Unreported Decisions – ST – July 2022
By Vinay Kumar Jain and Jay Chheda, Advocates
1. Whether transfer of Input Tax Credit from one branch to another branch of same legal entity under the garb of Facilitation Service and Business Support service is legal and acceptable?
Facts and pleadings: JSW Steel Ltd., Odisha (hereinafter referred to as ‘Petitioner’ or ‘JSW Orissa’) is engaged in the business of manufacturing and sale of hot and cold rolled coils, sheets and plates bearing GSTIN 21AAACJ4323N2ZR. JSW Steel Ltd., Maharashtra (‘JSW Maharashtra’) has obtained GST registration as Input Service Distributor under GSTIN 27AAACJ4323N2ZF. JSW Maharashtra had participated in a tender bidding process invited by the Government of Odisha for lease of iron ore blocks in Odisha. JSW Maharashtra was granted the lease after successful bid. JSW Odisha paid bid premium, royalty and other charges to Odisha State government towards license for right to use minerals at the mining blocks. JSW Odisha paid the applicable OGST and CGST under reverse charge (‘RCM’) on the various charges paid and availed Input Tax Credit (‘ITC’). Further, JSW Odisha utilized the said ITC against output liability on stock transfer of goods and sale of goods. JSW Odisha also raised an invoice on JSW Maharashtra towards facilitation charges for payment of license fees on behalf of JSW Maharashtra and discharged output IGST liability by utilizing ITC accumulated at its end. Through the said transaction the accumulated ITC at JSW Odisha was exhausted and ITC was indirectly transferred and made available to JSW Maharashtra, which being an ISD, distributed the same to various other units of JSW.
The Odisha state GST officials objected to such modality as they were of the view that the intention of raising invoice towards facilitation charges on JSW Maharashtra was to indirectly transfer the accumulated ITC at JSW Odisha to JSW Maharashtra which in turn would be transferred by JSW Maharashtra as ISD to other units of JSW. The department initiated proceedings under Section 74 of the CGST Act, 2017 and confirmed demand against JSW Odisha of Rs. 401,16,88,016/- along with penalty of Rs. 401,16,88,016/- and interest of Rs. 99,14,51,105/.
The Odisha state GST officials objected to such modality as they were of the view that the intention of raising invoice towards facilitation charges on JSW Maharashtra was to indirectly transfer the accumulated ITC at JSW Odisha to JSW Maharashtra which in turn would be transferred by JSW Maharashtra as ISD to other units of JSW. The department initiated proceedings under Section 74 of the CGST Act, 2017 and confirmed demand against JSW Odisha of Rs. 401,16,88,016/- along with penalty of Rs. 401,16,88,016/- and interest of Rs. 99,14,51,105/
The Petitioner i.e. JSW Odisha challenged the said order in Writ Jurisdiction and argued that the Petitioner’s payment of royalty and other statutory dues to Odisha State government were made on behalf of JSW, Maharashtra. Hence, the Petitioner contended that the unutilized ITC is of JSW Maharashtra who is competent to distribute such ITC to its other units. The Ld. Advocate General argued that the transactions in question are sham due to lack of “supply” of “goods” or “services” by JSW Odisha to JSW Maharashtra. Further the Ld. Advocate General stated that JSW Odisha has not obtained ISD registration to distribute ITC to JSW Maharashtra.
Orrisa High Court Judgement: The Hon’ble High Court held that that JSW-Company from its Head Office at Bombay had applied and participated in the tender process but JSW as a Company, has been granted the mining lease for iron mines situated within Odisha. To utilize such mines in Odisha, registration was obtained by JSW in the state of Odisha. Subsequently, JSW Odisha paid royalty and other statutory dues and ITC was also claimed which lead to excess ITC remaining as unutilized at JSW Odisha. Such unutilized ITC was sought to be utilized by raising facilitation output invoices on JSW, Maharashtra in the garb of ‘support services’. The Court held that the JSW Odisha’s claim of depositing output GST under RCM on behalf of JSW Maharashtra lacks sufficient evidence to back such claim and the transaction in question prima facie amounts to siphoning of tax credit from one branch to another. Accordingly, the High Court declined to allow the prayer of the Petitioner to restrain the Revenue to affect recovery of the demand confirmed under section 74. However, the High Court issued notice to Revenue to file its response on the challenge of lack of jurisdiction of State of Odisha to confirm such demand as ITC has been availed by JSW Maharashtra and no proceedings can be initiated against JSW Odisha.
M/s JSW Steel Ltd. v. Union of India and Others – Judgement dated 17.05.2022 in W.P. (C) No. 10052 of 2022 & I.A. No. 5190 of 2022, High Court of Orrisa2. Whether the Show Cause Notice issued by the officers of Directorate of Revenue Intelligence (DRI) were within jurisdiction or not in view of the amendments in Finance Act 2022 to negate the impact of decision of Supreme Court in the case of Cannon India?
Facts and pleadings: In the said case, Writ Petition was filed to challenge the Order-in-Original emanated from Show Cause Notice issued by the officers of Directorate of Revenue Intelligence (DRI). The Petitioner challenged the order contending the lack of jurisdiction of DRI officers on the ground that they are not a “proper officer” within the meaning of Section 2(34) of the Customs Act, 1962 by relying on two decisions of the Hon’ble Apex Court, Commissioner v. Sayed Ali 2011 (265) E.L.T. 17 (S.C.) and Canon India Private Limited Vs. Commissioner of Customs 2021 (376) E.L.T. 3 (S.C.) which held that the officer from DRI is not a “Proper Officer” as per Section 2(34) of the Customs Act, 1962 for issuing Show Cause Notice under Section 28 of the Customs Act, 1962.
During the pendency of the proceedings, Finance Bill, 2022 was passed proposing changes to the Customs Act, 1962. Section 97 of the Finance Act, 2022 validated all proceedings already taken before the commencement of the Finance Act, 2022 by any officers of Customs as specified in the Customs Act, 1962 and to subsequently complete the pending proceedings post the commencement date in accordance with the provisions of the Customs Act,1962 as amended by the Finance Act 1962.
Madras High Court Judgement: The High court acknowledged the pending proceedings in this matter when the Finance Bill, 2022 (Section 97) was passed proposing changes to the provisions of the Customs Act, 1962 (Section 2(34), 3, 4, 5) and validating the actions already taken. Vide the Budget Amendments in 2022, Section 3 notified the officers of DRI, Customs (Preventive) and Customs (Audit) as officers of Customs. Further amendment to Section 5 provided powers to the CBIC to notify functions of officers and appoint class of officers as ‘proper officers’. Further specific inclusion in section 5 has been undertaken to provide for concurrent jurisdiction in multiple officers. Further such amendments shall retrospectively apply since the time Customs Act has been brought into force and validate all previous actions carried out by this class of officers.
The Hon’ble High Court observed that post Budget Amendments in 2022, the Officers of Directorate of Revenue Intelligence (DRI) are appointed as “Officers of Customs” under notification issued under Section 4(i) of the Customs Act, 1962. Further under Section 6 of the Customs Act, 1962, the powers and functions (duties) of the Board or “Officers of Customs” specified in Section 5 read with Section 4 can be entrusted on these officers. Hence, the court held that, the orders passed are valid and legal and will be disposed off in accordance with the provisions of the Customs Act, 1962 and Section 97 of the Finance Act, 2022.
3. Whether the principle of unjust enrichment apply in case of refunds when the Petitioner is engaged in export of services?
Facts and pleadings: Jar Productions Pvt. Ltd. (hereinafter “Petitioner”) is registered under the Companies Act, 2013 and providing production services to ‘A Suitable Company Ltd.’ located in London, U.K. (ASCL). The Petitioner had entered into an agreement with ASCL, wherein as per Clause 4.10, any refund of tax received by the Petitioner, shall be deducted from the production expenses while computing the consideration towards production services. The Petitioner paid output IGST on the consideration received and utilised inputs/input services ITC for payment of output IGST liability and filed first refund claim for the period April to July 2019 on 31.03.2021. The said refund claim was allowed by the Department. Thereafter, the Petitioner filed another refund application for period August 2019 to October 2019. However, a Show Cause Notice was issued to the Petitioners, and subsequently the said claim was rejected on the ground that the incidence of tax was passed by the Petitioner to ASCL, resulting in unjust enrichment to the Petitioner. The Petitioners filed an appeal against the said order, however the same was also dismissed. Similarly, the refund claim of the Petitioners for the period November 2019 to July 2020, was also rejected on similar grounds. Hence, the Petitioner filed Writ petition before Bombay High Court against the said orders.
The Petitioner submitted that based on the decisions of the Hon’ble Bombay High Court in various judgements, the principle of unjust enrichment does not apply to the export services (zero rated supplies) rendered by the Petitioner.
Bombay High Court Judgement: The Hon’ble High Court noted that the Respondents did not dispute the entitlement of refund of GST by the Petitioner but contended the passing of incidence of tax to ASCL. The Court observed that as per Section 54(8)(e) an applicant is entitled to the refund of tax if the incidence of tax has not been passed on to the recipient of the services. The Court observed that in the present case, the agreement executed between the Petitioner and the ASCL shows that the approved production budget includes all costs in connection with the production services including the amount of Indian GST, thereby depicting that GST is included in all costs in connection with production services. Thus, the Court observed that it can be clearly established that the incidence of tax has not been passed to ASCL since as per Clause 4.10 the amount of GST is refunded to the Petitioner is to be deducted from the total cost in connection with the production services as per the said Clause. Therefore, the Hon’ble High Court set aside the orders of both, the Adjudicating Authority and the Appellate Authority holding that services rendered by the Petitioner were export services and because no passing of incidence of tax was established by the Respondent.
4. Whether inordinate delay in adjudication of show cause notice is fatal and violation of the principles of natural justice?
Facts and pleadings: Unic Associates (hereinafter referred to as “Petitioner”) were served with a Show Cause Notice on 06.10.2010 (hereinafter referred to as ‘SCN’). The Petitioner was aggrieved by the demand proposed in such SCN which had been adjudicated by the Department in the year 2021. The Petitioner citing the well settled principles of case laws and jurisprudence stating that such proceedings completed long after the issue of SCN to be quashed since they are in violation of the principles of natural justice.
Madras High Court Judgement: The Hon’ble High Court stressed on the fact that the authorities are overburdened by several litigations, hence, holding the orders passed long after the issuance of the SCN to be in violation of the principles of natural justice as not fair. Additionally, it added that the Petitioner could have approached the court under Article 226 of the Constitution of India for a Mandamus to direct the Department to adjudicate the show cause notice by completing the necessary assessment in reasonable time. The Hon’ble High Court dismissing the petition expressed that Petitioner of being equally guilty of the delay in not following up with the Department to pass an order at an earlier date.