Unreported Decisions – ST – August 2021

By Vinay Kumar Jain & Sachin Mishra, Advocates

1. Whether GST would be payable on the whole amount collected by the societies or associations from its members or only on the amount in excess of ₹ 7500/- in view of exemption granted under Entry 77 of Notification 12/2017-CT(Rate) Dated 28.06.2017?

Facts and Pleading: M/s. Greenwood Owners Association and others (hereinafter “Petitioners”) are all Resident Welfare Associations (“RWA”), whereas one Petitioner is a resident in an apartment. With the onset of GST, vide Notification 12/17-CT(Rate) dated 28.06.2017 an exemption was granted under Entry 77 to the contributions made to RWAs upto an amount of ₹ 7500/- per month per member. However, questions arose in cases where the contribution exceeded ₹ 7500/-. Subsequently, the GST Department issued a clarification, categorically clarifying that GST would be applicable only on the amount in excess of ₹ 7500/-. One of the Petitioners approached the AAR seeking clarification regarding this issue. The AAR, in turn, held adverse to the clarification, stating that the grant of exemption was conditional upon the contribution being an amount of ₹ 7500/- or less, and that if the same exceeded the sum of ₹ 7500/-, then the entirety of the amount collected would be brought to tax. Subsequently, the department also issued a Circular No.109/28/2019 dated 22.07.2019 in lines of the aforesaid observations. The Petitioners have challenged the said circular along with the AARs before Hon’ble High Court by way of these writ petitions.

The Petitioners argued that the interpretation adopted by the Department is contrary to the express language as well as the intendment of the exemption granted. The Petitioners laid emphasis on the use of the phrase ‘upto’ in the relevant Entry stating that the grant of exemption was for contribution upto ₹ 7500/-, which remained constant notwithstanding any change in the amount of contribution. The Petitioners also argued that as per Article 13(3) of the Constitution of India, ‘law’ would include any Ordinance or Bye law, Rule, Regulation, Notification, custom or usage, excluding Circulars. Therefore, they argued that the withdrawal of a statutory exemption by way of a Circular is contrary to the provisions of the Constitution.

The Respondents submitted that as per the provisions of Section 15 of the CGST Act, the transaction value in the present case is the contribution made to the RWAs and it should, in entirety, be taken into account for the purpose of levying tax. The Respondents compared the provisions of the Tamil Nadu Additional Sales Tax Act, 1970 to state that where the Legislature intended beneficial tax treatment by insisting upon a slab rate, such slab is usually indicated in the Stature itself. Therefore, the Respondents submitted that, since there is no slab rate prescribed in the instant case, but only a range which entitles the assessee to exemption, any variation in that amount thus leads to automatic disentitlement. The Respondents also relied upon the Constitutional Bench Supreme Court decision in the case of Commissioner of Customs Import, Mumbai vs Dilip Kumar & Company (2019-VIL-23-SC-CU-CB), to argue that the exemption provision must be construed strictly, and therefore the Petitioners are not entitled to seek beneficial treatment.

Judgment: The Hon’ble High Court while placing reliance upon the Dilip Kumar Case (supra) held that an Exemption Notification must be interpreted strictly, and that the plain words employed in Entry 77 being, ‘upto’ an amount of ₹ 7,500/- can thus only be interpreted to state that any contribution in excess of the same would be liable to tax. The Hon’ble High Court stated that the term ‘upto’ hardly needs to be defined and connotes an upper limit, and that the same is interchangeable with the term ‘till’ and means that any amount till the ceiling of ₹ 7500/- would be exempted for the purposes of GST. Therefore, the Hon’ble High Court quashed the impugned order of the AAR and the impugned Circular finding the same as contrary to the express language of the Entry in question.

M/s. Greenwood Owners Association & Ors vs The Union of India & Ors, High Court of Madras, decided on 01.07.2021 in W.P. Nos 5518 & 1555 of 2020 and others.

2. Whether a reversal of Input Tax Credit (ITC) is contemplated in relation to loss arising from manufacturing process under Section 17(5)(h) of the CGST Act 2017?

Facts and Pleading: M/s ARS Steels & Alloy International Private Ltd. (hereinafter “Petitioner”) is engaged in the manufacturing of MS Billets and Ingots. MS scrap is an input in the manufacture of MS Billets and the latter, in turn, constitutes an input for manufacture of TMT/CTD Bars. There is a loss of a small portion of the inputs, inherent to the manufacturing process. The Department vide the impugned orders is seeking to reverse a portion of ITC claimed by the Petitioners, proportionate to the loss of the input, referring to the provisions of Section 17(5)(h) of the CGST Act. Thus, the Petitioners have filed a writ petition against the assessment orders passed against them.

Judgment: The Hon’ble High Court observed that Section 17(5)(h) of the CGST Act relates to goods lost, stolen, destroyed, written off or disposed by way of gift or free samples. The Hon’ble High Court held that the loss that is occasioned by the process of manufacture cannot be equated to any of the instances set out in clause (h) of the Section 17(5) of the CGST Act 2017. The Hon’ble High Court stated that the situations as set out in clause (h) of section 17(5) indicate loss of inputs that are quantifiable and involve external factors or compulsions, whereas a loss that is occasioned by consumption in the process of manufacture is one which is inherent to the process of manufacture itself. The Hon’ble High Court further placed reliance upon the Rupa & Co. Ltd v CESTAT, Chennai (2015 (324) ELT 295), wherein a division bench of the High Court of Madras held that some amount of consumption of the input was inevitable in the manufacturing process, and therefore the CENVAT credit should be granted on the original amount of input used notwithstanding that the entire amount of input would not figure in the finished product. Thus, the Hon’ble High Court set aside the impugned orders and allowed the writ petition.

M/s Ars Steels & alloy International Pvt Ltd v The State Tax Officer, Group – I & Anr., High Court of Madras, decided on 24.06.21, in W.P. No. 2885 of 2021.

3. Whether the doctrine of mutuality of interest exists between the Trust and the Contributors/ Beneficiaries? Whether the services rendered by the Trusts are classifiable under ‘banking and other financial services’ category as per section 65(12) of the Finance Act 1994?

Facts and Pleading: M/s. ICICI Econet Internet and Technology Fund (hereinafter “Appellant”) are venture capital funds established as a trust under the Indian Trusts Act, 1882 and registered with SEBI as a Venture Capital Fund. The Appellants are represented and managed by a Trustee and the terms and conditions pertaining to the formation of the Appellants-Trust are contained in the Indenture of Trust (IOT). The Appellant’s properties are held in the trust by the Trustee for the benefit of beneficiaries, who are contributors to the Funds. The Trustee receives a remuneration in the form of Trusteeship fees for services rendered by it to the Appellants, and to ensure that the Appellants receive professional and experienced advice, the Trustee appoints an Investment Manager or Asset Manager to manage the assets of the Appellants, the terms of which are contained in the ‘Investment Management Agreement’. The Investment Manager is responsible for managing the assets of the Appellants and receives remuneration in the form of management fees for the services rendered by it.

The department demanded service tax on the Appellants on account of expenses incurred by the Trust; return of income earned by a specific class of unit holders and Provision for losses and impairment of investment debited to financials as service incomes earned by the Trusts. On the issue of mutuality, the department has relied upon Hon’ble Supreme Court decision in M/s Bangalore Club Vs. Commissioner of Income Tax, Civil Appeal No. 124,125 of 2007, 272-278 of 2013 arising out of S.L.P.(Civil) No. 16880 – 16884 of 2010 and16879 of 2010 dated 14.1.2013 to say that Supreme Court has laid down three conditions under the principle of mutuality (i) there must be a complete identity between the contributors and participators (ii). the actions of the participators and contributors must be in furtherance of the mandate of the association and (iii). there must be no scope of profiteering by the contributors from a fund made by them which could only be expended or returned to themselves. However, as per department during the course of their investment management business, the Trust/ Funds used contributions to advance loans to their portfolio companies/buy equity/quasi equity etc. as per Trust Deed; hence, in the present case, the Funds being engaged in commercial operations with third parties (investee portfolio companies/body corporate), ruptures the principle of ‘privity of mutuality’, and consequently, violates the one-to-one identity between the investor and Fund; thus, the first condition of mutuality is not satisfied.

Judgment: The Hon’ble CESTAT held that these Trusts are essentially mutual funds that are engaged in Portfolio management, etc. The Hon’ble CESTAT observed that though these mutual funds are named as Trusts, the essential function of such Trust was of commercial concerns i.e. maximising the profits, and the same is clearly stated in the objectives of the Trust. The Hon’ble CESTAT further observed that it is also mentioned clearly in various places that the Trust fund shall be managed by the Trust, with the object of carrying on the activity of a Venture Capital Fund, thus the profit motive of the Trust was evident. The Hon’ble CESTAT held that when these Trusts are treated as juridical persons for the purposes of SEBI regulations, there are no reasons to not treat them in a similar manner for the purpose of taxation. Thus, the Hon’ble CESTAT stated that the Appellants have violated the principles of mutuality by concerning themselves in commercial activities and by using the discretionary powers to benefit a certain class of investors or nominees or employees or subsidiaries. Therefore, the Hon’ble CESTAT held that the Appellants can no longer be treated as trusts for the purposes of taxation statutes. Thus, as per Hon’ble CESTAT, the Appellants have failed the test laid down by the Supreme Court in the case of Bangalore Club v CIT (supra). The Hon’ble CESTAT also observed that there exists a basic difference between funds and clubs. Trusts/funds are initiated with a profit motive, and the activities are akin to those of a Bank or a financial institution, whereas clubs have no or minimal commercial interest and are normally formed to share facilities, which would otherwise be inaccessible or unaffordable at an individual level. Therefore, the Hon’ble CESTAT held that Appellants are a ‘commercial concern’, since they are managing the money invested by Subscribers/Contributors/Investors and thereby rendering a service to the contributors under the category of Banking and Other Financial Services, wherein the consideration is in the form of withholding the dividends/profits distributable, thus, as long as they are performing taxable services, they are liable to pay service tax. The Hon’ble CESTAT also stated that activities of the trusts should also be considered in common parlance and not only in terms of the definition, and in common parlance these funds are understood to be Venture Capital Funds. Thus, the Hon’ble CESTAT held that there was nothing illegal in holding that the trusts do exists and function as juridical persons as far as they are rendering service leviable to service tax as per the provisions of the Finance Act 1994.

M/s ICICI Econet Internet and Technology Fund & Anr. V Commissioner of Central Tax, Bangalore North, CESTAT Regional Bench, Bangalore, decided on 01.07.21, in Service Tax Appeal No. 2900 of 2012.

4. Whether the term ‘business’ as defined under Section 2(17) of the Central Goods & Services Act, 2017 (hereinafter referred to as “CGST Act 2017”) includes a medical store run by a Charitable Trust to sell medicines at a lower rate, without any pecuniary benefit?

Facts and Pleadings: M/s. Nagri Eye Research Foundation (hereinafter “Petitioner”) is a registered charitable Trust which is inter alia running a medical store where the medicines to the indoor and outdoor patients of the Petitioner Hospital are sold at a lower rate. Further, whatever marginal income is earned is used only for the purpose of mitigating any unforeseen eventualities and/or administrative expenses. Accordingly, the Petitioners filed an application for advance ruling on the question as to whether GST Registration was required for the medial store run by the Petitioner, and whether the medical store providing medicines at a lower rate amounts to supply of goods. The AAR held that the Petitioner was required to obtain GST Registration for the medical store and that the medical store providing medicines at a lower rate amounted to supply of goods. The said order was upheld by AAAR as well. The Petitioners challenged the said observation before the Hon’ble High Court by way of a writ petition.

The Petitioners argued that both the authorities failed to appreciate the fact that the activities carried out by the Petitioner by running a medical store could not be termed as a ‘business’ within the meaning of Section 2(17) of the CGST Act, inasmuch as such activities can neither be said to be a trade or commerce nor for any pecuniary benefit. The Petitioners further argued that, considering the objectives of the Trust, the Petitioner trust cannot be said to be running a medical store for profit by any stretch of imagination. The Petitioners also submitted that the Petitioners give benefits to patients under various schemes floated by the Central/ State Government and therefore, in such a situation too, the activity could not be said to be a business activity.

Judgement: The Hon’ble High Court held that every supplier who falls within the ambit of Section 22(1) of the CGST Act, 2017 has to get themselves registered. The Hon’ble High Court observed that as per Section 7(1) of the CGST Act, 2017 the expression ‘supply’ includes all forms of supply of goods and services or both such as sale, transfer, barter etc. made or agreed to be made for consideration by a person in the course or furtherance of business. Since the Petitioners are selling the medicines, may be at a cheaper rate but for consideration in the course of their business, the Hon’ble High Court observed that the submission of the Petitioners that such a sale could not said to be a “business” in view of the definition contained in Section 2(17) of the said Act cannot be accepted. The Hon’ble High Court stated that as per the definition of the term ‘business’, it clearly emerges that any trade or commerce whether or not for a pecuniary benefit, would be included in the term ‘business’ as defined under Section 2(17) of the Act. Therefore, the Court dismissed the petition being devoid of merits.

M/s. Nagri Eye Research Foundation vs Union of India, High Court of Gujarat at Ahmedabad, decided on 09.07.21, in R/Special Civil Application No. 7822 of 2021.