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With a slew of critical Notifications and Circulars issued in the month of May 2023, the CBDT has taken significant strides in proposing and clarifying various issues in Direct Tax. Through a series of critical Notifications and Circulars, they have addressed key concerns and provided guidance to taxpayers. Further, On the Indirect Tax front, the CBIC has reduced the E-invoicing limit to 5 crores. As for the judicial developments, Karnataka High Court has ruled game of skill played with or without stakes not gambling. In another important judgement, the SC holds credit note issued by manufacturer to dealer as valuable consideration for warranty replacement, liable for sales tax. The newsletter also features curated insights from industry experts on recent tax reforms, emerging trends, and updates from the global tax arena. We have covered all such developments in this Newsletter. Apart from this, following are some of the key developments covered in this Newsletter:
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.
Compiling all such developments, we are glad to bring to you the 32nd Edition of our ‘Vision 360’ Newsletter in association with TIOL. We have covered the key judicial and legislative developments in Direct, Indirect Tax other regulatory areas in the month of June 2023. We hope that reading of the newsletter would bring an enriching experience to you! Your valuable feedback is always welcome at firstname.lastname@example.org or email@example.com
The CBIC vide Circular No. 16/2023-Cus, dated June 07, 2023 have implemented of the Hon’ble Supreme Court direction regarding ‘pre-import condition’ in the Advance Authorization scheme This direction was given in the case of UOI and others Vs. Cosmo Films Limited [Civil Appeal No. 290 of 2023]. In the said judgment, the Supreme Court had aside the Gujarat High Court’s decision wherein they had struck down the pre-import condition contained in para 4.14 of FTP 2015-20 for being arbitrary and ultra vires. Aggrieved, Revenue preferred an appeal before the SC. The Supreme Court had noted that inconvenience caused to exporters by paying IGST and claiming refund thereafter could not be a ground to hold the ‘pre-import’ condition as arbitrary. Accordingly, the SC upheld the mandatory fulfillment of the pre-import. The decision had finally settled the issue of the pre-import condition vis-à-vis IGST exemption and compensation cess under Advance Authorization scheme during the period October 13, 2017 to January 9, 2019. The Apex Court has directed the Revenue to permit the manufacturer-exporters who were enjoying interim orders, till the impugned judgments were delivered, to claim refund or ITC. The Apex Court has also directed the Revenue to issue suitable circular in this regard.
Accordingly, the CBIC has clarified that the Supreme Court's order implies that imports under the Advance Authorization scheme that do not meet the pre-import condition requirements are liable to pay IGST and Compensation Cess.
The CBIC has further clarified that, as the existing system for customs duty payment does not support payment after the goods are cleared. Therefore, importers must approach the assessment group at the port of import to pay the IGST and cess using a TR-6 challan. After payment, the port of import shall generate a notional Out of Charge for the Bill of Entry on the Customs EDI system. This enables the transmission of IGST and Compensation Cess information to the GSTN portal. As a result, importer can claim the ITC for the assessed Bill of Entry. If the ITC is used for paying IGST on outward zero-rated supplies, the importer may be eligible for a refund.
The Appellant had entered into a service agreement with its holding company i.e McDonald's USA whereby the Appellant had agreed to perform certain services for its holding company. Thereafter, the Appellant filed a refund application for refund of tax paid on the inputs used for the services rendered to its holding company under the Service Agreement, however, the Adjudicating Authority rejected the refund application, deeming the Appellant acted as an intermediary with the place of supply in India. Aggrieved the Appellant had filed an Appeal before the Appellate Authority, however, the Appellate Authority upheld the refund rejection and noted that the Appellant was acting as a mediator between prospective joint ventures and franchisees, where the main supplies were made by holding company and ancillary supplies were provided by the Appellant and therefore, they do not qualify as export of services under Section 2(6). Aggrieved the Appellant preferred a Writ before the Delhi High Court.
The High Court observed that the Appellate Authority overlooked the Master License Agreement, which allowed the Appellant to enter into sub-licenses with franchisees which is a separate agreement. Hence, the HC concluded that there was no justification for the finding that the Appellant acted as a mediator between joint ventures/franchisees and holding company. Additionally, the HC also emphasized that the scope of services as mentioned in the Service Agreement, read in isolation, do not entail procurement or facilitating services from third-party suppliers. The court further noted that this had no connection with the requirements or contemplation of Section 13(3)(b) and Section 13(5) of the IGST Act. The HC also contended that the issue involved in the instant case was covered by the earlier decision of M/s Ernst and Young Limited [W.P (C) 8600/2022] and M/s Ohmi Industries Asia Private Limited [W.P. (C) 6838/2022], wherein it held that rendering service on behalf of another person does not render the service provider an intermediary.
The High Court observed that the Appellate Authority exceeded the scope of the SCN by raising additional grounds to reject the Appellant's claim for refund. The court emphasized that the Appellate Authority travelled beyond the SCN and therefore it was liable to be set aside solely on this basis. The HC highlighted that the Service Agreement clearly established that the holding company acts as the service recipient and the Appellant as the service provider. It further emphasized that the supply of services provided by the Appellant did not require the physical presence of McDonald's USA in India, therefore the that relevant provisions of Section 13(3)(b) of the IGST Act were not applicable to the Appellant’s services. As the provision contemplates the location of service, whereby the presence of a service recipient is necessarily to be in India. As a result, the court set aside the impugned order and remanded the matter back to the Adjudicating Authority for a fresh consideration.
McDonald’s India Private Limited [TS-203-HC(DEL)-2023-GST]
The Applicant had entered into two work agreements, the first agreement covered the supply of goods for the supply of goods including Flue Gas Desulphurization (FGD) system, Limestone and gypsum handling system, chimney-related items, and spares. The second agreement encompassed services such as such as transportation, erection, safety compliances and testing of the supplied items. The Applicant sought advance ruling on whether they are required to pay GST on initial advance of 5% and interim advance of 7.5% for the goods supplied under the First Contract Agreement under Notification No. 66/2017 – C.T. dated 15 November 2017 (‘NN. 16/2017’).
The Applicant contended that they are liable to pay taxes on the goods at the time of supply, upon the issuance of the invoice, and not on the receipt of advance payments and therefore supply of goods under the first contract, qualify for the benefits as per NN. 66/2017. The AAR observed that in the instant matter, the issue to be determined is whether the supply, which comprises two contracts under a single bidding document, should be classified as a 'composite supply' with the second contract as the principal supply or if both contracts should be treated as separate transactions for which the ‘time of supply’ and ‘rate of tax’ to be levied would differ as per the provisions of the CGST Act.
The AAR observed that the supply under the second contract begins after the completion of all activities in the first contract. Accordingly, scope of work in each contract undertaken by the Applicant is independent and distinct, thus it cannot be clubbed together. The AAR further noted that the agreements does not exhibit the concept of a "naturally bundled", as these contracts can be executed independently. Consequently, the supply of goods and services under the two contracts with separate invoicing cannot be construed as composite supply. The AAR emphasised that when viewed as separate contracts, the Applicant is eligible for the benefit of NN. 66/2017 for the outward supply of goods. Accordingly, the tax liability for the supply of goods under the first contract arises at the time of supply, by the Applicant or the last date on which he is required, u/s. 31 of the CGST Act to issue the invoice with respect to the supply.
PES Engineers Private Limited [2023-VIL-90-AAR]
The instant ruling is welcome by the Trade and Industry. Generally, in cases of works contract, the GST authorities are of the view that the bifurcation of contract for supply of goods and services is artificial and the supply is actually indivisible. It would be pertinent to note that in RE: Cable Corporation of India Limited [2019 (20) G.S.T.L. 631 (A.A.R. - GST)], the Maharashtra AAR had held that where two separate agreements are entered for the supply of works contract and transportation, such services are dependent on one another and therefore, classifiable as ‘Composite Supply.’ It would be interesting to see whether the Revenue would file an Appeal against the instant ruling, before the AAAR.
The Petitioner was issued with a SCN for wrongly availing ITC as their supplier had not paid the tax. Subsequently an order was passed, along with a demand notice. The Petitioner had filed an appeal against the order before the Appellate Authority but the same was dismissed for being barred by the limitation period. Aggrieved the Petitioner preferred a Writ before the Patna High Court.
The High Court observed that the Petitioner had the opportunity to file an appeal within 90 days, as directed by the Supreme Court in consideration of the pandemic-related limitations. However, the Petitioner failed to adhere to the timeline and filed the appeal after a delay of 65 days, surpassing the stipulated limitation period. The HC emphasized that due to the Petitioner's own failure in not availing the available appellate remedy, they cannot invoke the extraordinary jurisdiction under Article 226 of the Constitution of India. The HC further observed that the Petitioner's claim regarding ITC and its computation should have been raised before the appellate authority as the determination of the tax payable on the basis of the various claims validly arising from the statute and computation cannot be agitated in a petition under Article 226 of the Constitution. Accordingly, the Writ was dismissed.
The CBIC has issued Circular No. 11/2023-Customs dated May 17, 2023 regarding the Amnesty Scheme providing One Time Settlement for Default in Export Obligation by Advance Authorization and EPCG Holders. This scheme is in line with Notification No.32/2023-Customs dated April 26, 2023.
The Ministry had issued the notification to amend 13 Customs notifications pertaining to Advance Authorization and EPCG Schemes. The amendments implement the procedure outlined in DGFT's Public Notice No. 02/2023 dated April 01, 2023. It allows authorization holders to settle pending cases of default in export obligations by paying applicable Customs duty. The interest payable is capped at 100% of exempted duties, with no interest on Additional Customs Duty and Special Additional Customs Duty. The Authorization holders must ensure completion of the payment process before September 30, 2023, to avail of this scheme. Notably, the scheme does not apply to cases involving fraud, misrepresentation, or unauthorized diversion of materials or capital goods. Furthermore, Authorization holders are not eligible to claim CENVAT credit or seek refunds for duties paid under this scheme.
CBIC vide Notification No. 10/2023 – Central Tax dated May 10, 2023 has lowered the E-invoicing aggregate turnover limit from 10 crore to 5 crore, effective from August 01, 2023.
The Company had availed CENVAT credit on the structural steel items like M.S. Plates, MS Sheets/Aluminium Coil, Joist//MS Channels, Angels etc. However, the Department had denied the credit on the ground that the items were not capital goods in terms of Rule 2(a) of CENVAT Credit Rules, 2004 (‘CCR 2004’). Aggrieved, the Company filed Appeal, wherein the Tribunal relied on the case of Vandana Global Limited vs. CCE, Raipur [n 2011 (274) ELT A-78 (Chhattisgarh)] and allowed the benefit of CENVAT credit on the steel items. Aggrieved, the Department filed an Appeal before the Punjab High Court.
The HC examined the term 'capital goods' defined in the CCR 2004 and based on the consistent view taken by the judiciary in similar cases, observed that the Company has a right to claim CENVAT Credit for the impugned goods. Accordingly, the HC dismissed the Department’s Appeal and allowed the benefit of CENVAT Credit for goods used as inputs for capital goods in the fabrication of structures embedded to earth.
The Principal Commissioner, CGST Ludhiana vs. IOL Chemicals and Pharmaceuticals Limited [2023-VIL-259-P&H-CE]
It would be pertinent to note that the issue of CENVAT credit on capital goods has been a hotly debated topic in tax circle, with numerous litigations over the years. While the definition of capital goods has been the subject of much interpretations, several landmark judgments by the Supreme Court and various High Courts have unequivocally upheld the entitlement of assesses to claim CENVAT credit on capital goods. There are amply of judgments like the Bhushan Steel and Strips Limited [2008 (223) ELT 517], Jai Balaji Industries Limited [Excise Appeal No. 76313 of 2016] etc. wherein the Tribunal has allowed input credit in respect of similar items used in the factory for construction work and fabrication of structures. The recent judgment by the Punjab High Court, serves as yet another affirmation of the judiciary's stance and provides much-needed clarity to such similar contentions of the Department.
In one of the most important judgements in GST, the Bombay HC has pronounced its judgement on the deeming fiction created by Section 13(8)(b) of IGST Act. The constitutional validity of section 13(8)(b) of the IGST Act was challenged by the Petitioner contending that the aforesaid provision is violative of Articles 14, 19, 245, 246, 246A, 248, 265, 269A, and 286 of the Constitution.
The matter was first listed before the division bench of the Bombay HC, wherein the One Judge observed that Section 13(8)(b) of IGST Act not only falls foul of overall scheme of CGST Act and IGST Act but also offends Articles 245, 246A, 269A and 286(1)(b) of Constitution, and the other judge has expressed his disagreement and has rendered his separate opinion.
Therefore, in view of such difference in opinion, the matter was listed before the Hon’ble Chief Justice. The Chief Justice of the Bombay HC has held that the fiction which is created by Section 13(8)(b) would be required to be confined only to the provisions of IGST and ruled that Section 13(8)(b) and Section 8(2) of the IGST Act are legal, valid, and constitutional. However, the court has also held that these provisions can only be applied to the IGST Act and can’t be used to levy tax on intermediary services under the CGST and SGST Acts.
Dharmendra M. Jani vs. Union of India [Writ Petition No.2031 Of 2018]
In a rather lengthy and elaborate decision which includes multiple views from the various courts, this landmark judgment is welcome by the trade with open arms as it will have a far reaching impact on many taxpayers engaged in a similar business of export. In another matter concerning the intermediary service provision, it would be relevant to note that the Delhi HC in RE: M/s Ernst and Young Limited [2023-VIL-190-DEL], held that Professional services provided to foreign entities of the parent company does not amount to 'intermediary services'. This judgment on the scope of intermediary services is likely to provide much-needed certainty and clarifications for taxpayers. It would now be interesting to see whether the Revenue would challenge the instant judgement of the Bombay HC, before the SC.
DGFT vide the Public Notice No. 07/2023 dated 18 April 2023, has clarified the duties on which interest is payable.
It has been clarified that the interest payable under amnesty scheme for one-time settlement of default in export obligation (EO) by Advance Authorisation (AA) and EPCG Authorization holder is capped at maximum of 100% of such duties exempted on which interest is payable.
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