Gst Legal Services & Consultation Mumbai, India

CBIC notifies CAROTAR, 2020 for administration of Rules of Origin under Trade Agreements

Under the Finance Act, 2020, the Government had inserted Chapter VAA and Section 28DA of the Customs Act to provide provisions for administration of rules of origin (‘ROO’) under a trade agreement.

In respect thereto, the CBIC has recently notified the Customs (Administration of Rules of Origin under Trade Agreement) Rules, 2020 (‘CAROTAR’) vide Notification No. 81/2020 – Customs (N.T.) dated 21 August 2020. The CBIC has further issued Circular No. 38/2020 – Customs dated 21 August 2020 prescribing guidelines for implementation of the new Rules.

Following are the key highlights of CAROTAR, 2020, which shall come into force on 21 September 2020:

Declaration by Importers
- Importers claiming preferential rate of duty would be required to make a declaration in the Bill of Entry that the goods qualify as originating goods for preferential rate of duty under the relevant trade agreement;
Origin Requirements
- Importers claiming preferential rate of duty would be required to possess information, as indicated in Form I, to demonstrate the manner in which country of origin criteria is satisfied, and submit the same to the proper officer on request. The importers would be required to maintain the said information / documents for a period of 5 years from the date of filing of the Bill of Entry, while also exercising ‘reasonable care’ to ensure the accuracy and truthfulness of the documents / information, which inter alia include the following:
- Production process undertaken in country of export undertaken in country of origin with respect to production of the imported good;
- Which of the originating criteria prescribed in the Rules of Origin has been claimed, for example, Wholly Obtained (‘WO’), Regional Value Content (‘RVC’) + CTH (‘Change in Tariff Heading’) / CTSH (Change in Tariff Sub-Heading’) or CTH or CC (‘Change in Tariff’) or RVC, etc.;
Powers of the Customs Authorities
- Requisition of details from importers
  - Where, during the course of customs clearance or thereafter, the proper officer has reason to believe that origin criteria prescribed in the respective Rules of Origin have not been met, he may seek information and supporting documents, from the importer to ascertain correctness of the claim.
  - Further, where the importer fails to provide requisite information by the prescribed time or where the information is found to be insufficient, the proper officer shall forward a verification proposal to the nodal officer nominated for this purpose.
  - The Principal Commissioner of Customs or the Commissioner of Customs may, disallow the claim of preferential rate of duty without further verification where the importer relinquishes the claim or the information furnished by the importer and available on record, provide sufficient evidence to prove that goods do not meet the origin criteria.
- Verification Request
  - The proper officers may request for verification of certificate of origin from Verification Authority where there is a inter alia doubt regarding genuineness or authenticity of the certificate of origin or there is reason to believe that the country of origin criterion stated in the certificate of origin has not been met or the claim of preferential rate of duty made by importer is invalid.
  - The proper officers may suspend the preferential tariff till conclusion of the verification. However, the importer may be allowed to provisionally assess and clear the goods on payment of security amount.
  - The proper officer may deny claim of preferential rate of duty without further verification where the Verification Authority fails to respond to verification request within the prescribed timeline or does not provide the requested information in the prescribed manner or where the information provided sufficiently evidences that goods do not meet the origin criteria prescribed in the respective Rules of Origin.
- Denial of claim of preferential tariff upon import of identical goods
  - Further, in case where it is determined that goods originating from an exporter or producer do not meet the origin criteria prescribed in the ROO, the Principal Commissioner of Customs or the Commissioner of Customs may, without further verification, reject other claims of preferential rate of duty filed prior to or after such determination, for identical goods imported from the same exporter or producer. The importer would be provided the reasons of rejection in writing including the detail of the cases wherein it was established that the identical goods from the same exporter or producer did not satisfy the origin criteria.
  - Lastly, once the claim for preferential tariff is denied, the same would be informed to Risk Management Centre of Customs for enabling compulsory verification of assessment for all subsequent bills of entry with a preferential duty claim.

GLS Comments:

The objective for introduction of CAROTAR 2020 can surely be considered as righteous, being a regulatory check on importers misusing / abusing the trade agreements for evasion of customs duties. However, the same casts additional hurdles for genuine importers. The CAROTAR 2020 requires certain information from the importers which may be difficult to obtain to say the least. Most notably, in certain cases, the CAROTAR 2020 requires the production process of the goods being imported, from the country of export, which may not be easily available.

In addition to the compliance requirements, the CAROTAR 2020 places ample discretionary powers in the hands of the proper customs officers, who may deny the preferential rate during import if they have ‘reasons to believe’ that the information provided by the importer is not accurate.

Considering the additional burden of compliance requirements imposed by the CAROTAR 2020, it is likely that representations would be filed before the appropriate authorities challenging the same or in the alternative, requesting certain relaxations.

HC: Collection of Entertainment Tax by Municipality post introduction of GST permitted

The Petitioner runs a cinema theatre in a partnership firm. Until, the introduction of GST, Puducherry Government collected Entertainment Tax from the theatre owners. Post the introduction of GST, the Petitioner charged GST @ 18% and 28% depending upon the ticket prices excluding 10% maintenance charges, allowed to be charged by the theatre owners. However, the petitioner was forced to pay entertainment tax at the rate of 25%. Thus, altogether the petitioner was compelled to pay 53% tax.

Challenging the imposition of entertainment tax, the Petitioner submitted that out of the total tax collected, the dispute herein was in respect of 25% of entertainment tax being collected by the Respondent. After introduction of GST, and when the Puducherry Municipalities Act, 1973, is subject to GST, the Respondent had no authority to collect the entertainment tax. The entertainment tax is imposed by the Municipality and not by the State. Section 173(2) of the CGST Act annulled the collection of the tax by the Municipality.

The Petitioner further relied upon Article 265 of the Constitution of India, to submit that no tax can be collected, without the authority of law. It was further submitted by the Petitioner that entertainment tax cannot be collected separately especially when the same is included under GST.

Upon perusal of Section 173 of the CGST Act, the Madras HC observed that the the Legislature have consciously retained the power of the Municipal Council to collect tax on all other subjects except the collection of tax on advertisements other than advertisements published in the newspapers. In other words, the Municipal Corporation has the powers to impose Entertainment tax even after GST was introduced. It was observed that Section 173(1)(a) is a specific provision stating powers of Municipal Corporation to impose tax under different heads. Accordingly, Section 173(2) cannot override a specific provision made under Section 173(1), and is a stand-alone provision.

The HC further observed that as Section 173(2) of the CGST Act states that collection of tax by such authorities shall stand annulled or rescinded or modified, the powers of Municipal Corporation are only modified and are neither totally annulled nor rescinded.

Basis the above observations, the Madras HC held that the collection of the entertainment tax by Municipality is within their power as Entry 62 of the State List of the Seventh Schedule of the Constitution of India. Accordingly, the Madras HC dismissed the Writ filed by the Petitioner.

Balaji Theatre vs. The Chief Secretary and Ors. [W.P.No.33077 of 2018]

AAR: Immovable Property with distinct value for goods and services is not a Works Contract

The Applicant, engaged in the business of providing data center construction and contracting services, had entered into a contract with M/s Cray. Inc for preparation and maintenance of Data center on sub-contracting basis. The Applicant had undertaken civil and mechanical works and also supplied various other equipment namely UPS and batteries, fire alarm system, chillers, air conditioners, etc. involving supply of equipment as well. Thus, the contract involved a composite supply of goods and services that are naturally bundled in the course of setting up of data center.

The Applicant referred to Notification No. 8/2017 – IT (Rate) dated 28.06.2017 and stated that analyzing the provisions of the CGST Act and the relevant entries of the aforementioned rate notification, it is pertinent to note that in order to be eligible to pay GST under the said notification, the supply of services will have to be in the nature of works contract.

The Applicant further referred to Section 2(119) of the CGST Act and submitted that a contract shall not be a contract for mere supply of goods or services but shall be a composite supply involving supply of both goods and services, which results in creation or repair / maintenance / renovation / improvement etc. of an immovable property as a whole.

Further, the Applicant relied upon a judgment of the SC and a ruling of the Maharashtra AAR to substantiate that setting up of Data center cannot be shifted to another location by first dismantling and then re-erecting it at another site. The Applicant further relied upon various web sources, submitting that it cannot be moved or shifted due to its structure and design, thereby proving that data center is be an immovable property.

In view of the above, the Applicant submitted that the supply of goods and services was in the nature of works contract as the same not only involved supply of goods but also installation, fitting out, repair, maintenance of an immovable property i.e., data center. It was claimed by the Applicant that such activities fall under the ambit of works contract under GST, hence, shall be liable to 18% GST.

On the other hand, the Revenue submitted that the works contract is only applicable to immovable property and where the value for goods and services is not distinct. However, in the in the case, as it was disclosed that the value of goods is distinct from the value of services basis the inspection of agreement, the same cannot be defined under Section 2(119) of CGST Act.

The Maharashtra AAR observed that Schedule II to the CGST Act clearly mention that the following are supply of services:

Construction of a complex, building, civil structure, or a part thereof;
Works contract including transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contact

Hence, the works contract would be treated as a service and GST would be charged accordingly.

It was further observed by the Maharashtra AAR that the contract pricing is different for Equipment / Materials, their installation and maintenance. For goods supplied, the prices are shown exclusive of VAT / CST and for services rendered the prices are shown excluding Service Tax. It was further observed that the statement of works has clearly bifurcated the contract into supply of goods and services.

Further, it was observed that the goods are used to provide services of installation, testing and commissioning and these services cannot be supplied without the supply of goods. Therefore, the goods and services are supplied as a combination and in conjunction and in the course of their business where principal supply is supply of goods. As a result, the subject case cannot be considered as a works contract.

Further, the AAR observed that the Application shall be rejected as only those cases are eligible where the supply of goods or services or both being undertaken or proposed to be undertaken and not already completed at the time of filing of application.

The AAR also noted that the supply cannot be classifiable under Chapter 9954 as only those supplies which are mainly related to the construction of service can be classified under CTH 9954. However, in the instant case, the data center is merely a space / room where the equipment / machinery / other various apparatus is installed. As a result, there is no case of construction.

Lastly, the AAR agreed with the Revenue that the supply of goods and services by the Applicant does not fall under the ambit of Works contract as the value of goods and services is clearly distinct from one another.

Basis the above observations, the AAR held that the supply of goods and services by the Applicant does not qualify as 'Works Contract' under GST.

Karnataka AAR: Couplers for attaching railway bogies classifiable under HSN 8607

The Applicant, engaged in the business of manufacturing and supply of various steel castings, automobile parts, valves, etc. had filed an application before the Karnataka AAR to ascertain whether railway parts such as couplers, knuckles, lock, etc. which are supplied to a customer who in-turn supplies the same to the Indian railways, would merit classification under HSN 8607 or 7325.

The Applicant submitted that their buyer places order for supply of the said goods, on obtaining the orders from the Indian Railways. Therefore, the said goods are finally used by the Indian Railways and no other customer can use the same. Hence, the goods shall merit classification under HSN 8607.

The Applicant further submitted that HSN 7325 covers castings or iron and is a general entry. All specific items such as Automobile parts, earthmoving parts, railway parts, etc. used in respective industries are derived from the basic entry i.e., castings of irons. However, when specific entries are provided for individual items based on usage, then goods need to be taxed as per the specific heading. Specific entry in the Schedule always overrides the general entry.

The Applicant further submitted that the ultimate consumer of the casting is the Indian Railways and cannot be used by anyone else. Further, the classification cannot be changed during different stages of supply chain and hence the castings cannot be supplied under HSN 7325 by the Applicant to its customer, when the customer is supplying the same to the Indian Railways under HSN 8607.

The Applicant further relied upon a Tribunal judgement wherein it was held that the radiators supplied to the Indian Railways merit classification under HSN 8607. The Applicant further placed reliance on the decision of the 37th GST Council meeting to stress upon the usage of the manufactured product and contended that the rate of GST is purely depends upon the usage. Accordingly, the said goods are rightly classifiable under HSN 8607.

Taking cognizance of the submissions made by the Applicant, the Karnataka AAR observed that HSN 8607 inter alia covers parts of railway or tramway locomotives, coupling devices, etc. Further, the HSN 8607 covers parts of railway, tramway locomotives or rolling stock subject to fulfillment of the following conditions:

They must be identified as being suitable for use solely or principally with the above-mentioned vehicles;
They must not be excluded by the provision of the Notes to Section XVII

The AAR observed that the Applicant fulfilled the first condition as the goods are manufactured as per the pre-determined drawings of the Indian Railways on placement of order by the buyer, who are the main contractors for supply of the railway goods. Further, the buyer of the goods had given an affidavit that the said goods are ultimately supplied to the Indian Railways and are not useful for anyone else.

The AAR further observed that Note 2 to Section XVII specifies that the expression ‘parts and parts of accessories’ do not apply to certain listed articles, whether or not they are identifiable as for the goods of Section XVII and the said goods are not covered under the articles specified in Note 2. Thus, the goods manufactured and supplied by the applicant are not excluded by the provisions of Note 2 to Section XVII.

The AAR further referred to Note 3 to Section XVII wherein it has been provided that the term ‘parts or accessories’ do not apply to parts which are solely or principally with the articles of those chapters. Accordingly, the AAR observed that in the instant case as the parts of coupling devices are suitable solely for Indian Railways and also classifiable under specific entry of HSN 860730. Thus, the second condition is also fulfilled and therefore it was held that the coupling devices were correctly classifiable under HSN 8607.

The AAR further held that goods classifiable under HSN 8607 are chargeable to 12% GST in terms of Notification No. 14/2019 – Central Tax (Rate) dated 30.09.2019. Further, no refund of unutilized ITC shall be allowed, where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on the output supply of the goods.

GLS Comments:

The Tariff classification of railway products has always been a matter of immense litigation and dispute. While, the Revenue authorities generally wish to exclude the said goods from the purview of HSN 8607 in terms of Note 2 to Section XVII, the assessees wish to classify the goods under HSN 8607 itself in terms of Note 3. In the instant case, the Karnataka AAR has rightly concluded the correct classification of couplers by subjecting the same to the conditions for classification and giving preference to the specific entry over general.

339 Records found, page 3 of 34

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