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Rule 36(4) under the CGST Rules restricts availement of credit in respect of unreported invoices to the tune of 10% of eligible credit available in respect of invoices / debit notes for which details have been uploaded by respective suppliers. It has been contended by the Petitioner that such restriction is discriminatory as it fails to differentiate between the genuine tax payers vis-à-vis fraudulent persons. It has been further argued that there is no logic or rationale behind 10% rule for allowing ITC for unreported transactions and that too based on reported transactions. Accordingly, the Petitioner has submitted that such provisions are manifestly arbitrary and ultra vires the provisions of CGST Act.

The Delhi HC has tagged the instant matter along with similar matters pending for consideration.

Bharti Airtel Limited vs. Union of India and Ors.

GLS Comments:

Rule 36(4) was introduced in GST w.e.f. 09 October 2019 restricting availement of credit to 10% of eligible credit available in respect of invoices / debit notes not reported. The said Rule was subsequently amended to restrict availement of credit to 20% of eligible credit available in respect of invoices / debit notes not reported. In this regard, it would be pertinent to note that this Rule had come into power from Section 43A of the CGST Act and not Section 16. Accordingly, one may also argue that such Rule is ultra vires to Art. 265 of the Constitution of India, which inter alia provides that Rules and Circulars cannot override the Act.

It would further be relevant to note that the impossible eventuality of forfeiting credit for default of supplier that the recipient has no control over, existed under the VAT regime as well. The Punjab and Haryana HC in the case of Gheru Lal Bal Chand v. the State of Haryana (2011) 45 VST 195 had held that such impossible eventuality is not admissible. Similarly, in In Larsen & Toubro vs. CCE (2001 (127) ELT (807), it was held that the assessee should not be penalized by denial of Input credit for the mistake of the recipient of goods.

Under the GST regime too, the provision u/r. 36(4) has been challenged in the cases of Bharti Telemedia Limited [W.P.(C) 6895/2020], Sales Tax Bar Association [W.P.(C) 13097/2019] Himanshu Mohta and Associates [W.P.(C) 13154/2019] all, before the Delhi HC. The said provision has also been challenged in the case of HSIL Limited [CWP-9861-2020] before Punjab and Haryana HC, and in the case of Society for Tax Analysis and Research [R/Special Civil Application No. 19529 Of 2019] before the Gujarat HC.

The Petitioners had filed a Writ before the Madras HC inter alia to declare the provisions of Rule 89(5) of the CGST Rules as ultra vires Article 14 of the Constitution as well as ultra vires Section 54 of the CGST Act in so far as it excludes the component of credit of input services from the definition of Net ITC in the formula prescribed for claiming refund of unutilized credit in cases of inverted duty structure.

The Madras HC made the following key observations in respect of the questions raised in the batch of Writ petitions:

Applicability of Gujarat HC judgement in VKC Footsteps

The Madras HC observed that the Gujarat HC had not fully taken into consideration the proviso to Section 54(3) and its import and implications, therefore the judgement in the case of VKC Footsteps [2020-TIOL-1273-HC-AHM-GST] and therefore, the Madras HC needed to independently analyse the relevant provisions before concurring the view of Gujarat HC.

Interpretation of Section 54 and Rule 89

It was observed that Section 54 enables a registered person to claim refund of any unutilised ITC, however, the words used in the provision make it abundantly clear that unless a registered person meets the requirements Sub-section 3(i) or (iii), no refund would be allowed. It was further noted that the cardinal rules of interpretation were that every word of the statute should be given meaning and one should not construe a statute in such a way as to render certain words redundant. Accordingly, if the intention of the Legislature was not to identify the source from which input goods and the rate of tax thereon, then the words ‘credit has accumulated on account of’ would not have been introduced.

Basis the above observation, the Madras HC was of the view that the proviso to Section 54(3) does not merely set out the two cases in which registered persons become eligible for a refund of unutilised input tax credit, it in fact performs the larger function of also limiting the entitlement of refund to credit that accumulates as a result of the rate of tax on input goods being higher than the rate of tax on output supplies.

In respect of Rule 89, it was observed that Section 54(1) empowers the prescription of the form and manner of a claim for refund and Section 54(4) contains procedural requirements as regards the application for refund. In the amended Rule 89(5), the expression ‘Net ITC’ has been defined as meaning ITC availed on ‘inputs’ during the relevant period. In light of the conclusion that a refund is permitted only in respect of unutilised ITC that accrues or accumulates as a result of the higher rate of tax on input goods vis-à-vis output supplies, the HC held that the amended Rule 89(5) is in conformity with the statute. Therefore, it was held that both Section 54 and Rule 89 are intra vires the CGST Act.

Constitutional Validity in terms of Art. 14

In respect of the constitutional validity of the term ‘input’, the HC observed that the correct meaning of the word ‘inputs’, as used in Section 54(3)(ii) of the CGST Act should be gleaned by applying the principle laid down by SC that while interpreting a defined term, the first port of call is the statutory definition and one turns to the trade or common parlance meaning if the context clearly points away from the statutory definition. In a tax statute context, the requirement to stay true to the statutory definition is more compelling. In terms of the said principle, the HC observed that the explanation to Section 54 uses the terms "inputs" and ‘input services’ separately and distinctively, thereby indicating the legislative intent to distinguish one from the other.

Therefore, the definition of the term ‘input’ was held not be to be ultra vires to the Constitution. 

Nature of Refund

The Madras HC further observed that Section 54(3)(ii) curtails a refund claim to the unutilised credit that accumulates only on account of the rate of tax on input goods being higher than the rate of tax on output supplies. Therefore, it qualifies and curtails not only the class of registered persons who are entitled to refund but also the imposes a restriction on refund entitlement and, consequently, the quantum.

Classification

IT was observed that Refund is a statutory right and the extension of the benefit of refund only to the unutilised credit that accumulates on account of the rate of tax on input goods being higher than the rate of tax on output supplies by excluding unutilised ITC that accumulated on account of input services is a valid classification and a valid exercise of legislative power. 

Basis the above observations, the Madras HC held that Rule 89(5) of the CGST Rules is intra vires to Section 54(3) of the CGST Act. Accordingly, the Writ Petitions were dismissed.

Tvl.Transtonnelstroy Afcons Joint Venture vs. Union of India [Writ Petition No. 8596 of 2019]

GLS Comments:

This judgement of the Madras HC comes as a huge disappointment for a number of taxpayers in the industries where inverted duty structure is prevalent, such as those executing turnkey projects. Such restrictive and regressive position had been taken earlier as well by the Maharashtra AAR in the case of Daewoo-TPL JV [ 2019-TIOL-233-AAR-GST] wherein it was held that Applicant engaged in execution of construction of large projects is ineligible for refund of ITC on ‘input services’ with respect to transaction covered under inverted duty structure.

The Gujarat HC had given hope to the taxpayers by its judgement in the case of VKC Footsteps (supra), however, the Madras HC has taken a contrary view now. As both the Courts are at the same judicial level, it would be interesting to see whether the matter would be taken up to the HC or whether the CBIC would analyse the same and issue any decisive clarification.

The CBIC has issued Notification No. 67/2020 – Central Tax dated 21 September 2020 to waive off the late fees payable u/s. 47 of the CGST Act in excess of Rs. 250/- for taxpayers having liability. The CBIC has further fully waived off the late fees for taxpayers having NIL liability, who failed to file their Form GSTR-4 for the quarters from July 2017 to March 2020 by the due date, provided, they file the said return between the period 22 September 2020 to 31 October 2020.

Furthermore, vide Notification No. 68/2020 – Central Tax dated 21 September 2020, the CBIC has waived off the late fees payable in excess of Rs. 250/- for taxpayers who fail to file their GSTR-10 by the due date, provided, they file the said return between the period 22 September 2020 to 31 December 2020.

It had been observed by the DGFT that the usage of harmonized standard Unit Quantity Codes ‘(UQC’) at the time of filing of Shipping Bills and Bills of Entry in ICEGATE was being mandated through various public notices issued by customs formations during the month of August 2020. It had been further observed that some members of the Trade and Industry were facing difficulties in complying with the standard UQCs in their old Advance and EPCG authorizations which had been issued with quantity units that do not match with the standard UQCs being adopted/available now.

Accordingly, in continuation of the efforts made by the DGFT and Customs to ensure standardization in the data collection for the purpose of clean data reporting and analysis, the DGFT has issued Trade Notice No. 26/2020-21 dated 14 September 2020 for streamlining of UQCs in DGFT’s EDI system and Customs ICEGATE. Following are the key highlights of the trade notice:

• No new authorizations mentioning Non-standard units such as BoU, packs, Boxes cartons and bottles etc. would be issued by Ras;
• In order to ensure that exports do not suffer in the meanwhile, for the authorizations already issued and carrying any Non-standard units such as BoU, packs, Boxes cartons and bottles etc., the customs authorities have been requested to allow exports against such authorizations till 30 October 2020 by accepting exporter's shipping bills in the UQCs provided in ICEGATE. After 01 November 2020, exports/imports without standard UQCs will not be permitted;
• In the meanwhile, such authorization holders have been requested to approach concerned RA and get the non-standard units indicated in their authorizations in the import and export quantities, converted to standard quantity units.

Until now, the taxpayers were required to quote the original invoice number while reporting a Credit/Debit Note in Form GSTR-1 or Form GSTR-6. However, the taxpayers are now provided with the facility to:

• Report single credit note or debit note issued in respect of multiple invoices in GSTR-1/GSTR-6;
• Choose the note supply type to identify the appropriate table;
• Indicate Place of Supply against each credit/debit note, to identify the supply type;
• Declare Debit/Credit Notes with tax amount. However, the same can be declared without any taxable value also i.e. if credit/debit note is issued for difference in tax rate only, then note value can be reported as ‘Zero’. Only tax amount will have to be entered in such cases;
• Similar changes have been enabled for amendment of credit/debit notes.

Corresponding changes have also been made in refund module while filing refund application of following cases:

• Refund for export of services with payment of tax;
• Refund on account of goods and services without payment of tax;
• Refund on account of supply of goods or services to SEZ with payment of tax;
• Refund on account of supply of goods or services to SEZ without payment of tax; and
• Refund on account of Inverted duty structure

Recently, the GSTN had facilitated reconciliation tool for matching GSTR-2B (auto-drafted ITC statement) with purchase register. In respect thereto, the GSTN has now enabled the Matching Offline Tool to view Form GSTR 2B and match the auto drafted details in Form GSTR-2B with the purchase register. The match results are used to create the matching report in offline mode. It has been clarified that the taxpayers are required to install Matching Tool from the GST Portal, and then add profile to match Form GSTR-2B details with the purchase register details.

The FAQs inter alia provide the procedure for downloading and installing the Matching Offline Tool, downloading JSON files, downloading purchase register, etc. 

M/s. LSDL had entered into a construction service agreement with M/s. LGDL. Both the entities had subsequently merged with M/s. Lancor Holdings Limited vide an amalgamation order of Madras HC. During the time of signing of the agreement, M/s. LSDL had paid consideration including service tax to the service provider M/s. LDGL, which had been duly reported in the ST-3 Return. Pursuant to the merger, both the entities had become part of the Amalgamated Company and the service, for which advance was originally given, stood cancelled as the same could not be proceeded with.

As the advance stood cancelled, the amalgamated Company claimed the refund of service tax. The refund claim was filed on the ground that where services did not materialize, the assessee were entitled to refund in terms of Rule 6(3) of the Service Tax Rules. The Appellant had submitted that when an agreement is cancelled or no service provided, the tax paid originally becomes a deposit and the amount loses the identity of Service Tax and hence, for claiming refund of such amount, Section 11B of the Central Excise Act, would not apply. However, the refund claim was rejected on the ground of limitation.

The Chennai Tribunal observed that Rule 6(3) of the Service Tax Rules, would take care of a situation where an agreed service could not be provided either wholly or partially. It was held that, in such a situation, Rule 6(3) permits the assessee to take credit of such excess Service Tax paid. It was further held that such paid tax is categorized as a deposit and hence, loses the characteristics of ‘tax’, and therefore, the provisions of Section 11B are not attracted.

Basis the above observations, the Tribunal held that when the amount loses the character of service tax, it could only be treated as a deposit, as held in innumerable precedents, which becomes an item for adjustment in terms of Rule 6 (3), since no service could ever be provided. Accordingly, the Tribunal set aside the refund rejection order with consequential relief.

Lancor Holdings Limited vs. The Commissioner of GST and Central Excise [Service Tax Appeal No. 41825 of 2019]

GLS Comments:

This judgement is in similar lines as the judgement of the Ahmedabad Tribunal in the case of Aakash The Place to Celebrate vs. Commissioner of S.T. [2013 (31) S.T.R. 251] wherein it had been held that where provisions of the said Rules are applicable, the time-limit mentioned under Section 11B of the Excise Act is not attracted. It had been also noted by the Tribunal that no time-limit had been provided under Rule 6(3) of the ST Rules.

This judgement may serve as a good precedent to clear the pending litigations under the erstwhile ST law for those taxpayers, whose refund applications had been rejected in similar matter.

The GSTN has recently released FAQs on e-invoicing, inter alia explaining its format, validity and applicability. Following are the key highlights of the FAQs:

• E-invoicing means the invoice prepared after obtaining an Invoice Reference Number (‘IRN’) by uploading specified particulars on the Invoice Registration Portals (IRP’). It does not mean generation of invoice by a Government portal;
• Upon reporting the ERP generated GST invoices on the IRP, the invoices will be returned with a unique IRN and a QR Code. A GST invoice will be valid only with a valid IRN;
• E-invoicing is mandatory w.e.f. 01 October 2020 for registered persons having aggregate turnover (based on PAN) of more than Rs. 500 crores in a financial year;
• In order to be e-invoice ready, businesses shall continue to issue invoices as per the current practice. Necessary changes on account of e-invoicing requirement (i.e. to enable reporting of invoices to IRP and obtain IRN), would be made by ERP/Accounting and Billing Software providers in their respective software;
• Presently, the B2B invoices, export invoices, credit notes and debit notices are covered under e-invoicing;
• E-invoicing is not applicable to B2C invoices. Presently, it is only mandated for B2B supplies and supplies for the purpose of export by notified class of registered persons;
• SEZ, insurance / banking companies, GTA service provides, among others are exempted from e-invoice mandate;
• For small entities not having their own ERP/Software solutions, a free offline utility will be provided, through which invoices can be easily prepared, reported to IRP and obtain IRN/signed e-invoice;
• Bulk upload will be required by large taxpayers. Their ERP or accounting system will be designed in such a way that user can report invoices in bulk;
• The GSTN has introduced ‘Schema’ which is a structured template or format for electronic invoice notified as Form GST INV-1;
• Invoice details in prescribed schema have to be reported to IRP in JSON format;
• IRP will check whether the invoice was already reported and existing in the GST System. In case the same invoice (document) has already been reported earlier, it will be rejected by IRP;
• Upon successful registration of invoice on IRP, it will return a signed e-invoice JSON to the supplier with IRN and QR Code;
• The QR code which comes as part of signed JSON from IRP, shall be extracted and placed on the invoice before generation of PDF/print;
• A Dynamic QR code made available to buyer through digital display (with payment cross-reference) shall be deemed to be having QR code;
• In case of large businesses who are mandatorily required to comply with e-invoicing, may send invoices to small business, for whom e-invoicing is not mandatory, by converting the signed e-invoice JSON into PDF;
• Once an IRN/invoice is cancelled, the same invoice number cannot be used again to generate another invoice;
• In case any amendment is required in an e-invoice, the same shall be carried out on the GSTN and not on IRP;
• The requirement of e-way bill continues to be mandatory even with the introduction of e-invoice;
• In case both Part-A and Part-B of e-way bill are provided in the e-invoice schema, the details will be used to generate e-way bill by E-Way Bill System automatically;
• ASP (‘Application Service Providers’ are software service providers who route GST data of their clients to GST System through GSPs (GST Suvidha Providers).

As the implementation date for e-invoicing is within sight for large taxpayers, it would be advisable to accustom to the new system by making necessary updates in their ERP systems. 

Dear Readers,

As the world has accepted the current reality and commendably moulded oneself to the new normalcy of digitalization, the economies seem to be getting back on their feet. In pace with the global growth, we are proud and pleased to publish our 1st Edition of Newsletter – A Treasury of Key Tax and Regulatory Developments, in association with Tax India Online.

In this maiden Newsletter, we have covered insightful articles on CBDT’s Guidance on Mutual Agreement Procedure and the RoDTEP Scheme. As the month of August 2020 had been rather busy for with numerous developments in the judicial and regulatory front, we have compiled all these developments in various segments.

In the Industry Perspective segment, we have interviewed a leading player of the Chemical Industry discussing the impact of the pandemic on business front and the rigorous competition in the field.

Further, in the International Desk segment, we have discussed in-dept the UAE’s VAT Guide on E-Commerce and various other judicial developments from Europe and Australia. In addition thereto, true to our view of bringing news which are Beyond Facts, we have covered all the judicial and regulatory developments in direct and indirect taxes with interesting insights. We have also covered developments of the erstwhile indirect tax laws, which can be helpful precedents for disposing the pending litigations.

We hope that reading of the newsletter would bring an enriching experience to you! Your valuable feedback is always welcome.

The Petitioner has challenged the vires of Rule 86A of the CGST Rules, as it gives power to the Department to block ITC at no fault of the registered recipient. The Petitioner submitted that the said provision is ultra vires to Section 16 of the CGST Act which prescribes eligibility and conditions for availing ITC.

Pending the disposal of the Writ, the Petitioner prayed for utilization of ITC. The Petitioner further prayed before the HC to direct the Respondents to stop the ITC recovery proceedings until the finality of the Writ. Lastly, the Petitioner sought an ex parte ad interim relief for the above prayer.

On perusal of the material on record, the Gujarat HC issued notice to the Respondent returnable on 14 September 2020. The HC has required the Respondent to explain:

• Whether omission on the part of the third party (Seller) in filing the GSTR-3B for the relevant period would be sufficient to block ITC of writ Petitioner;
• Whether for the above-mentioned action, the Department has invoked Rule 86A of the CGST Rules.

Kalpsutra Gujarat vs. The Union of India [R/Special Civil Application No. 10562 Of 2020]