Unreported Decisions – ST – September 2020
By Vinay Jain & Sachin Mishra, Advocates
1. Who is the recipient of service rendered by Foreign Intermediary Bank in relation to transfer of money relating to exports made by the exporters in India, the exporter on whose behalf the Indian bank acted or the Indian bank itself ?
Facts and Pleading: M/s. State Bank of Bikaner & Jaipur (herein after referred to as ‘The Appellant’) is inter alia engaged in providing banking services to the importers/ exporters by facilitating the settlement of payment between them for import and export of goods/services. In an export transaction from India, the exporter submits the export documents to the Appellant and informs the name and address of buyer’s bank for sending the export documents against acceptance and payment of Bill of Exchange. The Appellant forwards these documents to the Foreign Bank for collection of payment from the importer. If the exporter decides to bear all the bank charges, then the Foreign Bank charges its fees from the exporter for handling of export documents and collection of export proceeds. The foreign bank charges are then recovered from the exporter by deducting the same from the amount collected from the importer. There is no agreement between the Appellant and Foreign Bank. The aforesaid settlement transactions are governed by the URC 522 and UCP 600 protocols issued by International Chamber of Commerce. A trade notice was issued in 2014 inter alia clarifying that the Banks availed the services of the Foreign Bank and were, therefore, liable to pay service tax on the bank charges/commission deducted by the Foreign Bank under the reverse charge mechanism, both before and after July 01, 2012. Based on this a SCN was issued to the Petitioner demanding service tax on foreign bank charges under Reverse Charge Mechanism.
The Appellant argued that the foreign bank charges cannot be considered as ‘consideration’ received by the Appellant and included in the value of services. The Appellant cannot be considered as the recipient of the service provided by the Foreign Bank. The nexus between consideration (i.e. foreign bank charges) and the services provided by the Foreign Bank is established between the Foreign Bank and the exporter/ importer and not between the Foreign Bank and the Appellant Bank. Accordingly, as per the Appellant, the Foreign Bank and the Appellant Bank are co-service providers to the exporters/ importers.
The department argued that the Appellant being service recipient of the services provided by the Foreign Bank, the Appellant is liable to pay service tax on the aforesaid foreign bank charges under reverse charge mechanism. The department alleged that there exists a flow of service chain between the Exporter, the Appellant, the Foreign Bank and the importer, in which each of them is rendering independent service to one another, reliance was placed on CST vs Melange Developers Pvt. Ltd. 2019-TIOL-1684-CESTATDEL- LB. The department further alleged that the Appellant acted as guarantor for the Indian exporter in the financing of international trade, and, therefore, it cannot be a pure agent of the Indian exporter.
Judgment: The Hon’ble CESTAT held that the Appellant provides service to the exporters by sending the export documents to the bank of the importer abroad and collects payment. Thus, the role of the Appellant is to settle the payment relating to export/import. For performance of such activity, the Appellant charges service tax to the exporters. The Hon’ble CESTAT held that the Appellant cannot be said to be the recipient of service for the activities undertaken by the Foreign Banks situated outside India. The Appellant merely acts on behalf of the Indian exporter and facilitates the service. The Hon’ble CESTAT further observed that the Appellant has not paid any consideration to the Foreign Bank and, therefore, the Appellant cannot be said to be the recipient of any service by the Foreign Bank. Thus, the Hon’ble CESTAT held that the since the Appellant is not the recipient of any service rendered by the Foreign Bank, there is no liability to pay service tax on a RCM. Further, the Hon’ble CESTAT relied upon the decision of Madras High Court in BGR Energy Systems Limited, 2019-VIL-574-MADST, wherein the Trade Notice dated 10.2.2014 was examined and it was held that the it cannot be said that the bank of the exporter in India was the recipient of service provided by the Intermediary Bank or the Foreign Bank situated in Iraq. In fact, the Indian Bank of the exporter had only facilitated the service to be rendered by the Foreign Bank for the purpose of providing Bank Guarantee on behalf of the exporter. Accordingly, it was held that the Appellant is not the recipient of the services rendered by foreign bank. Interestingly, the Hon’ble CESTAT has not commented on the question as to whether the Indian exporter is the recipient of the service.
M/s. State Bank of Bikaner & Jaipur Vs. Commissioner of Central Excise & Service Tax, Alwar, CESTAT New Delhi decided on 5.8.2020 in Final Order No. 50737/2020
M/s. State Bank of Bikaner & Jaipur
2. Whether the amended Rule 89(5) of the Central Goods and Services Tax Rules, 2017 (“CGST Rules”) is ultra vires Sections 54(3) and 164(1) of the Central Goods and Services Tax Act, 2017 (“CGST Act”) to the extent it excludes the input service within the ambit of inverted duty structure refund?
Facts and Pleading: M/s. VKC Footsteps India Pvt. Ltd. (hereinafter referred to as the “Petitioner”) is inter alia engaged in manufacture and supply of goods attracting GST @ 5%. Majority of the inputs/input services used by Petitioner attracted GST at the rate of 12% / 18%, thereby resulting in accumulation of Input Tax Credit (“ITC”). By way of Notification No. 21/2018-CT, dated 18.4.2018, a revised formula was prescribed under Rule 89(5) of CGST Rules resulting in denial of refund of credit accumulated on account of “input services”. Further, by way of Notification No. 26/2018-CT, dated 13.6.2018, the said formula was made effective from 1.7.2017. Aggrieved by the same, the Petitioner had challenged the validity of amended Rule 89(5) of CGST Rules as being ultra vires Section 54(3) of CGST Act in as much as it denied refund of ITC accumulated on account of “input services”.
The Petitioner argued that GST being a consumption tax, tax burden is borne only by the final consumer and not the business. In order to avoid cascading effect of taxes in the form of unabsorbed excess tax on inputs with consequent increase in cost of product, a mature GST law provides for refund of accumulated unutilised excess input tax credit. Rule 89(5) of CGST Rules, under the garb of fixing formula for determining pro-rata amount of credit relatable to inverted duty structure turnover vis-à-vis total turnover, has instead, erroneously restricted the refund of ITC to inputs alone. There is nothing either in Section 54(3) of CGST Act or under proviso (ii) to said section to restrict refund to ITC on inputs. Restrictive formula prescribed in Rule 89(5) of CGST Rules, in effect, whittles down the effect of the word “any” employed in Section 54(3) of CGST Act. Such an exercise cannot be considered as a rule “for carrying out the provisions of the Act”, thereby rendering it violative of rulemaking power conferred by Section 164(1) of CGST Act.
Whereas refund of unutilized ITC in respect of tax paid on input services is permitted in case of zero-rated supplies, there is no intelligible differentia supporting rejection of refund of such ITC accumulated on account of inverted duty structure alone. On this count, the amended rule is discriminatory.
The Department argued that Rule 89(5) of CGST Rules only provides the mode of calculation of refund available, and to that extent, there is no embargo placed by Section 54(3) of CGST Act. Rule-making power conferred by Section 164 of CGST Act is worded in the widest possible manner. Therefore, amendment made to Rule 89(5) of CGST Rules is intra vires the provisions of the CGST Act.
Judgment: The Hon’ble High Court held that Sub-section (3) of Section 54 of CGST Act, 2017 provides for claim of refund of “any unutilised input tax credit”. The phrase “input tax credit” is defined in Section 2(63) of CGST Act to mean the credit of input tax. The phrase “input tax” as defined in Section 2(62) of CGST Act means the tax charged on any supply of goods or services or both made to any registered person. The term “input” is defined in Section 2(59) of CGST Act to mean any goods other than capital goods, and “input service” as per Section 2(60) of CGST Act means any service used or intended to be used by a supplier. Thus, “input” and “input service” are both part of the “input tax” and “input tax credit”. Therefore, as per provisions of Section 54(3) of CGST Act, the legislature has provided that registered person may claim refund of “any unutilised input tax credit”. By way of Rule 89(5) of CGST Rules, such claim of the refund cannot be restricted only to “input”, excluding the “input services” from the purview of “input tax credit”. Moreover, clause (ii) of proviso to sub-section (3) of Section 54 of CGST Act also refers to both supply of goods or services and not only supply of goods as per amended Rule 89(5) of the CGST Rules. Intent of the government by framing the rule restricting the statutory provision cannot be the intent of law as interpreted in Circular No. 79/53/2018-GST, dated 31.12.2018. Accordingly, the Hon’ble High Court held that the Explanation (a) to Rule 89(5) which denies the refund of unutilised input tax paid on input services as part of input tax credit accumulated on account of inverted duty structure is ultra vires the provision of Section 54(3) of the CGST Act, 2017.
M/s. VKC Footsteps India Pvt. Ltd. v. Union of India and others, Gujarat High Court Judgement dated 24.7.2020 in R/Special Civil Application No. 2792 of 2019 and others.
M/s. VKC Footsteps India Pvt. Ltd.
3. Whether Section 13(8)(b) of the Integrated Goods and Services Tax Act, 2017 (“IGST Act”) which deem the place of provision of intermediary service as location of service provider is ultra vires Articles 14, 19, 265 and 286 of the Constitution of India (“Constitution”)?]
Facts and Pleading: M/s. Material Recycling Association of India (hereinafter referred to as the ‘Petitioner’) was an association comprising of recycling industry engaged in manufacture of metals and casting etc. for various upstream industries in India. The members of the association facilitated sale of recycled scrap goods in India and other countries on behalf of their foreign principals. As per Section 2(13) of the IGST Act, the members were regarded as “intermediaries” of the foreign principals. As per Section 13(8)(b) of the IGST Act, since the foreign principal (recipient of the service) is located outside India, the place of supply shall be the location of supplier of services i.e. India. Accordingly, the supply being an intra-state supply, the members were held liable to pay Central Goods and Services Tax (“CGST”) and State Goods and Services Tax (“SGST”).
The Appellants argued that the aforesaid services cannot be regarded as “intermediary services” but are “export of service” as per Section 2(6) of the IGST Act. Being a “zerorated supply” as per Section 16(1) of the IGST Act, they are eligible to claim refund of Integrated Goods and Services Tax (“IGST”) paid in view of Section 16(2) of the IGST Act. As per Article 286(2) of the Constitution, Parliament is not authorized to legislate and artificially assign the place of supply to be within India when clearly the services are being exported out of India. The powers under Article 286(2) are confined within the scope of Article 286(1). Though the intermediary services are rendered outside India, assessees are subjected to CGST and SGST. Further, despite the recipient of services being outside India, the services are still deemed to be rendered within the state. Nature of intermediary services remains substantially same as compared to advisory services. However, the place of supply in case of advisory services is the location of the recipient. When the service remains the same, there appears to be no intelligible differentia as to why they are treated differently. Such differentiation also does not have any nexus with the object sought to be achieved. Entry 12AA of Notification No. 20/2019-Integrated Tax, dated September 30, 2019 exempts services provided by an intermediary when location of both supplier and recipient of goods is outside India. There is discrimination between cases where recipient is in India and where recipient is outside India. The provisions in the service tax regime whereby similar rules were available for intermediary services cannot be applied in GST regime since the term “recipient” is clearly defined in the GST regime which was not the case in the service tax regime. Section 13(8)(2)(b) is against the basic principle of GST being a destination based tax since the tax is leviable in India even though the services are consumed outside India. Section (13)(8)(b) of the IGST Act suffers from incurable defect of vagueness and is therefore, liable to be struck down. The Petitioner further submitted that it contributes to tax cascading and double taxation since the same transaction would be subjected to tax as import of service in the country of the recipient of service. The section suffers from unreasonableness as it creates a deeming fiction for a clear case of export of service which is contrary to the object of GST law.
The department alleged that as per Section 13(8)(b) of the IGST Act, since the place of supply is in India, the transaction cannot be regarded as export of services since the conditions specified in Section 2(6) are not satisfied. Going by the strict interpretation of the aforesaid provisions, the question of violation of Articles 265 and 286 does not arise. The reason for deferential treatment for determining place of supply in case of an intermediary is that an intermediary provides service to both supplier and recipient, and hence, it may not be feasible to apply the general rule by prescribing one person as the recipient. The provisions in GST regime, being in consonance with the provisions in service tax regime, the determination of place of supply in case of an intermediary as location of supplier is a policy decision of the government which cannot be said to be unlawful or violative of the Constitution. Parliament has got wide amplitude to create deeming fictions under taxation matters and to levy tax thereon. Benefits accruing to exporters of services are meant for those who actually export services and not to every other entity which is directly or indirectly associated with the exporter, like an intermediary. Violation of Article 14 of the Constitution is not tenable, because one service cannot be compared with other service to justify Article 14. The challenge on lack of intelligible differentia is also not tenable since it is very much within the powers of the government to categorize goods and services for the purpose of taxation in such manner as it meets the policies and objectives of the government. There are exceptions to the default rule under Section 13(2) of the IGST Act for determining place of supply as specified in Section 13(3) to 13(12) of the IGST Act. This is within the legislative competence as the legislature is free to pick and choose the supply that it intends to tax and the manner in which it intends to tax.
Judgment: The Hon’ble High Court held that the Section 13(8)(b) of the IGST Act is framed by the Parliament in consonance with Article 246A(2) of the Constitution. The legislature thought it fit to consider the place of supply in case of “intermediary services” to be the location of the supplier of services. On a conjoint reading of Sections 2(6) and 2(13) of the IGST Act, person who is an intermediary cannot be considered as an exporter of services because he is only a broker who arranges and facilitates the supply of goods or services or both. On reading Notification 20/2019-Integrated Tax, it can be inferred that Section 13(8)(b) was enacted to levy CGST and SGST and such intermediary services therefore, are kept out of the purview of IGST. There is no distinction between the intermediary services provided by a person in India or outside India. Merely just because the invoices are raised on the person outside India with regard to the commission and foreign exchange is received in India, it would not qualify to be export of services when the place of supply is in India. There is no deeming provision in the present case as submitted by the petitioner, but instead there is a clear stipulation in the Act legislated by the Parliament to consider the location of the service provider of intermediary to be the place of supply. Provision similar to Section 13(8) (b) existed in the service tax regime as well. Therefore, this being a consistent stand of the government, it cannot be treated as “export of services” under the IGST Act. There is no double taxation since the commission paid would not be taxable in the hands of the recipient, but on the contrary, would be entitled to get deduction of such payment by way of expenses.
M/s. Material Recycling Association of India v. Union of India & Ors. Gujarat High Court Judgment dated 24.7.2020 in R/Special Civil Application No. 13238 of 2018 and 13243 of 2018.
M/s. Material Recycling Association of India
4. Whether the expression “quantified” under Section 121(r) of the Finance Act, 2019 for filing of a declaration under Sabka Vishwas (Legacy Dispute Resolution) Scheme, 2019 (“SVLDRS, 2019”) will also include duty liability admitted in an oral statement prior to 30.06.2019?
Facts and Pleading: M/s. Seventh Plane Networks Private Limited (hereinafter referred to as the ‘Petitioner’) has filed the present Writ challenging the rejection order whereby the declaration filed by the Petitioner under SVLDRS, 2019 was rejected on the ground that the amount of duty involved in the audit had not been quantified on or before the 30.6.2019.
According to the department that petitioner was ineligible to apply under the SVLDRS, 2019 as the amount of duty involved in the audit had not been quantified before 30.6.2019 as the expression “quantified” under Section 121(r) of the Finance Act, 2019 means a written communication of the amount of duty payable under the indirect tax enactment.
The Appellant contended that though audit memo was issued in writing on 2.7.2019, yet the petitioner had accepted the demand on disputed points on 28.6.2019. In this regard, the Petitioner relied upon para 2(v) of Circular No. 1074/07/2019-CX dated 12.12.2019 read with paras 4(a) and 10(g) of Circular dated 27.8.2019 that allow relief under SVLDRS for cases under investigation and audit where the duty involved had been admitted by the assessee/declarant in a statement on or before 30.6.2019.
Judgment: The Hon’ble High Court observed that the that the expression “quantified” in Section 121(r) has been extended /widened by way of para 2(v) of Circular dated 12.12.2019 read with paras 4(a) and 10(g) of Circular dated 27.8.2019. The Hon’ble High Court held that the audit in the present case was concluded on 28.6.2019 and the amount due and payable was not only determined as well as communicated to the petitioner but was also admitted by the Petitioner on 28.6.2019. Accordingly, the Hon’ble High Court was of the view that the duty liability stood admitted in an oral statement by the Petitioner before 30.6.2019 and consequently stood quantified prior to the cut-off date in accordance with the beneficial circulars dated 12.12.2019 and 27.8.2019. The Hon’ble High Court further observed that a liberal interpretation has to be given to the SVLDRS, 2019 and the circulars issued thereunder as their intent is to unload the baggage relating to legacy disputes under the Central Excise and Service Tax and to allow the businesses to make a fresh beginning.
M/s. Seventh Plane Networks Private Limited vs. UOI, High Court of Delhi, decided on 14.08.2020 in W.P.(C) 3934/2020.
M/s. Seventh Plane Networks Private Limited
5. Whether the Appellant is liable to pay Service Tax on Sale of water? Whether the Appellant is liable to pay service tax on the advances received for construction of terminal which in turn was used for bunkering under ‘Renting of Immovable Property Service’?
Facts and Pleading: M/s. United Port Services Pvt Ltd (hereinafter referred to as ‘the Appellant’) is inter-alia engaged in purchase and sale of water at port and the differential of the sale and purchase price is the profit earned by the Appellant. The Appellant has also received some advance from M/s Asian Tanking Pvt Ltd. for construction of terminal which in turn was used for bunkering.
According to the department that the aforesaid sale of water by the Appellant at port falls within the ambit of Port Services under Section 65 (105) (zn) of the Finance Act, 1994. The department has also alleged that the amount was an advance paid by M/s Asian Tanking Pvt Ltd. towards hiring or renting of bunkers and the same is taxable under the Renting of Immovable property service under Section 65 (105 (zzzz) of the Finance Act, 1994.
The Appellant submitted that the Water supply done by the Appellant is actually a sale of water which is outside the purview of the Finance Act, 1994 and was also specifically excluded during a negative list period in view of Section 66D(e) of the Finance Act, 1994. The Appellant submitted that they have purchased the water from their suppliers at a lower price than their sale price and thus earned a profit. Therefore, no service tax can be levied upon them on the value of sale of water. The Appellant further contended that the advances have been received from their customers for construction of a terminal which is to be used for bunkering. The activity has not come to fruition and in terms of their agreement they were entitled to retain the advances received which they did. The Appellant submitted that the merely, because they have received some amount from their customers it does not mean that they are liable to pay service tax on such amounts unless the amounts were received towards rendering of a taxable service.
Judgment: The Hon’ble CESTAT observed that selling goods on their own account to customers does not qualify as a service or else, every merchant in the country should be held to be rendering a service. Thus, the Hon’ble CESTAT was of the considered view that sale of water is not exigible to Service Tax rather it is squarely covered by the definition of purchase and sale of goods. The Hon’ble CESTAT further observed that a plain reading of the definition of port service also shows, it is a service rendered within a port or other port, in any manner. It is not sale of goods (including water) within the port. Many goods may be sold or bought within the port, but all these do not become services merely because the venue of the sales happens to be the port area. Accordingly, the aforesaid demand under Port Services was set aside. Further, the Hon’ble CESTAT held that the Appellant have received amounts as advances for construction of a terminal for bunkering and merely because the Appellant has received some amounts from their customers they do not have to automatically pay service tax unless such amounts are relatable to rendition of a taxable service. Accordingly, as the department failed to show that the aforesaid advance was received for any Renting of Immovable property service, demand on this count was also set aside.
M/s. United Port Services Pvt Ltd vs. CCE, CESTAT Hyderabad, decided on 21.02.2020 in Service Tax Appeal No. 2820 of 2012.