Unreported Decisions – ST – December 2020
By Vinay Kumar Jain & Sachin Mishra, Advocates
1. Whether Proviso to Section 50 of the Central Goods and Services Tax Act, 2017 (‘CGST Act’) is retrospective in operation even as the Notification brought it into effect prospectively?
Facts and Pleading: Section 50 of the CGST Act deals with levy of interest on delayed remittance of the output GST liability. Section 100 of the Finance (No.2) Act, 2019 inserted a Proviso to Section 50 which stated that interest is leviable only on that portion of output liability which is discharged by way of cash. The date on which the said amendment would become effective was not specified. Later, in the minutes of the 39th GST Council meeting where the recommendation to insert the Proviso was discussed, it was stated that the amendment would be retrospective w.e.f. 1.7.2017. Subsequently, vide Notification No. 63/2020-Central Tax, dated 25.8.2020, the Central Government notified 1.9.2020 as the date on which the Proviso would come into force. This led to doubts and apprehension in the industry. The Central Board of Indirect Taxes and Customs (‘CBIC’) issued a Press Release dated 26.8.2020 stating that the notification was issued prospectively only to get over technical limitations and the decision of the GST council in the 39th meeting would be given full effect. The GST Authorities had issued notices to the assessees levying interest on the total output liability including the portion discharged by way of Input Tax Credit (‘ITC’). In case of many assessees, no opportunity was granted before confirming the levy of interest and proceedings to recover interest by attachment of bank accounts were resorted to. The issue before the Madras High Court was thus, on the effective date of application of the Proviso to Section 50 of the CGST Act.
The Assessees argued that the credit was available even before output tax liability arose and hence the question of delay does not arise. Interest is a measure of compensation and since ITC is already available in the electronic ledger, there is no question of the same being due to the revenue. No opportunity was granted before raising the impugned demand and consequential proceedings. The Assessees also argued that the Proviso has been inserted to set right an anomaly and is therefore retrospective in operation. The Assessees relied on the decision of Madras High Court in Refex Industries Limited v. Assistant Commissioner, decision dated 6.1.2020 in W.P. No. 23360 & 23361 of 2019 wherein it was held the proviso to be applicable retrospectively.
The Revenue argued that Section 41 of the CGST Act provides that the entitlement to credit is only with the filing of return on self-assessment basis. Thus, same cannot be availed of till such time a return is filed by an assessee. As per Section 49 of the CGST Act, only when a credit entry is made in the electronic credit ledger the entitlement to avail the same arises. The effective date of applicability of Section 100 of the Finance (No.2) Act, 2019 was not notified when the decision in Refex Industries was rendered. Thus, the decision is of no benefit to the assessee. The Revenue further argued that the Telangana High Court in Megha Engineering and Infrastructure Ltd. v. Commissioner of Central Taxes, Hyderabad [W.P. No. 44517 of 2018] has held that liability to pay interest is on the total output liability including that portion discharged by utilising ITC. The Revenue relied on a clarification which was issued by the CBIC bearing No. 20/16/07/2020-GST, dated 10.2.2020 to the effect that liability to interest would arise on total amount of tax liability as revealed in the GST return.
Judgment: The Hon’ble High Court held that the Proviso to Section 50 of the CGST Act is retrospective in operation notwithstanding the notification bringing it into effect from 1.9.2020. Thus, interest is leviable only on that portion of the output GST liability discharged belatedly by way of cash with effect from 1.7.2017. The Hon’ble High Court also held that the decision of the Madras High Court in the case of Refex Industries, has dealt with this very issue and held in favour of the Petitioner. The Hon’ble High Court held that the Department is enriching itself doubly by, on the one hand, holding in its coffers the available credit and on the other, seeking the payment of interest upon the same sum. It is settled that where a Proviso was designed to eliminate unintended and prejudicial consequences which would cause hardship to a party, such a Proviso should be seen to be remedial and one that mitigated the prejudice caused from inception. Moreover, interest is intended to compensate the revenue for loss of capital. In the present case, there is no loss insofar as the revenue is in possession of the credit which is as good as cash. The decision of the Telangana High Court in Megha Engineering is dated 18.4.2019, i.e., long prior to the amendment made to Section 50 by insertion of the Proviso and the clarifications issued by the GST Council and CBIC. The Hon’ble High Court held that this entire controversy has now been settled by the CBIC vide its Circular in F.No. CBIC 20/01/08/2019-GST, dated 18.9.2020 where it has reiterated that the amendment by insertion of Proviso of Section 50 of the CGST Act is intended to be retrospective and thus, recovery of interest will only be on net cash tax liability from 1.7.2017. The Hon’ble High Court observed that the Centre, the State and the CBIC are in agreement that the operation of the Proviso of Section 50 should only be retrospective and the interpretation to the contrary by the authorities constituted under the CBIC is misplaced. Further, on perusal of the minutes of 31st GST council meeting dated 22.12.2018, minutes of 35th GST Council meeting dated 21.6.2019, minutes of 39th GST Council meeting dated 14.3.2020, press release of the GST Council post the 39th meeting and the CBIC press release dated 26.8.2020, the Hon’ble High Court held that it is clear that the amendment is intended to be retrospective in nature.
M/s. Maansarovar Motors Private Limited and Ors. v. Assistant Commissioner and Ors., Madras High Court decided on 29.09.2020 in W.P. Nos. 28437, 29998, 31081 of 2019.
2. Whether Rule 5A of the Service Tax Rules, 1994 saved and authorities have power under Section 174(2)(e) of the CGST Act, 2017 to institute any investigation, inquiry, verification, assessment proceedings, adjudication, etc. after the enactment of CGST Act, 2017?
Facts and Pleading: M/s. Vianaar Homes Private Limited (hereinafter referred to as ‘the Petitioner’) is inter alia engaged in the business of construction of housing complex. On 21.1.2020, the Petitioner was visited by officers of CGST, Audit II and required to produce some documents and information regarding to several group of companies of the Petitioner, to which the Petitioner complied. This process of visitation was repeated and it seemed that the process of audit and verification proceedings had begun. Aggrieved by this the Petitioners challenged the letter that commenced the audit process by the Respondents.
The Petitioner contended that the Respondents have exercised powers beyond their jurisdiction under Rule 5A of Service Tax Rules, 1994 and are not proper officers. The Petitioner also contended that the Section 25 of the General Clauses Act, 1897 isn’t applicable since the Central Goods and Services Tax Rules, 2017 have been framed with effect from 22.6.2017 and supersede Service Tax Rule, 1994. The Petitioner further contended that since no obligation or liability has been accrued or incurred and no right of privilege has been acquired by the Respondents, Section 6 of the General Clauses Act, 1897 cannot save the Rule 5A of the Service Tax Rules, 1994. The Petitioner contended that since the proceedings were not instituted at the time of repeal, Section 174(2)(e) of CGST Act cannot save the current proceedings and no service tax was due from Petitioners. The Petitioner further contended that the duty, tax etc. that is within contemplation of the saving clause is only that which falls within the ambit of section 72 & 73 of the Finance Act, 1994 and Rule 5A proceedings are in the nature of a roving enquiry that would not result in tax becoming due, and, therefore, cannot be resorted to in the facts of the present case.
The Respondents contended that the arguments advanced by the Petitioners have already been considered and dismissed in the case of Aargus Global Logistics Pvt. Ltd. v. UOI, 2020-TIOL-593- HC-DEL-ST wherein it has been held that Rule 5A of Service Tax Rules, 1994 survives the CGST Act. The Respondents contended that by virtue of Section 3 of CGST Act, CGST officers are vested with the right to exercise powers under the Central Excise Act/Finance Act. It was further contended that the legislature intent cannot be to overlook the cases where there has been a duty evasion by an assessee prior to coming into force of the CGST Act, and the adjudication process for determining the said evasion has not commenced. The Respondents contended that the saving clause was imported for the very reason to assess the cases like the present one.
Judgment: The Hon’ble High Court has held that Rule 5A of Service Tax Rules, 1994 was saved even after the omission of Chapter V of the Finance Act, 1994. The Hon’ble High Court has held that the proceedings which formed the subject matter of Service Tax Rules, 1994 cannot be ignored just because the new law was implemented simultaneously with the repeal of old rules. If audit/verification would lead to any tax not paid or short paid, the adjudicatory process would necessarily follow. The Hon’ble High Court relied on the judgement of State of Punjab vs Harnek Singh, (2002) 3 SCC 48 and went on to look at the intention of legislature behind including the saving clause and came to conclusion that unless a different intention appeared the repeal of an act wouldn’t affect anything duly done or suffered. After determining the legislative intent for replacement of acts and looking at the articulation of Section 6 and Section 24 of the General Clauses Act, 1897 and the saving clause of CGST Act, the Hon’ble High Court has held that the Rule 5A of Service Tax Rules, 1994 is saved even though Chapter V of the Finance Act, 1994 is omitted.
M/s. Vianaar Homes Private Limited Vs. Assistant Commissioner (Circle-12), Central Goods & Services Tax, Audit-II and Ors. High Court of Delhi, decided on 03.11.2020 in W.P. (C) 2245/2020 and CM Appl. 7832/2020.
3. Whether levying of Service Tax on the Appellant under the category of “Banking and other Financial Services” on the amounts/value charged by the foreign bankers while delivering their inward remittance in foreign currencies to the Indian Bankers of the Appellant valid? Whether the services received by the Appellant from overseas companies for receipt of clinical or non-clinical overviews related to marketing the pharmaceutical goods manufactured and exported by the Appellant fall under the category of “Scientific or Technical Consultancy Services”?
Facts and Pleading: M/s. Aurobindo Pharma Ltd. (hereinafter referred to as ‘the Appellant’) is inter alia engaged in manufacturer of bulk drugs as well as providing of various services. (i) The export sale proceeds from their overseas customers are collected by the Appellant’s Indian Banker. The Indian Banks, who collect the said amount for the Appellant, in the process are required to pay certain charges to the foreign banks who transfer the funds to Indian Banks. (ii) The Appellant is also receiving consultancy from overseas companies with regards some clinical and non-clinical overviews which are required to be enclosed as part of the application to be filed before the Regulatory Authorities in various European countries for the purpose of marketing the pharmaceutical goods manufactured and exported by the Appellant.
The department has alleged that (i) service tax is payable under the category of “Banking and other Financial Services” on the amounts/value charged by the foreign bankers while delivering their inward remittance in foreign currencies to the Indian Bankers of the Appellant. The department has also alleged that (ii) the Appellant is liable to pay service tax under reverse charge mechanism on the charges paid to overseas companies for the aforesaid clinical and non-clinical overviews under “Scientific or Technical Consultancy Services”.
The Appellant contended that (i) even though the Appellant does not receive the entire amount of sale proceeds, but certain charges are deducted in receiving the sale proceeds as collection charges by the foreign bankers having tie-up with the Indian Banks, such charges cannot be said to be service charges recovered from the Appellant by the foreign banks. Thus, there is no relation of service provider and service recipient in the present case and hence Appellant cannot be chargeable to service tax under “Banking and other Financial Services”. The Appellant relied upon Green Ply Industries Ltd., 2015 (38) STR 605 (Tri-Del). The Appellant submitted that (ii) they have already paid Service Tax for the period from 1.6.2007 onwards under the category of ‘Management of Business Consultancy Service’ and such payment is not disputed by the Department and hence, same cannot be classified under “Scientific or Technical Consultancy Services”. The Appellant further submitted that overseas companies provide the services which are in nature of overviews and do not involve application of pure sciences for conducting research on samples of pharmaceutical products. Such services are not used for any scientific or development purposes but to meet the regulatory objective of the European Union in marketing their products. The Appellant argued that overseas companies are not Technology or Scientific organization but are a consultant firm engaged in providing regulatory compliance related services in Europe.
Judgment: (i) The Hon’ble CESTAT relied on Green Ply Industries Ltd., (supra) wherein it was observed that export sale proceeds from overseas customers are collected by appellants’ Indian Banker and even though appellants do not receive entire amount of sale proceeds, but certain charges are deducted in receiving sale proceeds as collection charges by foreign bankers having tie-up with Indian Banks, such charges cannot be said to be service charges recovered from appellants by foreign banks. The Hon’ble CESTAT held that there is no relation of service provider and service recipient in the present case and hence, amount deducted by foreign banks in transferring funds from overseas customers to Indian Bank, who ultimately passed on amount to Appellant cannot be chargeable to service tax under category of “Banking and other Financial Services”. (ii) The Hon’ble CESTAT relied upon IPCA Laboratories, 2019 (21) GSTL 502 (Tri-Mum) to held that when such services are provided for marketing of the product in the overseas market to meet the regulatory requirement, the same cannot fall under the category of “Scientific or Technical Consultancy Services”.
M/s. Aurobindo Pharma Ltd. vs. CCE & ST, CESTAT, Hyderabad, decided on 9.9.2020 in Service Tax Appeal No. 26923 of 2013.
4. Whether service tax paid on premium paid to DICGC for getting insurance on depositor’s accounts is eligible for credit under CENVAT Credit Rules, 2004? Whether CENVAT credit of the service tax paid on the commission paid to the brokers for underwriting the government securities etc. and for making investments in securities to maintain mandatory SLR as per the Banking Regulation Act, 1949 is admissible?
Facts and Pleading: M/s. Bank of America (hereinafter referred to as ‘the Appellant’) is a scheduled commercial bank. In order to provide financial services certain statutory requirements are imposed on the banks. (i) One such condition is deposition of amount with the Deposit Insurance Credit Guarantee Corporation (‘DICGC’) for getting insurance on depositor’s accounts. Service tax is charged on the amount that is paid as premium to the DICGC for which credit can be claimed later as CENVAT. (ii) The Appellant are also authorized by the Reserve Bank of India as a primary dealer (PD), to underwrite government securities. In addition to earning interest and trading profits on these government securities, Appellant also get underwriting commission which is subject to service tax. As per Section 11(2)(b)(ii) of the Banking Regulation Act, 1949, Appellant is statutorily required to deploy 20 to 25% of their funds in Government Securities and are also require to maintain mandatorily prescribed Statutory Liquidity Ratio (SLR). For the purpose of these the Appellant avail the services of stock brokers to buy and sell these government securities in open market.
(i) The Appellant argued that issue in respect of admissibility of CENVAT Credit of the service tax paid on the premium paid to DICGC, by the banks, has been settled by the larger bench of the tribunal in case of South Indian Bank, 2020-TIOL-861-CESTATBANG- LB, holding that CENVAT Credit is admissible. The Appellant also relied upon DBS Bank Ltd, Appeal No ST/89524/2018 decided on 07.09.2020, Yes Bank Ltd, Appeal No ST/86654/2016, decided on 15.09.2020 and IndusInd Bank, Appeal No ST/86705/2016 decided on 29.09.2020 wherein aforesaid decision of Larger Bench was followed. (ii) The Appellants relied on PNB Metlife India Insurance Co Ltd, 2015-TIOL-1097-HC-KARST and Reliance Industry Ltd, 2016 (1) TMI 19 CESAT Mumbai, to argue that the service tax paid by the Appellant will be admissible because it was paid on availing the services mandated by the RBI of maintaining capital adequacy or maintenance of SLR as per Banking Regulation Act, 1949. The Appellant further argued that the commission paid for under writing by the stock broker is a statutorily mandated activity. The Appellant also submitted that since the services of stock broker is essential for providing underwriting services to the RBI and also for maintaining prescribed SLR, there being a direct relation and nexus between the input and output services, the CENVAT Credit availed by Appellant on the commission paid to the brokers will be admissible.
(i) On the first issue, the department merely stated that they await confirmation from concerned Commissionerate on whether any appeal has been filed against the said judgment. (ii) The department contended that the services claimed by the Appellant to be taken by the broker are not in relation with providing of output services. Therefore, the service tax paid on brokerage commission will not be admissible as CENVAT Credit as it fails to fulfill the definition of input service under Rule 2(l) of the CENVAT Credit Rules, 2004. The department alleged that the an act of sale of unsubscribed government securities after completion of under writing is simply trading and not related with input service required for output service. The department further contended that the objective of maintaining SLR is to maximize profit and not to provide service to their clients which means it is an investment not related to output service. Therefore, the service tax paid on brokerage or commission cannot be said to be an input service for providing the output service.
Judgment: The Hon’ble CESTAT held that baking companies provide two different services that is deposit and lending, these two streams are distinctively recognized by the law as well and DCIGC insures only the deposits and not lending. That being so, as per the Hon’ble CESTAT, the “business of banking” cannot be said be said to be insured under the DCIGC. The Hon’ble CESTAT held that the manner in which the scheme operates is to mitigate the risk faced by the depositor while making the deposits with the bank and not the risk which bank or banking business incurs. The Hon’ble CESTAT relied on Dilip Kumar and Co – 2018-TIOL-302-SC-CUSCB, wherein a five-member bench of Hon’ble Apex Court has favored the strict interpretation of the fiscal statue. As per Hon’ble CESTAT, the provisions of the Finance Act, 1994 and the CENVAT Credit Rules 2004 should be considered in the light of the said the principles of interpretation as laid down by the Apex Court in the above referred decision. As per Hon’ble CESTAT, the larger bench has while deciding the case of South India Bank (supra), relied heavily on the decision of the Karnataka High Court, in case of PNB Metlife Insurance (supra) which was related to insurance of the bank. Hon’ble CESTAT is of the view that by extending the benefit by referring to insurance of the bank, and the banking business, may not be the justified approach as per this decision. In their view the matter needs reconsideration, in light of this decision of the Hon’ble Apex Court and hence, Hon’ble CESTAT has referred the issue again to Larger Bench for reconsideration.
M/s Bank of America Vs Principal Commissioner, CESTAT, Mumbai, decided on 2.11.2020 in Service Tax Appeal No. 87659 of 2016.