A virtual effacement of legal principles

[niranjan gupta]

A virtual effacement of legal principles

The judiciary needs to determine whether the executive has provided a proper law when it directs ineligibility to claim refund of input services under inverted duty structure, liability to pay tax under reverse charge mechanism on Ocean freight and ineligibility to claim input tax credit in respect of invoices having place of supply other than recipient’s State

(By NK Gupta, Senior Executive Director; CA Kashish Gupta, Senior Manager; M/s SS Kothari Mehta & Co)

A study of various legal provisions of CGST Act, 2017 with rules and notifications issued by the executive will only desiccate the status of an enactment as a codified Act representing will of people. Even given that narrative, the ongoing dispute regarding eligibility of claim refund of input services by suppliers covered under inverted duty structure, liability to pay tax on Ocean freight and eligibility to claim input tax credit in respect of inward supplies having place of supplies outside the State is extraordinary. Reading the provisions of sub-ordinate legislation, what’s clear, is that these dizzying requirements maintain no fidelity whatsoever to the statutory text. 

Sub-ordinate legislation related to subject issues

On 18.04.2018, Central Government amended sub-rule (5) of rule 89 of CGST Rules, 2017 so as to restrict the refund of unutilized input tax credit in respect of suppliers falling under inverted duty structure to the extent of inputs only. On 13.06.2018, this amendment was made retrospective w.e.f. 01.07.2017, thereby, depriving industry from huge tax refunds and imposing sudden cost burden. Not only this, Government issued various demand notices to importers who were importing goods on CIF (cost, insurance and freight) basis wherein they were asked to pay GST under reverse charge mechanism. Under CIF basis, exporter avails the services of freight from a shipping line and pays for the same. However, the story does not ends here. Government further proceeded the show its intention to disallow the input tax credit on services received by recipient having place of supply other than recipient’s State by not auto-populating details of such invoices in table 8A of Form GSTR-9.

It is in these facts and the devastating consequences that they have had on day to day affairs of business – that form the backbone of challenges in various jurisdictional High Courts across the Country. On the issue of refund of input services, writ petitions under article 226 of the Constitution of India has been filed before Gujarat and Rajasthan High Court Scorpio Enterprise Vs UoI 2018 (9) TMI 1766 - GUJARAT HIGH COURT; Shree Ram Lime Products Private Limited Vs UoI D.B. 2018 (8) TMI 587 - RAJASTHAN HIGH COURT; Shree Rama Newsprint Limited Vs UoI 2018 (9) TMI 1475 - GUJARAT HIGH COURT wherein court has issued notice to the Government. Similarly, regarding ocean freight, writ is pending before Gujarat High Court Mohit Minerals P Ltd Vs UoI 2018 (2) TMI 770 - GUJARAT HIGH COURT and Delhi High Court is yet to decide on the issue of eligibility of claim input tax credit D. Pauls Travel and Tours Limited Vs UoI 2017 (12) TMI 640 - DELHI HIGH COURT. Though Delhi High Court and P&H High Court has allowed furnishing of Annual Return manually in other related matters P.P. Automotive P Ltd Vs UoI 2019 (11) TMI 472 - PUNJAB & HARYANA HIGH COURT; Vadehra Builders Pvt Ltd Vs UoI 2019 (11) TMI 890 - DELHI HIGH COURT but legality of the matter is yet to be decided in D.Pauls(supra) matter. Division bench, which has heard oral arguments in these issues, will sometime during the course of coming weeks pronounce its verdict. Although, in answering the constitutional questions raised, the judges will heed to their past decisions, the case presents the court with its first real opportunity to rule decisively on the purport and reach of legislative competence of executive under GST law. The ultimate ruling, therefore, is likely to serve as a precedent of some value.  

Eligibility to claim refund of input services under inverted duty structure

Before taking up challenge to the vires of different statutory provisions, we may broadly state the powers of constitutional courts to annul a statute framed by the Union or State legislature. It is well settled that there is a presumption of constitutionality of statute.  It is equally well settled that the presumption of constitutionality would touch even the subordinate legislation. However, the grounds on which a statute framed by the Parliament or the State legislature are limited, as compared to the subordinate legislation. While a legislation framed by the subordinate legislature can also be questioned on the ground that the same is ultra vires the Act, or is beyond the rule making powers of the authority or that the same is wholly arbitrary and unreasonable, the law framed by the Parliament and the State legislature, it was held and observed in the case of State of A.P vs. Mc Dowell & Company & Ors., reported in 1996 (3) TMI 525 - SUPREME COURTthat it could be struck down only on two grounds viz., lack of legislative competence, or violation of the fundamental rights or any other constitutional provisions. It was further observed that no enactment can be struck down by just saying that it is arbitrary or unreasonable. The test of manifest arbitrariness, would apply to invalidate legislation as well as subordinate legislation under Article 14. Keeping in mind these principles, we may take closer look at the relevant provisions.

Section 54(3) of the CGST Act provides the substantive right to claim refund of any unutilized input tax credit at the end of any tax period. The section is extracted hereunder for reference:

(3) Subject to the provisions of sub-section (10), a registered person may claim refund of any unutilised input tax credit at the end of any tax period:

Provided that no refund of unutilised input tax credit shall be allowed in cases other than––

1. …………
2. where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies), except supplies of goods or services or both as may be notified by the Government on the recommendations of the Council:

The bare reading of the above section makes it clear that the person making ‘inverted rated supply’, shall be eligible to claim refund of ‘unutilized input tax credit’ under this section. Therefore, refund of unutilized input tax credit is a vested right of the person doing the inverted rated supply; and as soon as the goods or services or both are so supplied, the said right gets vested in the assessee by virtue of section 54(3) of the CGST Act.

It is pertinent to mention that sub-rule (5) of rule 89 of CGST Rules/ MPGST Rules provides the procedural law for claiming the refund of ‘unutilized input tax credit’. At this juncture, it is pertinent to recall apex court judgment in case of Commissioner of C.Excise and Customs Versus Venus Castings Private limted 2000 (4) TMI 37 – SC which has ruled as under:

“11. ………..In holding whether a relevant rule to be ultra vires it becomes necessary to take into consideration the purpose of the enactment as a whole, starting from the preamble to the last provision thereto. If the entire enactment is read as a whole indicates the purpose and that purpose is carried out by the rules, the same cannot be stated to be ultra vires of the provisions of the enactment…………” 

The creation of legal fiction under rule 89(5) i.e. restricting the amount of refund to the extent of inputs only, is beyond the scope of legislative provision which allows refund of unutilized input tax credit. Such legal fiction can be created only by a legislature and not by a delegate in exercise of rulemaking power. Thus the legal fiction created in rule 89(5) restricting the refund to the extent of input tax credit availed on input only is beyond the scope of delegate and is therefore liable to be declared as ultra vires, arbitrary, violation of article 14, unconstitutional and bad in law. 

It also defeats the very purpose of GST laws. On the one side, the legislature put a responsibility on the supplier to pass on all input tax credit on inputs and input services to the recipient, on other hand the executives are restricting refund of credit on input services by putting restriction under rule 89(5) of the GST Rules. Further, Goods and Service tax laws was formulated to make a single law for goods and services. It is known from the fact that the goods and services are having 50:50 ratio in India’s GDP, there is no logic to divide activities into goods and services, when the benefit accrues to the suppliers. 

Liability to tax under reverse charge mechanism on Ocean Freight

In the landmark decision of Govind Saran Ganga Saran v Commissioner of Sales Tax 1985 (4) TMI 65 - SUPREME COURT, the Hon’ble Supreme Court held that one of the canons of taxation is that there must be a clear indication of the person on whom the levy is imposed and who is obliged to pay tax. If this component is not fulfilled, the Apex Court stated that “it is difficult to say that the levy exists in point of law”.

For being exigible to GST, a supply needs to be classified either as “intra-state supply” or “inter-state supply”. An analysis of the provisions of IGST law provides that classification of supply as ‘inter-state’ or ‘intra-state’ depends upon “location of supplier” and “place of supply”. By going through the provisions of section 12 and 13 of IGST Act, 2017, it can be inferred that said section provides for place of supply (i) Where both provider of service and recipient of service is located in India, and (ii) Where provider of service or recipient of service is located outside India. 

It is worthwhile to note that place of supply has not been prescribed for a circumstance where provider of service as well as recipient of service are located outside India. Such a proposition in GST law is completely against the proposition under erstwhile law (service tax law) wherein Central Government was empowered to define place of supply in terms of powers conferred under section 66(2) of Chapter V of Finance Act, 1994 when provider of service and recipient of service are located in non-taxable territory.

Therefore, supply of freight service by foreign shipping line to foreign supplier is neither an inter-state supply nor intra-state supply as location of provider of services as well as recipient of service is outside India. Hence, said service does not fall under the ambit of GST law. Despite this proposition of law, delving upon the issue of taxability, the Notification No. 10/2017-IGST (Rate), dated 28.06.2017, under S.No. 10, vests the liability on importer of goods to discharge the liability on ocean freight under reverse charge basis but said notification also stipulates that payment under ‘reverse charge’ would be made by the ‘recipient of service’. Therefore, even upon delving the legislative provisions of GST law, it can be inferred that notification making importer as person liable to pay tax under reverse charge mechanism is ultra-vires the Act because he is an importer of goods but not an importer of services since he is not paying consideration to foreign shipping line for freight services i.e. he is not a recipient of service.

Eligibility to claim input tax credit in respect of inward supplies having place of supply outside recipient’s State

There is absolutely no provision that binds an assessee to avail the ITC only in the State where the place of supply falls. However, there is some misunderstanding on part of the GST Network, and may be those making the system. The term input tax credit is defined u/s 2(63) of the CGST Act to mean credit of input tax and input tax is defined u/s 2(62) to mean the central tax, state tax, integrated tax and union territory tax charged on the supply of goods or services or both and includes the tax paid on reverse charge basis. The terms central tax, state tax, integrated tax and union territory tax have been defined under section 2 of the CGST Act. The said definitions are reproduced below for ease of reference:

• 2(21). "central tax" means the central goods and services tax levied under section 9;
• 2(58). "integrated tax" means the integrated goods and services tax levied under the Integrated Goods and Services Tax Act;
• 2(104). "State tax" means the tax levied under any State Goods and Services Tax Act;
• 2(115). "Union territory tax" means the Union territory goods and services tax levied under the Union Territory Goods and Services Tax Act;

Thus, credit of input tax shall mean the credit of taxes paid on inward supplies which are levied under:

• CGST Act;
• IGST Act;
• UTGST Act;
• Any SGST Act.

Section 16(1) entitles every registered person to avail credit of input tax of all taxes charged on supplies used or intended to be used in the course or furtherance of his business. The same is subject to certain prescribed conditions and restrictions and, in the manner specified in section 49. Interestingly, Section 16(1) uses the words credit of input tax charged which signify that Section 16(1) allows/entitles a registered person to avail credit of all input taxes as summarized above. Thus, unless expressly restricted elsewhere in the GST Law, Section 16(1) of the CGST Act allows credit of all taxes levied under CGST Act and IGST Act irrespective of the “place of supply”. 

As per Table 8 of the Notified GSTR-9 form, the total of Table 3 and 5 of GSTR-2A are to be filled. As per Table 3 and 5 of GSTR-2A, all inward supplies are recorded irrespective of place of supply. For this purpose please refer Column 11 of Table 3 and 5. However, while totaling the said Tables 3 and 5, the GSTR-9 available on the GST Network seems to total only those invoices which are relatable to the State of Registration. This is something that the GST Network is not authorized to do.

Conclusion

Indeed, the Government has, in the past, did some works which reflects that law is being re-framed as per the revenue boosting interpretation of executive. In these circumstances, continuing with this approach which further mingled with the blocking certain inward supply invoices in GSTR-9, would amount to virtual effacement of legal principles. Should these provisions be upheld, we will be entering an abyss from which there can be no return. When that happens, our Constitution, and the hallowed promises it enshrines, will be found withering by the wayside.

Discussions to this article

[Ganeshan Kalyani]

Such a detailed analysis of yours on the burning issues enlightens the legal validity of the law. The law has to be reasonable, acceptable to public. By imposing tax on ocean freight there amounts to double taxation on the same transaction. The importer pays tax while clearing goods from the customs and also pays tax under reverse charge mechanism in case of CIF condition. This is not acceptable. The govt should omit the ocean freight chargeabliity from reverse charge notification. Govt is listening to the plea of the taxpayers and it is hoped that this issue will also be heard of.