Op EdsOP. ED.

While the country is still adapting to the new indirect taxation regime, even a slight change in the current injects uncertainty and sometimes inconvenience into the landscape. In the decision rendered by the Supreme Court in Union of India v. VKC Footsteps India (P) Ltd.[1], the settlement of an important legal proposition has brought a lingering issue to a halt, although to the dismay of the taxpayers.

This case concerns the question of refund of unutilised ITC in the inverted duty structure. The Court found substance in the justification of the discriminatory treatment of input goods and input services in amended Rule 89(5) of the Central Goods and Services Tax Rules, 2017 and in pursuance of the same, drew a line of distinction between the both.[2]

It affirmed the stance taken by the Madras High Court in Tvl Transtonnelstroy Afcons Joint Venture v. Union of India[3] and took a dim view of the Gujarat High Court’s decision in VKC Footsteps India (P) Ltd. v. Union of India.[4]

Understanding the subtleties of the judgment can be apprising in light of the resultant impact on the stakeholders.

Distinction between goods and services: A necessity or a redundancy?

Rule 89(5) prescribes a formula for ITC to ascertain the maximum refund amount. This rule was amended with a prospective effect in April 2018 which eliminated the component of input services from the formula. Resultantly, this action bereaved several taxpayers who found themselves incapable of availing refund for unutilised ITC in case of input services.

The mainstay of this issue pertains to the distinction between input goods and input services in the first place. It has been averred by the petitioner that goods and services not only differ on the constitutional level itself but input goods and input services are also defined separately in the CGST Act, thereby highlighting the inherent distinction. Treating them at par is not conceivable owing to the difference in the tax rates, benefits, exemptions and other relevant policies. Since refund is a form of exemption, it must receive a literal interpretation and should not have its compass laxly widened.

On the other hand, it was contended by the assessees that there must exist a reasonable nexus with the object sought to be achieved, in order to lawfully discriminate between the two. Such a differential treatment may be justified for the reason of revenue harvesting, however, that does not find a place in the present case. The bone of contention was that where on one hand, goods and services are conferred an equal treatment so far as levy is concerned, their prejudicial treatment for the purpose of refund is rather inequitable.

Apropos of this issue, the Court held that Parliament holds the power to exercise this latitude, which is not constricted to merely revenue harvesting purposes. It expressed disapproval of the discriminatory treatment being unfair as unfairness and inequality arise in situations wherein equals are treated unequally and unequals are treated equally. It was observed that the present case concerns itself with two different species altogether which are brought under the same pool only for the purpose of ITC utilisation. With there being no constitutional or statutory guarantee of refund, it was held that such classifications can justifiably exist in tax legislations.

Understanding the confines of Section 54(3)

Section 54(3) of the Act lays down the provision for refund of unutilised ITC at the end of a tax period.[5] This refund is allowed in two cases, namely:

(i) zero-rated supplies; and

(ii) inverted duty structure.

The latter being relevant to this case, this situation arises when the rate of tax on input supplies is higher than the rate of tax on output supplies and resultantly, there is accumulation of unutilised ITC in the electronic credit ledger.

Here, the issue arises owing to the applicability of Rule 89(5) on this section, which does not make room for expressly accommodating input supplies in the formula of net ITC to deduce the refund amount.

The assessee emphasised to overlook this lopsidedness, since giving effect to it would hinder the very objective behind the introduction of GST i.e. to further smooth inflow of credit and prevent cascading effect of taxes. In disagreement with this, the Court elucidated on the restrictive nature of Section 54(3). The negative format embodied in the provision bearing the terms “no refund” and “in cases other than” signify the intent of the legislature to make this non-inclusive.

Broadening the scope of the same would therefore amount to encroachment of the powers of the Parliament. The Court further observed that persons having unutilised ITC do not fall into a homogenous class as ITC can be unbundled in view of a fiscal measure.

Challenge to the validity of Rule 89(5)

Rule 89(5) of the CGST Rules, 2017 prescribes a formula for the computation of the maximum refund of ITC in the inverted duty structure.

As aforementioned, currently the amended rule stands such that it takes into account “inputs” while computing the net ITC, without defining the scope of the term “inputs”.  This has evidently stirred up a hornet’s nest in the system, where different interpretations are arising out of different authorities.

On one hand, the absence of an express mention of “input services” is considered reason enough to exclude the same for ascertaining the refund amount. On the other hand, a literal interpretation is realised to be detrimental to the interests of the taxpayers and to the nature of GST being a consumption-based tax. Perusing Section 54(3) in isolation would not indicate towards the omission of input services, owing to which, the assessee pleaded to apply the doctrine of severability and strike down Rule 89(5).

The application of this rule is by virtue of Section 164 of the CGST Act which confers a rule-making power on the Government to carry out the provisions of the Act.[6] However, it is contended that exercising this power to give effect to the objective of Section 54(3) is unnecessary and unwarranted. In fact, it is said to offend the section inasmuch as it bifurcates goods and services, without there being a necessity to do so. This was however, not entertained by the Court, which was of the opinion that the rule does not transgress the section, especially when proviso (2) provides that the Government holds the power to exempt such supplies of goods and services.

Another noteworthy contention was with respect to the anomaly arising in the formula prescribed by the rule, which was acknowledged by the respondent, petitioner and the intervenor alike. This inconsistency results in an inequality between taxpayers in the following circumstances:

– taxpayers dealing with a single line of goods i.e. outward supplies involving inverted rate structure; and

– taxpayers dealing with goods having both inverted duty structure and otherwise.

In the first scenario, the taxpayer would not be able to use either the unutilised ITC or get a refund. Whereas, in the second context, utilisation of ITC availed on input services for payment of output supplies is possible in the paradigm not having an inverted rate structure.

There was therefore a consensus among all the parties as far as the presence of an aberration was concerned. Nevertheless, that was not considered to be reason enough to strike down the rule altogether. Hence, in conclusion, the Court refrained from reading down or reframing the provision, however, the Court urged the Council to take a policy decision by reconsidering the formula. In essence, the baton was passed to the legislature.

Concluding comments

It is undisputed that goods and services are inherently of two different natures, which are identified separately both in the Constitution and the GST statutes. They, however, are broadly referred to as “supplies” in common trade parlance, especially for the purpose of taxation, unless a demarcation is required. Now, at what juncture do we draw the line of distinction and which circumstances call for affording a separate treatment to them, is often disputed since this distinction requires necessity, reasoning and justification.

Given the significance it holds, this judgment is undoubtedly a watershed moment in the regime. Upholding the application of Rule 89(5) on Section 54(3), the Court gave a nod to allowing refund only on input goods in the inverted duty structure. While technically, it may be within the vires of the powers of the authorities to exclude input services from refund, it is evidently proving to be counterproductive to the objective of the statute altogether. Assessees are right in questioning the skewed nature of this paradigm, wherein a business having a single line of products in the inverted duty structure would have no recourse. Hence, the focus must be shifted from taking a literal interpretation to taking cognizance of the straits of the taxpayers as allowing the refund would have eliminated the cascading effect of taxes in the truest sense.


5th year Law student, Symbiosis Law School, Pune. Author can be reached at  17010125203@symlaw.ac.in.

[1] (2022) 2 SCC 603.

[2] Central Goods and Services Tax (CGST) Rules, 2017, R. 89(5).

[3] 2020 SCC OnLine Mad 2570.

[4] 2020 SCC OnLine Guj 3206.

[5] CGST Act, 2017, S. 54(3).

[6] CGST Act, 2017, S. 164.a

Op EdsOP. ED.

Introduction

India is the first country to implement corporate social responsibility (in short referred to as “CSR”) mandated under the Companies Act, 20131. As per Section 135 of the said Act,

“Every company having a net worth of rupees five hundred crores or more, or turnover ofrupees one thousand crore or more or a net profit of rupees five crores or more during the  immediately preceding financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director”.2

The basis will be an average net profit made during three immediately preceding financial years. CSR is a sense of responsibility of voluntary contribution by various companies towards a better society and a cleaner environment where a company operates in the form of projects or programmes aiming the same. The company qualifying the abovementioned requirement for CSR has to spend at least 2% of its average net profit earned during the immediately preceding three financial years on CSR activities; which could be carried out in different forms. For example, providing education, promoting gender equality, healthcare or sanitation activities, projects related to rural development, contribution towards the protection of environment or to PM Cares Fund, relief activities during some disaster, etc. A specific example could be a contribution by way of cash donations towards the corpus of a charitable trust or undertaking any project activity through its unit or group entity or may undertake such activity through non-governmental organisations (NGOs).3

The Companies (Corporate Social Responsibility Policy) Amendment Rules, 20214 w.e.f. 22-1-2021 has implemented provisions of the 2019 Amendment to the Companies Act, 20135, to study an interplay between the Companies Act, 2013 as amended Central Goods and Services (CGST) Act, 20176 7 which will show that CSR is mandatory and failure to which can attract the wrath of penalties. Mainly the changes include the mandatory requirement to disclose CSR projects and activities and CSR Committee’s composition on their website and if failed to spend 2% in CSR then it should be disclosed in the report with the appropriate reason and in a scenario where the unspent amount if not related to “ongoing project” then it should be transferred to government’s notified fund. The penal action against the company could be to pay twice the amount which has to be transferred by the company to the fund specified in Schedule 78 or the unspent CSR Account, as the case may be, or 1 crore rupees, whichever is less; and, every officer in default shall be liable to a penalty of ⅒ of the amount required to be transferred by the company to such fund specified in Schedule 7, or the unspent CSR account, as the case may be, or two lakh rupees, whichever is less.

The input tax credit (in short referred to as “ITC”) is available to the supplier for the inputs, input services, and capital goods used to supply goods or services or both as part of such offers. The provision for availing of ITC is provided under Section 16 of the CGST Act, 2017 which provides that one would be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used “in the course or furtherance of his business”.9 The eligibility is provided under various limbs of Section 16 of the Act, per se, however a concept of blocked credit is provided simultaneously in Section 17(5)(h) of the Act,10 that ITC shall not be available in respect of goods lost, stolen, destroyed, written off, or disposed of by way of gift or free samples. Further, Section 17(5)(g) forbids ITC on goods or services procured for personal consumption.

Applicability of CSR and ITC

Provision of GST law does not specifically provide any provision for the taxability of goods or services provided by the companies as part of CSR activity. Cash donations, for example, donations given by cash, cheque or through electronic transfer of money or even the donations in kind (giving away goods or services) made voluntarily or gratuitously, cannot be construed as supply under GST as it is an activity without any quid pro quo. The contributions so made without any benefit in return cannot be treated as a consideration against any supply (in case of cash donations) or supply for consideration (in case of donations in kind) since there is no consideration received for giving such in-kind donations. Further, money is excluded from the definition of goods and services and hence, cash donations are not subject to GST.

In the case of corporate social responsibility activities, a company is providing outputs/output services free of cost. Thus, by taking into consideration the definition of taxable supplies and provisions of Section 17(2), input credit cannot be availed on CSR activities. Additionally, even according to Section 37 of the Income Tax Act, 196111, any expenditure incurred by the assessee with regards to CSR activities cannot be deemed by the assessee for business or profession.12 Thus, it cannot be claimed as business expenditure. If this is not a business expenditure, then ITC cannot be claimed on such spending and thus resultant in tantamount to an additional cost on account of CSR.

About this, two schools of thought prevail, first advocates that since CSR is a responsibility that is mandatory under the Companies Act, and therefore, any non-compliance of such provisions would necessarily have implications in furtherance of business. Therefore, CSR expenses must be treated as expenses incurred for inward supply in course of or furtherance of businesses. While on the other hand, the second theory explicates that the principle of GST shall be made applicable only if outward supplies are taxable. Since, CSR is made free of cost, and not with the intention of profitability but to foster its commitments towards the society, environment, and other measures, and hence, expenses incurred shall not be treated in course of or furtherance of business.

In Polycab Wires (P.) Ltd., In re,13 where the applicant, who is a dealer in electrical goods, had supplied electrical items to Kerala State Electricity Board (KSEB) through its distributors spread across the State in connection with reinstating connectivity in the flood-ridden areas as part of the “mission reconnect” “free of cost”. In addition to this supply to KSEB, the applicant had distributed electrical items like switches, fans, cables, etc. to flood-affected people under CSR expenses on a free basis without collecting any money. In the invoice so issued, the distributor had valued the goods for tax and the value was shown as 100% discount. Advance ruling sought that “determination of GST liability for goods provided free of any cost by the distributors of the applicant to KSEB for reinstating connectivity in flood-ridden areas; and admissibility of input tax credit concerning such goods. Thus, according to the applicability of Section 17(5)(h) of the KSGST Act, and CGST Act on CSR expenses, ITC cannot be claimed as a matter of entitlement”.

As evident from the interpretation of GST provisions, the expenses incurred in place of CSR shall not be considered in “furtherance of business”. However, there is an ample number of research studies that advocate that CSR increases business profitability, and increase corporate financial performance. Thus, it can be implied that CSR expenses are “in furtherance of business”. However. As derived from the Government’s intentions, CSR expenses are still treated as a noble concept and not seen from, the lens of business profitability.

The second school of thought advocates that the ITC is available on CSR activities because they are incurred in the course or furtherance of business. CSR activities have a high impact on the image of the company and are also mandatory as per the provisions of the Companies Act, 2013. It enhances the reputation of the company and thus, forms the goodwill of the company. Therefore, it can be ascertained that corporate social responsibility activities are incurred in the course or furtherance of business. So, ITC can be claimed for such events

In Essel Propack Ltd. v. Commr. of CGST14, where Essel Propack Ltd. manufactures multilayer plastic laminates and is subjected to Central Value Added Tax (CENVAT). An audit was shown in the factory and it was found that the CENVAT credit of service tax is amounting to Rs 12,12,772 which was availed towards such company’s commitment to corporate social responsibility  and the audit stated the same to be inadmissible. The appellant had made payment to a charitable trust for imparting training to students of an underprivileged section of society in the discharge of corporate social responsibility. It treated this payment towards CSR under the definition of input services. According to Rule 2(l) of the Cenvat Credit Rules, 2004 which has defined input services and that is for the manufacture of an assessee final product. The appellant argued that the said expenditure was incurred by the company within the definition of the concerned rule. Because through this training program students learnt the nature of the job that made them eligible to become future workers in factories. The appellant contends that it had engaged youth from the lower strata of the society in its factory to provide them on the floor exposure to the production activities of the company and in so doing, it has engaged them in preparation of data sheet, updating production logbook, preventive maintenance of the machine and assistance in the production operation as well as the transfer of raw materials, etc. So the same is counted within the manufacturing activities besides the fact that the purpose was to discharge CSR obligations.

A representation has been received seeking clarification as to whether donations and grants-in-aid received from different sources by a charitable foundation imparting free livelihood training to the poor and marginalised youth, will be treated as “consideration” received for such training and subjected to service tax under “Commercial Training or Coaching Service”. The important point here is regarding the presence or absence of a link between “consideration” and taxable service. It is a settled legal position that unless the link or nexus between the amount and the taxable activity can be established, the amount cannot be subjected to service tax.15 Between the provider of donation/grant and the trainee, there is no relationship other than universal humanitarian interest. In such a situation, service tax is not leviable, since the donation or grant-in-aid is not linked to a specific trainee or training.

The appellant argued that the concept of business is not stagnant and “over the period”, the expression consists of complete care and concern for the society at large and the people of the locality in which business is located in particular for which the term activities relating to business is of wider ramification and corporate social responsibility is within its ambit that would cover Rule 2(1) of the Cenvat Credit Rules for which he prays for purposive interpretation to be imported to the rule governing Cenvat credit. Whereas the Department argued that there was no correlation of input services with the business activity of the appellant since CSR activities are welfare activities and not pertinent to business/production-related activities. That the service of imparting training has been provided by the trust to the students of the weaker section of society and not by the appellant company itself and therefore there was no service provided by the Trust against which Cenvat credit is claimed by the appellant.

It was held that:

6.4. … CSR is not a charity anymore since it has got a direct bearing on the manufacturing activity of the company which is largely dependent on the smooth supply of raw materials even from a remote location or tribal belts (that requires no resistance in the supply chain from the community) and the same also augments the credit rating of the company as well as its standing in the corporate world.16

Section 7 of the CGST Act17 defines the scope of “supply”, which contains the transactions undertaken without consideration. It should be argued that CSR is an activity that indulges the supply of goods and services without any consideration, and in furtherance of business as observed from the above, and thus, must not be made eligible under the GST regime and ITC shall be made available. Moreover, on the judicial frontier, the Tribunal has also supported this position and reiterated that CSR is eligible to GST, as it is furtherance of business, and therefore, ITC should be made available. In Indian Institute of Corporate Affairs, In re AAR-Delhi18, the Court reiterated that:

“the amount paid by the companies to external agencies for CSR activities to undertake specified projects, would be considered as “consideration”, and activities undertaken on company’s instruction or direction shall be deemed to supply within the GST Act.”

Further, the Court held that:

CSR cannot be treated as a gift, as the delivery of the gift is made voluntarily, and therefore, cannot assume the character of gifts. As may be noticed from the Gift Tax Act19, the definition of gift necessarily includes any transfer made voluntarily and without consideration. Since the activity is mandated on companies, and therefore, any CSR activities cannot be termed as a gift.”

Thus accordingly, CSR is not falling under the purview of Section 17(5) of the Act, thus ITC can be availed in CSR cases.

There is no empirical evidence that shows that expenses on CSR would necessarily increase the performance of a company. As the term “furtherance of businesses” is interpreted that an activity must be undertaken for business stability and profitability, however, it is not clear, whether CSR shall be treated in furtherance of business.

Applicability of ITC on Covid-19 supplies

Now, as the country is facing unprecedented circumstances set by Covid-19 Pandemic and in such time, we have encountered an end number of companies which have been providing Covid-19 related equipments like oximeters, PPE kits, sanitisers, medicines, oxygen canisters, etc. to the employees who are working at their home to ensure their well-being as they were workforce which was working from home. As these goods are not procured for use in office premises of taxpayers, it may be comprehended by the tax officers that taxpayers are not eligible to avail ITC on such procurements under Section 17(5)(g) as these are used for personal consumption of employees. Thus, an exemption from customs under Notification No. 32/2021-Customs dated 31-5-2021,20 or Ad hoc Exemption Order No. 4/2021-Customs dated 3-5-2021,21 for extending exemption from integrated goods and services tax (IGST) on import of Covid-19 related equipment on payment of considerations but based on a certain situation, certain taxpayers may not be able to fulfil the said procedural conditions and end up paying IGST on such procurements.

Afterwards reply was sought from key GST Officials and Group of Ministers through the representation made by National Association of Software and Service Companies (NASSCOM) to clarify the eligibility of ITC on Covid-19 related procurements. Thus in the further notification, the clarification was sought that “all amount spend by taxpayers on Covid 19-related gear like PPE kits, oximeters, medicines towards ensuring the well-being of employees/their family should not be construed as personal consumption under Section 17(5)(g) of the CGST Act, rather it would be eligible for credit in terms of Section 16 of the CGST Act, as the amount as CSR was spent for providing relief to people suffering from Covid-19 Pandemic or giveaways provided to employees to ensure their safety”.22

The mechanism of ITC and blocked credit concerning CSR can be understood from the standpoint of business. The expression business requires no discussion as it is already defined under Section 2(17)(b) of the CGST Act23 and it has to be seen from the framework of supply as defined under Section 7 of the Act. The three-way test for ITC on CSR can be summarised that firstly, the moment the test of business of rending taxable supply is passed, one needs to see the eligibility and compliances under Section 16 of the Act, per se. Secondly, on having crossed the first barrier, the second test would be passing the blocked credit under Section 17(5)(h) of the Act. Thirdly, to get rid of the clutches of blocked credit, one needs to see if any activity say CSR is mandated by law, if the answer is yes, then it will be said to have passed the third test to make the ITC as an accrued and vested right under the ecosystem of GST.

The outbreak of the deadly Covid-19 pandemic created an abnormal situation in the entire world. The need for medical and health resources increased exponentially and in such circumstances, even the Government witnessed shortages in supplying resources to normalise the health situations. In such crucial times, many corporate houses and companies entered into the realm and extended their support by providing medical resources and monetary contributions. By extending such support, many companies fulfilled their social responsibility of CSR. However, the legal position regarding the eligibility of companies to avail ITC for such activities is still ambiguous and the confusion lies between the fact that whether these companies have the option to avail ITC or bear the additional burden created thereof.

As per the current GST Rules, the key requirement to avail ITC on goods or services is that it should be utilised “in the course or furtherance of business”. Courts in some instances have interpreted this as “anything done towards assisting or promoting the interests of a business”. Thus, any activity done towards the purpose of earning profit shall be in the ambit of “in the course or furtherance of business”. Considering the voluntary and philanthropic activities of the companies, Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Mumbai allowed the companies to avail CENVAT credit of service tax paid for carrying out CSR. It opined that CSR being a mandatory social obligation for both public and private companies, must be deemed as a business activity. Thus, the view that companies may avail ITC on goods supplied as an act of fulfilling their CSR obligations and is in the course or furtherance of business can be considered valid. However, the GST Rules allow ITC on the supply of goods that are used in the course or furtherance of business and provide cases where such credit cannot be availed. One such case where the credit cannot be availed is on goods that are disposed of as “gift” or “free samples”.

Here the conundrum lies, the difficulty faced by companies in availing credit on goods supplies donated during the dire need of pandemic times. The question here arises that whether such donations should be ascertained as “voluntary” or “gift” when distributed under CSR obligations. Whether the companies can argue that this benefaction should not be barred from availing  ITC, considering its nature is “mandatory” as opposed to “voluntary”. The Haryana and Gujarat State Governments introduced certain policies to avoid this ambiguity from becoming a challenge for the companies disposing of their CSR duties. As per the notifications issued, the applicable State GST (SGST) and Integrated GST (IGST) will be reimbursed to the companies engaged in distributing essentials. However, despite such incentivisation by the State Government, the interplay between goods and services provided to fight the outbreak and their eligibility for ITC remains an ambiguous aspect on broader terms and needs an urgent if not a permanent address.


*4th year student, BA LLB (Hons.), National Academy of Legal Studies and Research, University of Law, Hyderabad.

**3rd year  student, BA LLB (Hons.), Maharashtra National Law University (MNLU), Nagpur.

1 Companies Act, 2013.

2Companies Act, 2013, S. 135.

3Nilesh Vasa and Anindita Sarkar, A taxing “Corporate Social Responsibility for Companies under GST?” dated 14-5-2018 published in LSI LawStreetIndia.

4 Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021.

5Companies (Amendment) Act, 2019.

6 Central Goods and Services Tax Act, 2017.

7Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021 to the second proviso to S. 135.

8 Companies Act, 2013, Schedule 7.

9CGST Act, 2017, S. 16, as amended by Act 31 of 2018 and brought into force w.e.f. February 2019.

10CGST Act, 2017, S. 17(5), as amended by Act 31 of 2018 and brought into force w.e.f. February 2019.

11 Income Tax Act, 1961, S. 37.

12 Income Tax Act, 1961, S. 17(2).

13Polycab Wires (P.) Ltd., In re,2019 SCC OnLine Ker AAR-GST 1

142018 SCC OnLine CESTAT 7175.

15Circular No. 127/9/2010-ST, dated 16-8-2010.

16Essel Propack Ltd. v. Commr. of CGST, 2018 SCC OnLine CESTAT 7175.

17 CGST Act, S. 17.

18Indian Institute of Corporate Affairs, In re, (Advance Ruling No. 08/DAAR/2018 dated 28-06-2019), AAR-Delhi (2019) 107 Taxmann.com 413.

19Gift Tax Act, 1958.

20Notification of Customs, No. 32/2021-Customs, New Delhi dated 31-5-2021.

21Ad hoc Exemption from IGST, Order No. 4/2021-Customs dated 3-5-2021.

22GST: Representation to Address Concern of Input Tax Credit on Procurement of Covid-19 Related Goods, NASSCOM Community, The Official Community of Indian IT Industry.

23CGST Act, 2017, S.2(17)(b).

Advance RulingsCase Briefs

Kerala Authority for Advance Ruling: S. Anilkumar, Additional Commissioner of Central Tax & B.S. Thyagarajababu, Joint Commissioner of State Tax decided whether there will be any input tax credit on goods provided free of cost i.e as under CSR activity for flood-affected people.

Background

In the present matter, the applicant was a dealer in electrical goods, cables of all kinds including winding wires, pipes, etc. Applicant had supplied electrical items to Kerala State Electricity Board through their distributors in connection with reinstating connectivity in the flood ridden areas as part of the “mission reconnect”.

The above-stated materials were supplied free of cost as a CSR activity. To ascertain the impact of GST on the stated goods supplied free of cost, the applicant required advance ruling on the following:

  • Determination of GST liability with respect to goods provided free of cost by the distributors and admissibility of input tax credit
  • Applicability of Section 17(5) of the CGST Act, 2018 on CSR expenses.

Discussion

KSEB requested from the distributors of the applicant to supply electrical goods for the restoration of power supply at flood ridden areas. The said materials were supplied by the distributors free of cost being CSR activity for reinstating connectivity in flood ridden areas. Applicant also distributed items like switches, fan, cables, etc. to flood-affected people under CSR expenses on a free basis without collecting any money.

Further, it was noted that the distributors raised bill to M/S Polycab Wires Private Limited in relation to the materials supplied free of cost to KSEB. The tax invoices were issued to KSEB showing sale value, GST and total amount with 100% discount. However, the GST liability was paid to the Government.

Applicant stated that, since the GST liability was completely paid on free supply, they were eligible to avail full claim of input tax credit on the supplied items. M/s Polycab Wires Private Limited reimbursed the total amount to the distributors and account the same as donation in kind towards CSR Expenses for Kerala Flood Relief, 2018.

In the present case, after availing input tax credit, the applicant disposed of goods as a free supply for CSR activities. Hence, the applicant was liable to reverse the input tax credit already availed.

As per Rule 27 of GST Rules where the supply of goods or services is for a consideration not wholly in money, the value of the supply shall be the open market value of such goods. In case the open market value is not available, be the sum total of consideration in money and any such further amount in money as is equivalent to the consideration not in money, if such amount is known at the time of supply.

If the value of supply is not determinable, the value of supply of goods or service or both of like kind and quality.

Observations

  • Determination of GST liability with respect to goods provided free of cost by the distributors to KSEB for reinstating connectivity in flood ridden areas; and admissibility of input tax credit in relation to such goods.

To operationalize the commitment of the applicant to provide goods at free of cost to KSEB for flood renovation work, the applicant instructed its distributors to provide the goods. The distributors billed the goods to KSEB and paid GST to Government. In the invoice so issued, the distributor had valued the goods for the purpose of tax and value was shown as discount.

In the above-stated supply, since the consideration was not wholly in money, Rule 27 of the CGST/KSGST Rules would apply for valuation. Once the Goods were supplied to KSEB, the distributor would raise the claim to the applicant who would reimburse the value to the distributor.

In view of the above, the distributor would be entitled to input tax credit on the goods supplied to KSEB.

  • Applicability of Section 17(5) of the CGST Act, 2018 on CSR expenses

For the items like cables, fans, switches, etc. to flood-affected people under CSR expenses on free basis, input tax credit will not be available as per Section 17(5)(h) of the KSGST and CGST Act.[Polycab Wires (P) Ltd., In Re., 32AAACP6474E1ZM, decided on 2-3-2019]


Authorised Representative: P.J. Jhoney, FCA

Advance RulingsCase Briefs

Rajasthan Authority for Advance Ruling, GST: Bench of J.P. Meena (Member Central Tax) and M.S. Kavia (State Tax)  determined whether supplying of coaching services along with supply of goods/printed material/test papers, uniforms, bags and other goods to students shall be considered a supply of goods or supply of services.

Questions for consideration:

  • Applicant supplied services of coaching to students which also included along with coaching, supply of goods/printed material/test papers, uniform, bags and other goods to students. Such supplies were not charged separately but a consolidated amount was charged. The major component of which was imparting of coaching. In such circumstances, whether such supply shall be considered, a supply goods or a supply of services?
  • If the answer to the aforementioned first question is supply of service, whether such supply shall be considered as composite supply? If yes, what shall be the principal supply?
  • Applicant provides coaching service under a business model through Network Partners as per sample agreement attached, containing obligations of Applicant and Network partners. Accordingly, the network partner provides the services to the students on behalf of Applicant. In such a case, who shall be considered as supplier of service and recipient of service under the agreement?
  • Subject to the above question, what shall be the value of service provided by Applicant to students and by network partner to Applicant?
  • Whether both, Applicant and network partner can avail eligible ITC for their respective supplies?

Findings, Analysis & Conclusion

In the instant case, the applicant was providing coaching service to its enrolled students for consideration which will be a lump sum amount for both goods and services.

Therefore, transaction of supply of coaching service for consideration falls under the ambit of “Supply of Service”.

As the supply involves multiple services and goods, the issue has to be examined whether the said supply is s Composite Supply or a Mixed Supply.

In the present case there is a principal supply of goods or services which constitutes the predominant element of a composite supply. Classification of this composite supply as goods or service would depend on which Supply is the principal supply which is also to be determined on the basis of facts and circumstances of the present case.

Therefore, in the instant case, the applicant along with coaching services provided goods in the form of uniforms, bags, study material etc.

Supply of goods is a part of supply of service shall qualify as composite supply’. The principal supply being the supply of coaching service to the students, tax on such supply shall be levied accordingly.

Further, the AAR also observed that where services are provided by the applicant to the students. students shall be regarded as recipient as consideration is payable for the supply of goods or services or both by the students to the applicant. Similarly. Network partner will be regarded as a provider of service to the applicant

Bench also noted that, the values of goods are part of the value of services provided by the applicant and charged a consolidated amount to the students. Therefore, the consolidated value for which tax invoice is issued shall be the taxable value.

As per Section 16(1) of the CGST Act, Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, been titled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.

Hence, in the present matter, applicant was a registered person and could avail eligible ITC as per provisions of GST Act.

Ruling

Pointwise conclusion:

  • Supply by the applicant will be considered “Supply of Service”.
  • The ‘supply’ stated above shall be considered as Composite Supply, and Coaching Service shall be principal supply.
  • Applicant will be service provider to the students and Network partner will be service provider to the applicant.
  • Total consolidated amount charged for which Tax invoice generated by the applicant will be the value of service supply by the applicant.
  • Applicant can avail eligible ITC as per provisions of GST Act, 2017.

[Symmetric Infrastructure (P) Ltd., In re.; Raj/AAR/2021-22/09; decided on 2-09-2021]


Advocate before the AAR:

Present for the applicant: Sanjiv Agrawal

Advance RulingsCase Briefs

Authority for Advance Ruling, GST: A Division Bench of Dr Ravi Prasad M.P. (Additional Commissioner of Commercial Taxes) and MashhoodUr Rehman Farooqui (Joint Commissioner of Central Tax) addressed whether the input tax credit can be availed on the distribution of promotional products to distributors/dealer’s showrooms for the purpose of marketing the products and promoting the brand.

In the instant application, it has been stated that the applicant was engaged in the manufacture, distribution and marketing of Knitted and Woven Garments under the brand name of “Jockey”, swimwears and swimming equipment’s under the brand name “SPEEDO”.

Applicant sought advance ruling on the classification of goods and services as under:

“Whether in the facts and circumstances of the case, the promotional products/materials and Marketing Items used by the applicant in promoting their brand and marketing their products can be considered as “inputs” as defined under Section 2(59) of the CGST Act, 2017 and GST paid on the same can be availed as input tax credit in terms of Section 16 of the CGST Act, 2017?”

Applicant submitted that as per Section 16 of the CGST Act, every registered person subject to terms and conditions specified in Section 49 of CGST Act is entitled to avail the same as “Input Tax Credit” the GST paid by him on the supply of goods or service to him, which are used or intended to be used in the cause or in furtherance of his business and same will be transferred to his electronic credit ledger.

Adding to the above submissions, the applicant stated that promotional/marketing items using by them at point of purchase i.e. showrooms or to their distributor/dealer’s showrooms is to promote their brands and made known the range of products manufactured by them.

The said promotional/marketing items are distributed for free by the applicant to promote their brand, hence the same cannot be construed as “gift” and made applicable Section 17(5)(h) of CGST Act.

Applicant add that in respect of the promotional/marketing items to their own showrooms there was neither “supply” nor there was “gift” and hence applying the provisions of Section 17(5)(h) of CGST Act, 2017 and apportioning the input tax credit should not arise.

Analysis and Decision

Promotional/marketing items sent to showrooms and to distributor/dealer’s showrooms to use in promoting their brands and market their products will amount to use of said goods in business or furtherance of the applicant’s busniess. Therefore, the same would qualify as “input” in terms of Section 2(59) of CGST Act, 2017 and GST paid on the same is entitle to avail as “input tax credit” in terms of Section 16 of CGST Act, 2017.

Bench noted that the goods were not transferred out of the accounts of the applicant and remained in the accounts of the applicant as assets, which were returnable items but the applicant did not show any proof of the said being returned to the applicant and disposed at the end of the period of usage.

In light of the above-stated scenarios, the applicant uses the goods till the goods are usable for the promotion of his business and claims depreciation on the same.

In the applicant’s opinion, the above-stated goods are covered under “input”.

AAR expressed that,

Since the ownership of the material is being retained by the applicant, they could be treated as capital goods hence needs to be capitalized in his books of accounts. The said cannot be treated as “input” since the said term excludes capital goods.

Whether input tax credit can be availed on the capital goods?

Section 16 of the GST Act provides for the eligibility for taking/availing input tax credit.

Since the applicant used or intended to use the goods and services procured in the course or furtherance of business, the applicant was entitled to take the input tax credit, subject to other provisions of the Act and hence there was no blockage attributable to Section 17(1) as the applicant used the goods in the course or furtherance of business.

Ruling

  • ITC on GST paid on procurement of the “distributable” products which are distributed to the distributors, franchisees is allowed as the said distribution amount to supply to related parties. The said distribution to the retailers for their use cannot be claimed as gifts to the retailers or to their customers free of cost and hence ITC of GST paid on such procurement is not allowed as per Section 17(5) of the GST Acts.
  • GST paid on the procurement of “non-distributable” products qualify as capital goods and not as “inputs” and the applicant is eligible to claim input tax credit on their procurement, but in case if they are disposed of by writing off or destroyed or lost, then the same needs to be reversed under Section 16 of CGST Act, 2017 read with Rule 43 of the CGST Rules, 2017.

[Page Industries Ltd., In Re., 2020 SCC OnLine Kar AAR-GST 7, decided on 15-12-2020]

Advance RulingsCase Briefs

Himachal Pradesh, Authority for Advance Rulings: The Division Bench of Rakesh Sharma, Additional Commissioner of State Taxes and Excise, Member (State Tax) and Abhay Gupta, Joint Commissioner of Central Tax, Member (Central Tax) held that input tax credit cannot be claimed for GST paid on hiring commercially licensed vehicles for transportation of employees if the service of providing the facility of transportation of employees is not obligatory under any law.

In the instant application, the applicant is a public service broadcaster, taxpayer availed services of hiring taxis for different purposes, such as:

  • To pick up/drop shift duty-staff in odd hours.
  • This facility is being provided in odd hours to lady-employees, handicapped & general employees.
  • Taxis are hired for tour/OB recordings, etc. within the State of Himachal Pradesh on different occasions.
  • Taxis are also hired to drop shift staff at High Power Transmitter during morning/evening & for office work during day time.

Question raised by the applicant was:

Whether input tax credit was available to the applicant on the services availed for the aforementioned items through contractors and what rate of GST will be applicable on the same?

Findings of the Authority

Bench noted that the applicant was a registered taxpayer and entered into an agreement for hiring commercially licensed vehicles for transportation of his employees.

As per Section 16 of the CGST/HPGST Act, 2017, every registered person shall be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business.

Availability of ITC as per the provision of the second proviso to Section 17(5)b is available only on the condition that such goods or service or both is obligatory for an employer to provide to its employees under any law for the time being in force.

Bench stated that since the applicant had not been able to cite any law under which the service of providing the facility of transportation to his employees was obligatory, hence ITC will not be available to him.

Conclusion

  • As per Notification No. 20/2017 dated 22-08-2017, the applicable tax rate on renting of Cabs is 5% with limited ITC and 12% with full ITC.
  • If the facility provided by a taxpayer for transportation of employees is not obligatory under any law, for the time being in force then no ITC will be available to such a taxpayer. The applicant will, however, be eligible to claim ITC for the service supplied at 12% GST Rate if the conditions laid down in the second proviso to Section 17(5) b are satisfied. [Prasar Bharti Broadcasting Corpn. of India (All India Radio), In Re., decided on 24-02-2020]
Case BriefsHigh Courts

Orissa High Court: S.K. Paigrahi, J., while addressing a matter, observed that,

One cannot lose sight of the fact that GST regime is relatively new and is still evolving.

“…attempts to dampen the spirit of GST proper implementation are already assuming huge proportions and need to be curbed with an iron fist so that the contours of fiscal compass will be extended to the advantage of the people.”

Petitioner filed the bail application under Section 439 of the Criminal Procedure Code, 1973 for being punishable under Section 132(1)(b)(c) and (1) of the OGST Act, 2017.

Business transactions were made using several fictitious firms including G.S Unitrade,  G.S. Steels and Alloys Co., B.B Associates, Om Shri Ganesh Traders. Petitioner, Ronak Beriwal, Subhash Chandra Swain and Basanta Kumar are the proprietors of GS Unitrade, G.S. Steels & Alloys Co, B.B. Associates and Omm Shree Ganesh Traders respectively.

Above persons, individually and in collusion with each other alleged to have created several dummy and non-existent entities to avail bogus Input Tax Credit (ITC), for the purpose of defrauding the Revenue.

Concern 

Creation of dummy and non-existent firms was the matter of concern.

Fake and fraudulent transactions have, among others, caused huge loss to the State exchequer at least to the tune of Rs 122.67 crores.

Fraud

After intensive analysis of data from GSTN/e-way bill portal and inputs from various sources, the Joint Commissioner of State Tax, CT & GST Enforcement Range, Sambalpur detected the fraud committed by the accused.

Several incriminating documents, containing business transactions of such business entities, were unearthed and seized.

Petitioner, in his capacity as the proprietor of G.S. Unitrade, had shown to have purchased goods from many bogus firms and has availed ITC on the strength of fake invoices, without actual transfer of goods.

“…manner in which the accused, in collusion with other accused, had been operating would suggest that there are certain inherent flaws in the GST system, which is prone to such abuse.”

“Fraudsters are taking advantage of the inadequacy of electronic trails of all transactions by employing ingenious methods.”

The search and inspection conducted by the State Authorities revealed that no business was actually being conducted by the declared place of business.

Fictitious firms were created in the name of many daily labourers, private tutors, housewives etc., with the help of their identity documents like PAN, Aadhaar Card, Mobile phone, Voter Card, etc.

Hence accused was alleged to have committed of offences under Section 132(1)(i) read with Section 132(5) of the OGST Act, 2017, which are a non-bailable and cognizable.

Decision

In the instant case, the alleged GST fraud committed by the petitioner is having humongous ramification on the revenue collection by the State.

Further the bench added that, the possibility of the accused tampering the evidence and/or influencing/intimidating the witnesses also cannot be ruled out.

Moreover, the Courts cannot lose sight of the adverse impact such activities would have in the economy.

Bench stated that a large number of cases emerged in different parts of the country where such persons, with vested interests, have created a host of unscrupulous and bogus entities.

Fake entities are then used for the purpose of indulging in issuances of false and fabricated invoices, without actual movement or supply of goods and services and without payment of any GST to the public exchequer, but for the purpose of claiming ITC, by defrauding the Revenue.

Enormity of such devious activities touch the raw nerve of the economic system and strike at the root of the proper and effective functioning of the GST regime, which has been set up with the laudable object of “One Nation, One Tax, One Market”.

High Court stated that a countrywide cartel specializing in defrauding the GST system is operating to bring the economy to its knees.

High Court declined the release of the accused petitioner on bail at this stage. Accordingly, the bail petition filed on behalf of the accused/petitioner was rejected. [Amit Beriwal v. State of Odisha, 2020 SCC OnLine Ori 546 , decided on 27-07-2020]

Business NewsNews

The government has decided to speed up the input tax refund to exporters. As per Rule 91 of CGST Rules, 2017, 90 % of the refund amount claimed shall be granted on a provisional basis within a period not exceeding 7 days from the date of acknowledgement of the refund claim. Further, as per Section 54(7) of the CGST Act, 2017, the final order for granting refund shall be issued within 60 days from the date of receipt of the complete application. Out of total taxpayers under GST, 64% who were already registered under the previous tax regime have transitioned to GST as on 02-03-2018. However, no specific study has been undertaken on the impact of the said transition. The Minister of State for Finance further has stated that, the processing of the refund claim is being done after the claimant has filed the GST return and the grant of the refund shall be within 60 days from the date of receipt of the complete application.

[Source: Press Information Bureau]

MINISTRY OF FINANCE