SRD Nutrients (P) Ltd., even if NCCD was
levied on the product and not on the excise duty
payable. The Apex Court in this regard was of the
view that exemption notifications, like the one in
question must be read in a manner that give
them a liberal interpretation, provided that no
violence is done to the language employed.
[Bajaj Auto Ltd. v. UoI – Judgement dated 27-3-
2019 in Civil Appeal No. 3239 of 2019, Supreme
Court]
Central Excise and Service Tax
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12
TAX AMICUS April 2019
Service tax audit after introduction of GST –
Saving clause under CGST Section 174(2)(e):
Jharkhand High Court has prima facie rejected
the contention that saving clause in CGST
Section 174 did not protect Service Tax Rules
and hence action taken pursuant to such rules
was without authority of law, after introduction of
GST. Dispute pertained to inquiry/audit under
Rule 5A. The Court however prima facie held that
the expression ‘instituted’ in CGST Section
174(2)(e) implied that proceeding stood already
instituted at time of repeal of Finance Act, 1994.
Decisions of Gujarat and Delhi High Courts were
referred while directing status quo till next date of
hearing. [Sulabh International v. UoI – Order
dated 4-4-2019 in W. P. (T) No. 1599 of 2019,
Jharkhand High Court]
Construction exclusively or primarily for
commerce alone liable to service tax: Bombay
High Court has held that if primary use of
construction was non-commercial, even if 1/3rd of
the constructed area was used for commercial
purpose, service tax would not be attracted under
Section 65(25b) of Finance Act 1994 for services
of commercial and industrial construction. The
High Court upheld CESTAT ruling that
construction of sports complex for
Commonwealth Youth Games on land owned by
Govt. of Maharashtra was not for commercial
purposes. Affidavit by Director of Sports and
Youth Services that stadium would be used for
non-commercial purposes even after games, was
noted. [Commissioner v. B.J. Shirke Construction
Technology – Judgement dated 15-3-2019 in
Central Excise Appeal No. 186 of 2017, Bombay
High Court]
Omission/substitution included in meaning of
‘repeal’: Reiterating that omission/substitution
would fall within ‘repeal’ of a provision and relying
on Central Excise Section 38A(c), Bombay High
Court has held that notice dated 17-1-2000 under
the Modvat Rules would be valid even post 1-4-
2000 when Cenvat Rules were introduced. The
Court however remanded the case observing that
order, without cross examination and without
supplying relied-upon documents, was in the
breach of natural justice. It observed that
statement that superior goods were diverted after
taking credit, needs to be tested through cross
examination. [Commissioner v. Milton Polyplas –
Judgement dated 1-4-2019 in Central Excise
Appeal No. 142 of 2005, Bombay High Court]
Cenvat credit refund – CESTAT when can
interpret GST transitional provisions: In a
case of partial denial of refund of Cenvat credit,
CESTAT Hyderabad, relying on proviso to CGST
Section 142(3) has upheld the denial. It rejected
the plea that if assessee had taken back the
credit, after rejection of refund, before CGST Act
came into force, they could have transferred it as
ITC and hence should now be paid-back in cash.
The Tribunal observed that in transitional cases,
CESTAT has to interpret and apply provisions of
CGST Act, to the extent they modify provisions of
Central Excise Act and Finance Act, 1994. It
however held that other transitional provisions
such as transfer of Cenvat credit lying in balance
as input tax credit under GST is purely a
provision of the CGST Act and CESTAT has no
role in interpreting or applying such provisions.
[United Seamless Tubular Pvt. Ltd. v.
Commissioner - 2019-VIL-210-CESTAT-HYD-
CE]
Mere consumption of goods during service
cannot turn it into work contract: CESTAT
Ahmedabad has held that consumption of goods
by a service provider during the provision of
service does not automatically convert the
service into a works contract. The Tribunal
observed that if the scope of work contract was
extended to include consumables then there
would be no service which can fall outside the
purview of works contract. It also observed that
even consultancy service provided by an
© 2019 Lakshmikumaran & Sridharan, India All rights reserved
13
TAX AMICUS April 2019
engineer or an advocate involves consumables
like paper, ink, pen, etc. [Krishna Engineering
Works v. Commissioner – 2019 (22) GSTL 409
(Tri. – Ahmd.)]
Supply of electricity in the absence of licence,
exigible to service tax: Observing that petitioner
was not a person authorised to transmit, supply,
distribute or undertake trading in electricity,
Calcutta High Court has ruled that receiving high-
tension electricity and converting into low-tension
for supply to occupants of a mall, was classifiable
as services. It held that any interpretation that
violates Electricity Act, should be avoided. The
Court held that although electricity is goods, in
the absence of licence under Section 12 of the
Electricity Act, would be termed as a service
liable under Section 65B(23) of the Finance Act,
1994. [Srijan Realty Pvt. Ltd. v. Commissioner –
2019 TIOL 594 HC KOL ST]
No automatic vacation of stay after 6 months:
Distinguishing the Supreme Court judgement in
Asian Resurfacing of Road Agency vacating stay
on all pending proceedings on expiry of 6
months, CESTAT Bangalore has held that
officials are to approach the Tribunal for vacation
of stay. It held that the Supreme Court judgement
was restricted to original courts and that the
Tribunal is not a trial court but an authority. The
Tribunal held that in the absence of application
for vacation of stay, the stay order will continue
till disposal of appeal. Larger Bench decision in
the case Haldiram India was relied on.
[Vijayanagar Sugars (P) Ltd. v. Commissioner –
Misc. Order No. 20104-20106/2019, dated 7-3-
2019, CESTAT Bangalore]
Supply of tangible goods - Possession and
effective control are relevant: In a case
involving lease of computer system and provision
of IT Assistant, CESTAT Delhi has set aside
demand under Supply of Tangible Goods
services. It noted that lessor could not remove, at
their discretion, any assets, while lessee could
direct him to re-assign equipment from one place
to another. The Tribunal observed that both
equipment and the Assistant worked under direct
physical possession and effective control of
lessee. It held that this fulfilled the requirements
of exclusion clause. [Compucom Software Ltd. v.
Commissioner - Final Order No. 50167/2019,
dated 4-2-2019, CESTAT Delhi]
Ratio decidendi
Karnataka Sales Tax – Turnover not limited to
‘taxable turnover’: Supreme Court has held that
levy under Section 6B of the Karnataka Sales
Tax Act, must be on the total turnover and not
only on the taxable turnover. It rejected the
contention that ‘total turnover’ in Section 6B(1) for
purpose of turnover tax, cannot include turnover
on which State has no power to levy tax.
Applying strict rule of interpretation of taxing
statutes, the Court held that except the
deductions provided under the first proviso to
Section 6B(1), nothing else can be deducted from
total turnover as defined under Section 2(u-2).
[Achal Industries v. State of Karnataka –
Judgement dated 28-3-2019 in Civil Appeal
No(s). 4837 of 2011 and Ors., Supreme Court]
Value Added Tax (VAT)
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14
TAX AMICUS April 2019
Rusk and toast are bread as per composition,
hence not liable to VAT: Chhattisgarh High
Court has held that Rusk and Toast are to be
treated as Bread under Entry-7 of Schedule-I to
the Chhattisgarh VAT Act making them tax free
goods. The goods were held not classifiable
under the residuary entry of Part IV of Schedule II
of the Act. Upholding the single Judge Order, the
Court observed that as per judicial precedents, it
was required to find out if contents of the product
fits the description of the basic entry and only if
the same was not possible, residuary entry can
be taken as a resort. [State of Chhattisgarh v. Saj
Food Product (P) Ltd. - 2019-VIL-138-CHG]
Mobile crane wire rope classifiable as part of
mobile crane: Supreme Court has held that wire
ropes used in mobile cranes are a part of such
cranes and liable to 4% tax as per Entry 155 of
Schedule IV to Rajasthan VAT Act. The Apex
Court observed that in order to make mobile
cranes operational, use of wire ropes was
essential and hence mobile crane wire rope was
an essential part of the mobile crane. Relying on
judgement in Annapurna Carbon Industries, the
Court reiterated the test that a thing is a part of
the other if the other cannot function without it.
[Commissioner v. Prasoon Enterprises –
Judgement dated 26-3-2019 in Civil Appeal No.
3198 of 2019 and Ors., Supreme Court]
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15
TAX AMICUS April 2019
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