Authority for Advance Ruling (AAR Tamilnadu) pronounced in case of M/s. Sanghvi Movers Ltd. that full ITC cannot be availed by registered branch office for the services procured from HO where payments are netted off against the receivables and full payment is not made.

Facts of the Case:M/s. Sanghvi Movers Ltd. (SML) registered in the state of Tamilnadu (hereinafter referred as “the Applicant”) is a branch office of M/s. Sanghvi Movers Ltd., registered in the state of Maharashtra (hereinafter referred as “HO”). SML is engaged in the business of providing medium-sized heavy-duty cranes on rental/lease/hire basis to the clients without transferring the right to use the cranes. SML have pan-India presence and cranes are deployed across India as per the requirements of customers. As the movement of cranes involves significant time and cost, SML has set up various branches (“SML branch offices”) across India at strategic locations including Tamil Nadu, to minimize transportation time and costs. Under GST, SML has obtained registration for 10 locations across India, including its head office (“SML Maharashtra”) located in Pune, Maharashtra and branch office (“SML Tamil Nadu”) located in Chennai, Tamil Nadu. SML branch offices receive enquiries from various customers for supply of cranes on hire charges. SML branch offices negotiate with customers and receive final work orders from customers. The title and ownership of all the different types of cranes along with their components vest with SML Maharashtra. Therefore, on receipt of the final work order, all the SML branch offices in turn raise internal work orders on SML, Maharashtra to provide requisite cranes on hire charges along with appropriate support and assistance to various customers across India.

In order to comply with the provisions of GST law and ensure operational feasibility, SML Maharashtra has entered into a formal service arrangement with all SML branch offices (including SML TamilNadu) by entering into a Memorandum of Understanding (MoU), wherein SML Maharashtra has agreed to provide cranes and crane components to all SML branch offices on hire charges. As part of the service arrangement, whenever the applicant receives a final work order from its customers for providing cranes on hire charges, they will in turn raise an internal work order on SML Maharashtra for providing the required cranes on hire charges. Further, an invoice from SML Maharashtra is issued to the applicant and the value considered for levying GST is approximately 95% of the value charged to the customer by the applicant. The applicant makes payment to HO against the invoice raised by HO after netting off the amount payable against the amount receivables from the customers and avails full input tax credit of the invoice raised by HO.

The applicant claimed that he is eligible to claim full ITC on the invoice raised by HO since he is complying with all the conditions pre-requisite for claiming ITC. Further the applicant claimed that as the said transaction is taking place between distinct persons as defined under Section 25(4) of the CGST Act and is treated as supply, as per Schedule I of CGST Act: as per the proviso to Rule 37 of the CGST rules, the condition to make actual payment to supplier within 180 days is not applicable to the applicant and they are entitled to avail credit of the IGST charged by SML Maharashtra by making deemed payment by netting off receivable and payable in book of accounts. In the light of the above facts, the applicant has sought the authority for advance ruling to determine the admissibility of ITC of the IGST paid by SML Maharashtra in the hands of the applicant.

Ruling:As per facts of the case the applicant is a branch office of SML HO. Under GST, the applicant and SML being distinct entity has obtained registrations separately u/s. 25(4) of CGST Act, 2017. Accordingly SML HO and Branch are distinct persons under GST. It is seen that though SML HO invoices to SML at 90% of the underlying billing by SML to its customers, the full amount is not being paid. As per the MOU, the same is being netted off against the receivable by SML for the upkeepment charges that SML HO has to pay to the applicant as per the MOU.

As per proviso to Section 16(2), the applicant will not be eligible for full input tax credit as they are not paying the full amount to their supplier SML HO as seen in the MOU where payments are netted off against receivables. The applicant in his application has stated that as per proviso to Rule 37, the condition to make actual payment to supplier within 180 days is not applicable to the applicant. However, the proviso clearly states that, the value of supplies “made without consideration” as specified in Schedule I shall be deemed to have been paid as per second proviso to Section 16(2). 

In the instant case, there is a consideration to be paid by SML to SML HO as per MOU and the consideration is specified in the invoices raised by SML HO to the applicant. Hence, proviso to Rule 37 i.e. exemption from making full payment, will not be applicable to the applicant. Accordingly, AAR ruled that the applicant will not be eligible for the full ITC as per the inward supplies received from SML HO as they would be required to reverse such ITC if taken as per second proviso Section 16(2) of CGST Act and Rule 37 of CGST Rules.

Comments: Even though ruling of AAR is applicable only to the tax payer who sought the views of AAR, the views expressed in ruling of Tamilnadu AAR can be applied by tax authorities in other cases and accordingly ITC can be denied wherever receivables are netted off in books against amount payable. In view of author, the judgment is not logical and ignores practical aspects of doing business considering that HO and Branch are one company registered under same PAN and merely rotating fund against the invoice raised internally will result into unnecessary movement of fund and thereby blockage of working capital. The judgment is silent on admissibility of full ITC in the hands of recipient of supplies where supplies between related parties is made without consideration (i.e. without assigning monetary value to the transaction) and in such case deemed value is considered as value of supplies as per proviso to rule 28 of CGST Rules, 2017 (i.e. value of supply is deemed as 90% of the of the price charged for the supply of goods of like kind and quality). There could be many litigations on this point in coming days.

Even though ruling of AAR is applicable only to the tax payer who sought the views of AAR, the views expressed in ruling of Tamilnadu AAR can be applied by tax authorities in other cases and accordingly ITC can be denied wherever receivables are netted off in books against amount payable. In view of author, the judgment is not logical and ignores practical aspects of doing business considering that HO and Branch are one company registered under same PAN and merely rotating fund against the invoice raised internally will result into unnecessary movement of fund and thereby blockage of working capital. The judgment is silent on admissibility of full ITC in the hands of recipient of supplies where supplies between related parties is made without consideration (i.e. without assigning monetary value to the transaction) and in such case deemed value is considered as value of supplies as per proviso to rule 28 of CGST Rules, 2017 (i.e. value of supply is deemed as 90% of the of the price charged for the supply of goods of like kind and quality). There could be many litigations on this point in coming days.

If the whole world is looking upto India as their prospective market, then how can our Indian economy crash?

Is the slow down of economy man-made or natural ?

During Demonetisation , I had tried to explain the concept of “Velocity of Money” through an animated Video and had stated that the success of demonetization would depend largely on the effect on the velocity of money in the post demonetization period.

In this article, I would like to extend my views on the present state of economy in continuation of the said video.

Though the good “political intent” of the present Government cannot be denied and most of their actions are steered towards the best interests of the nation, but it also seems that the Government lacks smart and intelligent advisors  leading to slow down of economy.

One biggest blunder which the present Government is making is the assumption of “complete parallel economy”

We need to understand that parallel economy is just theoretical and “physical money” or “cash” per se cannot be black or white.

Money on the move has no fixed abode. From one wallet to another, from one shopper to the next, from one bank account to another, that is the life of money. 

“Cash/Money in Bank” has a peculiar feature compared to other assets. If a Machine is transferred through 12 people in a year, it will still give almost the same level of production, but this is not so in the case of money!
When Rs. 2000 Note flows in an economy hundred times in a day, it gives 100 people satisfaction while going home that they have earned Rs. 2000/- and applied the same in stuffs which gives them happiness and the total value is worth Rs. 200000 showing signs of a healthy economy

But it is natural that out of these 100 people transacting in money, some 90 people may account for the money transaction and some 10 may not account for the same but the Government needs to realize that in order to not allow these 10 transactions going unaccounted – the stopping of the flow of all the 100 transactions is not the solution which ultimately leads to economic slow down and getting the remaining 90 people to go out of business !

Let me explain this with a real life example.

Lets say, when a consumer “A” may buy Jewellery worth Rs. 2,00,000 in cash, “A” may be using his unaccounted money but the receiver Jeweller “B” deposits cash into bank by invoicing it in the name of some “X“ and pays due income tax on the same.

Now the the jeweller B subsequently pays its job-worker “C” for their job charges by account payee cheque and after deduction of 1% TDS which ensures that job worker shall pay taxes on the same and out of their job-charges credited in its bank, “C” would pay salary to its individual employees “D” by cheque who shall also file their returns. The individual employees “D” shall now use this amount to consume various services like petrol , e-commerce shopping while making digital payment through Mobile wallets and hence these moneys are always accounted.
Now assuming that whole trail of money transaction as described above has happened on the same day, A,B,C and D all would go home happy and the value of Rs. 2,00,000/- would be Rs. 8,00,000/- at the end of the day and the Government would also get its share of direct and indirect taxes on each transaction total amounting to Rs. 8,00,000/- . The only Revenue leakage was the tax lost on the source from which person A has earned Rs. 2,00,000/-. Sometimes, even “A” who has accumulated past savings does not know whether the amount spent by him on buying jewellery is black or white and as I said , the biggest mistake which the present Government is doing is the doubting of the very first transaction of consumers like “A” who then loses his purchasing power due to tax terrorism and uncertainties in law and which ultimately results into lower velocity of money because none of the transactions shall happen.

In other words, earlier the Rs. 1000 Note used to travel something like this in an Indian economy.

BLACK, WHITE , WHITE , WHITE, WHITE , WHITE, BLACK, WHITE...

However, due to immature steps of the present Government during the post demonetization period and the hasty implementation of GST, the new Rs. 2000 Note now travels in the following fashion

BLACK, IDLE, IDLE, IDLE IDLE, IDLE , IDLE , BLACK, IDLE ,IDLE… 

And this has lead to massive recessive and liquidity crunch wherein the businessman are sitting IDLE!

While some notable reforms are made by the Government through the introduction of RERA and implementation of Insolvency and Bankruptcy Code which were necessary irrespective of its negative effect on the velocity of money, but as a Chartered Accountant practising into Income Taxes, if I am to suggest one step to increase the speed of money which will automatically boost the economy, it shall be the –

“Removal of the draconian provisions of Section 115BBE under the Income Tax Law which was amended during demonetization in a very insensitive manner”

The citizens of India has not yet tasted the venom of this amended draconian law of Section 115BBE because it is made applicable w.e.f A.Y 2017-18 and the scrutiny of the cases of the said year are under assessment and the ill-results as envisaged by me shall come by December 2019 if corrective steps are not taken.

What is Section 115BBE ?

Section 115BBE of the Act, as amended by the Taxation Laws (Second Amendment) Act, 2016 w.e.f. A.Y 2017-18 states that if a taxpayer fails to prove the nature and source of credit in its books of account or the explanation offered by him in respect of any credit is not satisfactory in the opinion of Assessing Officer, he shall be liable to pay effective tax at the rate of 77.25% even if he has offered the said income in his return of income !

For example, lets say that one of my friend “V” started teaching CA students and in pursuance of this noble profession, he  received fees of Rs. 11,00,000/- in cash which he deposited in the bank account and offered the same for taxation in his return of income as tuition fees. Now at the time of income tax scrutiny, the provisions of Section 115BBE shall vest the Income Tax Officer with unfettered powers to reject any explanation, being not to his satisfaction. After two years, my friend may be asked to produce the parents of the students before ITO to record their statement. The parent shall be asked to show the entry of tuition fees paid in their books of accounts and in order to save his skin, the said parent would never turn up to confirm the transaction or say that his son never studied under that teacher. Ultimately, my friend “V” shall be asked to pay flat tax of 77.25% on his income of Rs. 11,00,000/-

On the contrary, my other friend “U” who claims to have won Rs. 11,00,000/- from casino and betting will just pay tax at the maximum rate of 30%.

This provision of Section 115BBE shall affect any taxpayer into any business where there are cash sales involved and the Income Tax Officer has suspicion that the cash is not arising out of regular business.

In case of earlier example of Jeweller “B”, now B has to file confirmation from customer A ( which is unlikely) and on failure to do so, the Government shall fasten B with 77.25% tax. Thus by resorting to such harsh measure, the Government is stopping the whole flow of money from A to D to all leading to decrease in the velocity of money and rather the above provision is encouraging the parallel economy as now the jeweller B shall not deposit the said cash in his accounts though it wants to pay tax ( at 30% and not 77.25% ) and now the money will always remain black money and even the Government will lose its share at each time the money flows from one person to another.

Talking about corruption, the mentality of present tax-payers of “New India” is such that if an option is given to them to pay 30% tax or to pay bribe and reduce tax to 0% , I am very confident the citizens of New India would opt to pay 30% tax because they trust this Government blindly and they trust that the Government shall use their hard earn tax money for the betterment of the nation. But when the same Government themselves shall make laws to make the scenario – 77.25% or 0%, the Government is either spreading tax-terrorism or is indirectly encouraging corruption because the taxpayer is left with no other option to save his hard earned money and more importantly to buy peace of mind but to succumb to the wishes of a Babu.

There are series of such poor decisions lately by the Government like 100% penalty for transactions in cash for more than Rs. 2,00,000/- , taxing the profits of corporate thrice leading to effective tax rate of 50% on profits of Companies, poor implementation of GST etc which has lead to decrease in velocity of money and liquidity crisis and ultimately slow down of economy.
No doubt, there are natural factors in addition to the above, which are attributable to economic slow down.

It is true that the businesses have not slow down but the business model have changed. The valuation of Airbnb which does not own any properties is much more than Hilton or Marriot. The Valuation of Uber or Ola which does not own any taxi is much more than any Company in the world owning fleet of taxis or self drive cars.

We have moved from
“We sell Cars” to “We transport”.
“We run Private Schools” to “We educate”
“We trade” to “We make markets”

and thus every Indian businessman has to accept this change and bring an innovation in its products, process or Services. The present Government is doing an excellent work in encouraging innovation through its flagship programme “Startup India”. India with its 22k Startups is heading towards becoming one the largest Startup ecosystem in the World and Government has supported these Startups right from the launch of its Scheme.

The popularity of our PM is unmatchable. The present Government has got the greatest mandate ever in history of India and hence it is expected from the Government to grace its mistakes, be open to public discussion, take external advisory from Research Institutions or opposition leaders, where needed and take corrective actions for decisions which has gone miserably wrong.

PS : Become part of the movement to send a message to the Law makers about the ill-effects of Section 115BBE by signing this petition on change.org at http://chng.it/nNkxbhcK. Also you may share this article through Facebook/ Whatsapp or Retweet from my Twitter handle camehul87 to spread awareness.

In FY 2018-19 and 2019-2020, many taxpayers have received notices from Income Tax Department proposing to tax the total surrender value received on account of Designated Unit linked insurance policies in the nature of pension without any sum assured or death benefit. The taxpayers are perplexed because at the time of investment in such insurance plans, they believed that such policies shall be fully exempt at the time of receipt but now notices are received for reopening the cases u/s 148 and taxing the total surrender value or maturity value at relevant tax rate.

There are instances where even if the total surrender value receipts is almost same as amount of premium paid and despite the fact that there is no profitability, the tax officials are demanding tax on the entire maturity proceeds/surrender value without giving any deduction of premium paid by citing the provision of Section 80CCC(2).

Hence, this article is written to provide an opinion as to how such situations can be dealt with.

First of all, it is true and to be known that exemption in case of ULIPs in nature of pure pension is not available u/s 10(10D) on surrender of such plan where there are no mortality charges and no sum assured attached to the policy and hence the provisions of Section 80CCC(2) are clearly attracted.

Now, the Provision of Section 80CCC is relevant which is reproduced here:

80CCC (1) Where an assessee being an individual has in the previous year paid or deposited any amount out of his income chargeable to tax to effect or keep in force a contract for any annuity plan of Life Insurance Corporation of India or any other insurer for receiving pension from the fund referred to in clause (23AAB) of section 10, he shall, in accordance with, and subject to, the provisions of this section, be allowed a deduction in the computation of his total income, of the whole of the amount paid or deposited (excluding interest or bonus accrued or credited to the assessee’s account, if any) as does not exceed the amount of one hundred and fifty thousand rupees in the previous year.

(2) Where any amount standing to the credit of the assessee in a fund, referred to in sub-section (1) in respect of which a deduction has been allowed under sub-section (1), together with the interest or bonus accrued or credited to the assessee’s account, if any, is received by the assessee or his nominee—

(a)  on account of the surrender of the annuity plan whether in whole or in part, in any previous year, or

(b)  as pension received from the annuity plan,

an amount equal to the whole of the amount referred to in clause (a) or clause (b) shall be deemed to be the income of the assessee or his nominee, as the case may be, in that previous year in which such withdrawal is made or, as the case may be, pension is received, and shall accordingly be chargeable to tax as income of that previous year.”

Now the following argument may be raised before the tax officials:

As per Section 80CCC(2) of IT Act, the taxability shall arise only in respect of amount credited in respect “of which deduction has been allowed” and hence if no deduction is claimed on account of premium paid on impugned policy, and the surrender value is less than total premium paid then the provision of Section 80CCC(2) cannot be invoked.

For Example, lets say ‘A’ has taken a policy for 5 years with premium of Rs.1,00,000/- to be paid every year. However, A surrenders the policy before completion of term of 5 years and receives Rs.4,50,000/- as surrender amount against the premium paid of Rs. 4,00,000/-. Now, if ‘A’ has not taken any deduction of premiums paid for the respective years, then  the surrender amount of Rs.4,50,000/- on receipt should not be fully taxed as one may argue that the provisions of Section 80CCC(2) is not invokable for the reason that no deduction is taken for the premium paid.

In this case, an interesting scenario may arise, where the assessee had made investments in PPF of Rs.1,50,000/- and in pension plan to the tune of Rs.1,00,000. In the return of income, deduction upto Rs.1,50,000/- is only allowed as per Section 80CCE [cumulative deduction of Rs.1,50,000/- allowed under Section 80C, 80CCC and 80CCD(1)] and so it is not discernible  whether deduction of Rs. 1,50,000/- was claimed in respect of pension plan or PPF and hence it can be argued that deduction was taken only for PPF and 80CCC(2) is not applicable as no deduction is claimed in respect of pension plan

Another scenario arises where deduction is claimed but not fully say for example deduction taken was only Rs.70,000 for pension plan and no other eligible deduction available thereby the limit of Rs.1,50,000/- was not fully absorbed, in such cases, Assessing Officer may take a view that the entire receipt from insurance is fully taxable as once deduction was taken, Section 80CCC is invokable and no separate deduction is available as per provision of Section 80CCC(2). However according to our view only the amount of deduction earlier claimed along with bonus and interest should be taxable.

Emphasis is also laid on Circular no.7/2003 dated 05.09.2003 wherein it was clarified that, “The insurance policies with high premium and minimum risk covers are similar to deposits or bonds. With a view to ensure that such insurance policies are treated at par with other investment schemes, amendments have been made in section 88 and clause (10D) of section 10. The existing clause (10D) of section 10 has been substituted so as to provide that the exemption available under the said clause shall not be allowed on any sum received under an insurance policy issued on or after the 1st day of April, 2003, in respect of which the premium payable in any of the years during the term of the policy, exceeds twenty per cent of the actual capital sum assured. In view of this, the income accruing on such policies (not including the premium paid by the assessee) shall become taxable. However, any sum received under such policy on the death of a person shall continue to remain exempt. The new provision also provides that the amounts received under sub-section (3) of section 80DD, shall not be exempt under this clause.”

Though the above Circular was for earlier Section 88 of IT Act which now stands substituted by Section 80C w.e.f 2006 and hence the ratio of Circular would be equally applicable in the given scenario.

Regarding the applicability of provision 80CCC(2) reference may be made on the decision of ITAT Mumbai Bench in case of Sandeep Sukhtankar vs ITO [ITA No.2690/Mum/2012] dated 18.06.2014 wherein it was held that,

“We  have  heard  the  rival  submissions. AO  had  admitted  that  the  assessee  had  not  claimed deduction under the provisions of chapter VI A of the Act,that he had had received an amount in dispute  by  surrendering  lifetime  pension  policy  and  life  insurance  policy  from  ICICI  Prudential life  insurance. These  two  factors  in  themselves  are sufficient  to  hold  that  money  received  by  the assessee is a capital receipt and not taxable. Provisions of section 2 of the section 80CCC are very clear. In light of the said sub section, we decide ground no.4 in favour of the assessee.”

Alternatively, it can even be argued that the investment in such ULIP is capital asset because the definition of capital asset is exclusive definition defined as follows:

 “Section 2(14) capital asset” means—

(a)  property of any kind held by an assessee, whether or not connected with his business or profession;

(b)  any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992 (15 of 1992),

but does not include—

 (i)  any stock-in-trade other than the securities referred to in sub-clause (b), consumable stores or raw materials held for the purposes of his business or profession ;

(ii)  personal effects, that is to say, movable property (including wearing apparel and furniture) held for personal use by the assessee or any member of his family dependent on him, but excludes—

(a)  jewellery;

(b)  archaeological collections;

(c)  drawings;

(d)  paintings;

(e)  sculptures; or

(f)  any work of art.

Explanation 1.—For the purposes of this sub-clause, “jewellery” includes—

(a)  ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stone, and whether or not worked or sewn into any wearing apparel;

(b)  precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel.

The definition of capital asset specifically excludes certain items and insurance policies does not fall under the exception given and hence accordingly, the benefit of indexation and deduction on account of cost of acquisition should be made available.

Central Board of Indirect Tax & Customs (CBIC) issued circular no. 20/06/03/2019-GST dated 18^th July, 2019 clarifying implications under GST related to Information Technology enabled services (ITes) outsourced to Indian entities by overseas companies (i.e. call centres, business process outsourcing service, accounts outsourcing service etc.). The said circular clarifies that the definition of “intermediary” u/s. 2(13) of IGST Act inter alia provides specific exclusion of a person i.e. that of a person who supplies such goods or services or both or securities on his own account. Therefore, the supplier of services would not be treated as “intermediary” even where the supplier of services qualifies to be “an agent/ broker or any other person” if he is involved in the supply of service on his own account.

The circular mentions that IT enabled services have not been defined under GST Act however, the same has been defined as below under sub-rule (e) of rule 10A of Income Tax Rules, 1962 pertaining to Safe Harbour rules for international transactions;

“information technology enabled services” means the following business process outsourcing services provided mainly with the assistance or use of information technology, namely;

(i) back office operations;

(ii) call centers or contact center services;

(iii) data processing and data mining;

(iv) insurance claim processing;

(v) legal databases;

(vi) creation and maintenance of medical transcription excluding medical advice;  

(vii) translation services;

(viii) payroll;

(ix) remote maintenance;

(x) revenue accounting;

(xi) support centers;

(xii) website services;

(xiii) data search integration and analysis;

(xiv) remote education excluding education content development; or

(xv) clinical database management services excluding clinical trials,

but does not include any research and development services whether or not in the nature of contract research and development services.

Implications under GST shall be as below;

• Where the supplier provides services as listed above to his clients or customers of his clients on his own account, the supplier will not be categorized as “intermediary” and hence the supplier can avail the benefits of export of services under GST subject to compliance with the criteria mentioned in section 2(6) of IGST Act.
• Where the supplier arranges or facilitates the supply of goods or back-end services or both which include support services, services provided during pre-delivery, delivery and post-delivery of supply (such as order placement and delivery and logistical support, obtaining relevant government clearances, transportation of goods, post-sales support and other services etc.), the supplier will fall under the ambit of “intermediary” under section 2(13) of IGST Act. Hence, the services provided by the supplier will be not qualify as export of service under GST.
• Where the supplier provides back-end services on his own account along with arranging or facilitating the supply of various support services as listed above, whether the supplier will fall under the ambit of “intermediary” under section 2(13) of IGST Act will depend on facts and circumstances of each case and would be determined keeping in view which set of services is the principal/ main supply.

Conclusion:

As can be seen from the aforesaid analysis that the deciding factor to qualify service provider as “intermediary” depends on the fact whether the service provider is providing services on his own or arranges/facilitates the same. If the service provider falls within the ambit of “intermediary”, he will not be eligible to claim the benefit of export of services under GST. As such there is very thin line of difference in deciding factors to determine whether the service provider is providing services for the client and customers of client on his own or arranges the same. Hence, it should be decided very judiciously after considering all the underlying facts and especially terms of the contract executed between the service provider and the overseas company.

According to the views of the author, few of the deciding factors in determining whether the service provided by the service provider on his own or as a facilitator could be;

• Whether the service provider provides exclusive service to the client or provide similar service to more than one client
• Contractual arrangements between the service provider and the client viz. whether the fees payable to the supplier of service depends on reimbursement of cost incurred for the people employed by the supplier of service or fixed in nature depending on nature of service
• Responsibility casted on the supplier of service as regards deliverance/ performance
• Whether the services are provided by the service provider independently or jointly along with the team of overseas client
• Whether the service provider is independent to take all the necessary decisions as regards the performance of service or not

Central Board of Indirect Tax and Customs clarified through circular No.108/27/2019-GST dated 18^th July, 2019 about procedures, documentation and implications under GST on transaction with respect to goods sent/taken out of India for exhibition or on consignment basis for export promotion. Key aspects of the same have been highlighted below.

1. Activity of sending/ taking the goods out of India for exhibition or on consignment basis for export promotion do not constitute “supply” except when such activity satisfy the tests laid down in Schedule I of the Act.
2. The registered person engaged in such activity needs to maintain a record in the format specified in circular as annexure.
3. The goods can be sent/taken outside India on “approval basis” shall be accompanied by delivery challan issued in accordance with rule 55 of CGST Rules, 2017 [i.e. Transportation of goods without issue of invoice]
4. Since such transactions will not constitute “supply”, execution of a bond or LUT is not required.
5. The supply would be deemed to have taken place, on the expiry of six months from the date of removal if the goods are neither sold abroad nor brought back within six month. Hence, the tax invoice is to be issued once the sale is confirmed or on expiry of six months from the date of removal in case goods are neither sold nor brought back within the stipulated time.
6. Refund claim can be preferred only once sale is confirmed and not at the time of sending of goods on consignment. In case of deemed sale where neither sale is confirmed nor goods are brought back within six months, refund claim cannot be preferred under the option of export with payment (Rule 96). However, in such cases, refund claim can be preferred under LUT option.

Safari Retreats Private Limited (“Company”) Vs Chief Commissioner of Central Goods & Service tax (Orissa High Court)

The Company is mainly carrying on business activity of constructing shopping malls for the purpose of letting out of the same. Various materials and other inputs such as Cement, Sand, Steel, Aluminum, Wires, plywood, paint, Lifts, escalators, Air-Conditioning plant, Chillers, electrical equipments, DG sets, transformers, building automation systems and services such as architectural service, legal and professional service, engineering service and other services including services of special team of international designers were availed by the Company. All these goods and services purchased/received for such construction are taxable under the GST.

The Company completed construction of one of the large shopping mall at Odisha and started letting out different units of the said shopping mall to different persons on rental basis. The activity of letting out the units of the shopping mall attracts CGST and OGST on the amount of rent received by the Company. The Company having accumulated input Credit of GST amounting to Rs 34,40,18,028/- in respect of purchases of inputs in the form of goods and services wanted to avail the credit of input tax in order to utilise the said input credits to discharge and pay GST payable on the rentals received by the Company from the tenants. The revenue authorities advised the Company to deposit the CGST and OGST collected without taking input credit in view of restrictions placed as per Section 17(5)(d). The benefit of input tax credit has been denied to the petitioner on the ground that, input tax credit shall not be available in respect of the goods and services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.

Held by Orissa High Court:

While considering the provisions of Section 17(5)(d), the narrow construction of interpretation put forward by the Department in not in line with very objective of the Act, inasmuch as the petitioner in that case has to pay huge amount without any basis. In our considered opinion, the provision of Section 17(5)(d) is to be read down and the narrow restriction as imposed, reading of the provision by the Department, is not required to be accepted, inasmuch as keeping in mind the language used in (1999) 2 SCC 361 (supra), the very purpose of the credit is to give benefit to the assessee. In that view of the matter, if the assessee is required to pay GST on the rental income arising out of the investment on which he has paid GST, it is required to have the input credit on the GST, which is required to pay under Section 17(5)(d) of the CGST Act.

Background

Section 80JJAA was introduced to provide incentives to industries to generate employment for semi-skilled and unskilled labours. It was amended by Finance Act, 2016 and again under Finance Act, 2018. We have summarized important provisions as below.

Eligibility for claiming deduction under 80JJAA

• Assessee should be subject to tax audit u/s. 44AB of Income Tax Act and has profit or gains from business.
• Business should not have been formed by splitting up or by way of reconstruction of an existing business. A business formed by re-establishment, reconstruction or revival by the assessee of the business u/s. 33B can claim this deduction.
• Business should not be acquired by way of transfer from any other person or as a result of any business reorganization.

Amount of Deduction under Section 80JJAA

One can claim a deduction of an amount equivalent to thirty per cent of additional employee cost for three assessment years. This means that in each three years entity is eligible to claim the deduction of 130% of the employee cost paid to new employees.

Additional Employee Cost is the total emoluments paid or payable to surplus employees employed during the last year.

Additional cost shall be NIL, if:

• there is no increase in the number of employees from the total number of employees employed as on the last day of the preceding year
• emoluments are paid otherwise than by an account payee cheque or account payee bank draft or bank transfer

Additional Employee is an employee who has been employed during the previous year and whose employment has the effect of increasing the total number of employees employed by the employer as on the last day of the preceding year, but does not include:

• an employee whose total emoluments are more than twenty-five thousand rupees per month
• an employee for whom the entire contribution is paid by the Government under the Employees Pension Scheme
• an employee employed for a period of less than two hundred and forty days* during the previous year
• an employee who does not participate in the recognised provident fund

*In case of the business of manufacturing of apparel or footwear or leather products, two hundred forty days is substituted with one hundred and fifty days.

It has been clarified that where an employee has not been employed for a period as mentioned above in a financial year and completes the minimum period of employment in next financial year, he/she shall be deemed to have been employed in the succeeding financial year and benefit of this section can be taken accordingly.

Examples

XYZ Pvt. Ltd. is incorporated on 30th June 2015 and engaged in the business of manufacturing. It had 250 employees as on 31st March 2018.

a) During the financial year 2018-19, 70 new employees were employed and 20 employees (old and new) resigned before 31st March 2019. Employees as on 31st March 2019 will be as follows:

Particulars	Number of Employees
a)      No. of employees as on 31st March 2019	300
b)      No. of employees as on 31st March 2018	250
c)       Increase in no. of employees for which additional employee cost will be deductible	50

b) The company employed 15 new employees during the financial year 2018-19 out of which 5 resigned. Out of the existing employees, 20 employees also resigned during the year. Increase in the number of employees will be:

Particulars	Number of Employees
a)      No. of employees as on 31st March 2019	240
b)      No. of employees as on 31st March 2018	250
c)       Increase in no. of employees for which additional employee cost will be deductible	0

c) The company employed 600 new employees during the financial year 2018-19. Also, 60 old employees had resigned during the year:

Grade	Date of Joining	No. of employees employed	No. of employees resigned	Monthly salary per employee
I	01/04/2018	100	15	Rs.28,000
II	01/05/2018	200	12	Rs.19,000
III	01/01/2019	200	16	Rs.15,000
IV	02/01/2019	100	22	Rs.7,000
	TOTAL	600	65

Total additional employees employed during the year 2018-19 are as follows:

Particulars	Number of Employees
a)      No. of employees as on 31st March 2019	725
b)      No. of employees as on 31st March 2018	250
c)       Increase in no. of employees	475

Particulars	Number of Employees
a)      No. of new employees employed during the year	600
b)      Less: No. of employees having emoluments more than Rs.25000	100
c)       Less: No. of employees not fulfilling the condition of 240 days	300
d)      Less: No. of employees resigned out of new employees who are eligible (Grade II)	12
e)      No. of additional employees for whom we can claim additional employee cost	188

Additional employee cost eligible for deduction under section 80JJAA will be Rs. 1,17,87,600. (188 employees*Rs.19,000*11 months*30%).

Compliance Requirement

An employer is required to obtain Form 10DA from a practising CA for claiming the deduction. The form should be filled before filing an income tax return for that year.

Income tax return has to be filed on or before the due date specified under section 139(1) of the Act.

Issues that require more clarity from Tax Authorities

• Does the threshold limit of days include leave period as well?
• What will happen in case of upward revision of salary in year 2 or 3?
• What is to be considered as emoluments? Whether bonus or non-monetary perquisites be considered for computation of emoluments and whether it is eligible for deduction?

High time to consider tax benefit u/s. 80JJAA

Considering the March end, this is high time to claim benefits under the Income Tax Act for the financial year 2018-19. Ascertain the tax benefit available for the financial year 2018-19 and obtain a certificate from a practising Chartered Accountant as per compliance requirement.

For more information on the subject, please get in touch with us.

CBIC has clarified various doubts as regards treatment of various sales promotional schemes under GST vide circular 92/11/2019 dated 7th March 2019 to ensure uniform implementation of the law. Summary of the said circular is as below.

Free Samples & Gift

It is clarified that samples which are supplied free of cost without any consideration do not qualify as “supply” under GST and hence will not be subject to tax except where the transactions fall within the ambit of schedule I of the Act specifying transactions which are subject to tax when carried out without consideration. As per clause (h) of section 17(5), the input tax credit shall not be available to the supplier on inputs, input services and capital goods to the extent they are used in relation to the gifts and free samples. However, if the said transaction is subject to tax under schedule I of the Act, the input tax credit will be available. 

Discount offered linked to volume of purchase

Sometimes a supplier offers a discount in proportion to quantity purchased by the customers e.g. 10% discount on purchase above Rs.5000/-, 15% discount on purchase above Rs.10,000/- and so on. Such discounts are shown on the face of the invoice. Some suppliers offer periodic/ year-end discounts to stockists/ distributors based on quantity purchased by them during the period/ year. such discounts are established in terms of the agreement entered into at the time of supply or even before that. In such cases, discounts are not shown on the face of invoice since such discounts are decided later based on volume supplied. Such discounts are passed on by the suppliers through credit notes

Buy one and Get one free

As stated above, goods and services which are supplied free of cost are not subject to tax (except in case of activities covered under schedule I of the Act). In case of buy one get one free offer, it is not free to supply but two or more supplies are supplied at a single price charged for the entire supply. Taxability of such supply will be dependent upon as to whether the supply is a composite supply or mixed supply and the rate of taxation will be determined as per section 8 of the Act. It is pertinent to note that as per section 8, for composite supply, tax rate applicable on item constituting as principal supply will be applicable on the full value of supply offered as part of buy one get one free. In case of mixed supply consisting of two or more supplies offered as a package for a single price (without bifurcation), tax rate applicable to the product/service with the highest rate of tax will be applied to the entire value of supply. It is also clarified that ITC shall be available to the supplier for the inputs, input services and capital goods used in relation to supply of goods or services or both as part of such offers.  

It is clarified that discounts offered by the suppliers to customers as above shall be excluded to determine the value of supply provided they satisfy the parameters laid down in sub-section (3) of section 15 of the said Act i.e. if the discount is offered after the supply, such discount is established in terms of agreement entered into at or before the time of such supply and specifically linked to relevant invoices and input tax credit attributable to such discount on the basis of document issued by the supplier has been reversed by the recipient.

Secondary Discount

These are the discounts which are not known at the time of supply or are offered after the supply is already over. It has been clarified that where condition laid down in clause (b) of section 15(3) with regards the reversal of input tax credit by the recipient of the supply is not fulfilled, credit note u/s. 34(1) can not be issued to give the effect of reduction in tax amount due to the discount offered subsequently. Hence, it is very important to note that credit note cannot be issued to reduce the taxable value of supply under GST unless the recipient of supply does a reversal of the credit attributable to the discount value offered by the supplier subsequent to supply of goods and services. Unilateral act of reducing the value of supply by the supplier through the issue of credit note without verification of the fact that recipient of the supply did a reversal of the input tax credit will result into the recovery of tax on the part of the supplier. 

Highlights of notifications issued by CBIC dated 7th March 2019 are as below.

Increase in turnover threshold limit for dealers under composition scheme

Threshold limit of aggregate turnover for composition scheme dealers u/s.10 of CGST Act has been enhanced to Rs. 1.5 crore during previous financial year. This will be applicable effective from 1st April, 2019. For 7 notified states (Arunachal Pradesh, Manipur, Mizoram, Meghalaya, Nagaland, Sikkim, Tripura, Uttrakhand), threshold limit shall be Rs.75 lacs. Notification no. 14/2019 – Central Tax supersedes the earlier notification 08/2017 – Central Tax dated 27-06-2017.

Due date for filling 3B return

Due date for filling 3B return for the months of April to June 2019 has been prescribed as 20th day from the end of respective month. Every registered person furnishing the return in FORM GSTR-3B of the said rules shall, subject to the provisions of section 49 of the said Act, discharge his liability towards tax, interest, penalty, fees or any other amount payable under the said Act by debiting the electronic cash ledger or electronic credit ledger, as the case may be. Notification 13/2019 – Central Tax.

Due date for filling GSTR-1 return (monthly)

Due date for filling GSTR-1 return for the months of April to June 2019 has been prescribed as 11th day from the end of respective month for registered persons having aggregate turnover of more than 1.5 crore rupees in the preceding financial year or the current financial year. Time limit for furnishing details of inward supplies as per section 38(2) and return for discharge of tax liability 39(1) of CGST Act will be notified later depending on smooth functioning of new mechanism of return filling which is proposed to be made operational effective from July 2019. Notification 12/2019 Central Tax.

Due date for filling GSTR-1 return (quarterly)

Due date for filling GSTR-1 return for the months of April to June 2019 has been prescribed as 31st July, 2019 for registered persons having aggregate turnover of up to 1.5 crore rupees in the preceding financial year or the current financial year. Time limit for furnishing details of inward supplies as per section 38(2) and return for discharge of tax liability 39(1) of CGST Act will be notified later depending on smooth functioning of new mechanism of return filling which is proposed to be made operational effective from July 2019. Notification 11/2019 Central Tax.

Threshold limit for mandatory registration increased to Rs.40 lacs

Any person, who is engaged in exclusive supply of goods (within state) and whose aggregate turnover in the financial year does not exceed forty lakh rupees are not required to get registered under GST. This will be made effective from 1st April, 2019. However, this will not be applicable to following class of persons. Notification 10/2019 – Central Tax.

• Persons required to get registered under act compulsorily irrespective of turnover u/s.24 of CGST Act including persons engaged in inter-state supply of goods
• Persons engaged in supply of ice cream and other edible ice whether or not containing cocoa, pan masala, tobacco and manufactured tobacco substitutes
• Persons engaged in making intra-State supplies in the States of Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Puducherry, Sikkim, Telangana, Tripura, Uttarakhand
• Persons opt for voluntary registration u/s. 25(3) of CGST Act
• Previously, notification 5/2017 was issued under section 23(2) which exempted those who are entirely supplying exempted goods or services but are liable to registration only due to their liability to tax under 9(3). But now, this exemption appears to override section 22. It is to be noted that where aggregate turnover includes income by way of interest or discount on loans and advances the benefit of this exemption notification cannot be taken. ‘Exclusively engaged in supply of goods’ is a condition of the notification and section 22 can be invoked if this condition is violated on any day in the year and tax from Rs.20 lacs upto the date when this condition stands breached may become due without any availability of input tax credit.

  Composition scheme for supplier of services

Composition scheme has been notified for the service providers having Lacsturnover in the preceding year up to Rs.50 lakh. First supplies of goods or services or both the aggregate turnover of fifty lakh rupees made on or after the 1^st day of April in any financial year, by a registered person can avail benefit of composition scheme subject to following conditions. Tax rate applicable in case of taxable supplies by the composite dealer will be 6% (CGST &  SGST @ 3% each). This will be made effective from 1st April 2019. Notification 2/2019 Central Tax

• Supplies are made by registered person having turnover up to Rs.50 lakh during previous financial year and not eligible to pay tax as composite dealer u/s.10
• Registered person was not engaged in making any supply which is not leviable to tax
• Registered person is not engaged in making inter-state supply
• Registered person is neither a casual taxable person nor a non-resident taxable person
• Tax rate applicable for all supplies will be 6% notwithstanding different tax rates prescribed under section 9 or 11 of CGST Act
• Registered person is not engaged in making any supply through an electronic commerce operator who is required to collect tax at source under section 52
• Registered persons engaged in supply of ice cream and other edible ice whether or not containing cocoa, pan masala, tobacco and manufactured tobacco substitutes
• Where more than one registered persons are having the same Permanent Account Number, union territory tax on supplies by all such registered persons is paid @6%
• The registered person shall not collect any tax from the recipient on supplies made by him nor shall he be entitled to any credit of input tax.
• Other conditions as applicable to casual taxable person engaged in supply of goods will also be applicable to supplier of service viz. the supplier will not issue tax invoice, declaration on bill of supply etc.
• The registered person under composition scheme shall pay tax on all inward supplies for which he is liable to pay tax under Reverse Charge Mechanism as per section 9(3) and 9(4) of CGST Act. So composition dealer is also liable to pay tax under reverse charge mechanism as applicable to regular category of tax payer.

It has also been clarified as part of explanation that supplies from the first day of financial year (i.e. 1st April, 2019) will be considered for the purpose of eligibility of the person to register under composition scheme. But for the purpose of determination of tax payable under this notification shall not include the supplies from the first day of April of a financial year to the date from which he becomes liable for registration under the Act.

Background

The Supreme Court verdict dated 28 February 2019 in the case of Regional Provident Fund Commissioner West Bengal v. Vivekananda Vidayamandir and others reiterated the salutary principles of ascertaining components of salary to be considered for the calculation of provident fund (PF) contribution by the employer and deduction from employees’ salary. This can be considered as landmark judgement about applicability of PF considering that it addresses multiple civil petitions pending before the apex court on subject matter and takes into consider all preceding pronouncements on the subject.

Facts of the Case

Multiple appeals before the Supreme Court raised a common question of law whether allowances such as travel allowance, canteen allowance, education allowance, special allowance, conveyance allowance, management allowance etc. paid by an establishment to the employees would fall within the definition of “basic wages” for the purpose of contribution under EPF Act.

Provisions under EPF Act

Basic wage, under section 2(b) of EPF Act has been defined as all emoluments paid in cash to an employee in accordance with the terms of his contract of employment. But it carves out certain exceptions which would not fall within the definition of basic wage and which includes dearness allowance apart from other allowances mentioned therein (i.e. the cash value of food concession, house ­rent allowance, overtime allowance, bonus, commission or any other similar allowance payable to the employee in respect of his employment or of work done in such employment). But this exclusion of dearness allowance finds inclusion in Sec. 6 of EPF Act. The test adopted to determine whether particular allowance to be excluded from basic wage is that the payment under the scheme must have a direct access and linkage to the payment of such special allowance as not being common to all. The crucial test is one of universality.

Arguments before the Hon’ble Court

It was argued that the special allowance paid to the teaching and non­-teaching staff of the respondent school was nothing but camouflaged dearness allowance to reduce the contribution towards EPF. It is to be considered for the purpose of calculating contribution under EPF. The allowance shall fall within the term dearness allowance, irrespective of the nomenclature, since it was being paid to all employees on account of rise in the cost of living.

Ratio/Key Takeaways from the Ruling of Hon’ble Court

• Basic wages which vary from individual to individual according to their efficiency and diligence will stand excluded for the purpose of computation of contribution towards EPF.  In other words, the allowances in question can be excluded only if; it is variable or linked to any incentive for production resulting in greater output by an employee.
• Test to be adopted to determine if any payment is to be excluded is that the payment under the scheme must have direct access and linkage to the payment of such special allowance as not being common to all. The crucial test is one of universality.  Where the wage is universally, necessarily and ordinarily paid to all across the board such emoluments are to be considered for the purpose of contribution towards EPF.
• Where the payment is specially paid to those who avail of the opportunity is not to be considered. Eg. it was held that overtime allowance, though it is generally in force in all concerns is not earned by all employees of a concern. It is also earned in accordance with the terms of the contract of employment but because it may not be earned by all employees of a concern, it is to be excluded. In other words, the amount can be excluded only if it is shown that the workman concerned had become eligible to get this extra amount beyond the normal work which he was otherwise required to put in.

Conclusion

It can be concluded that special allowance or any other allowance, by whatever name called, normally paid by an establishment shall be taken into consideration for the purpose of computation of contribution towards EPF unless; 

• Allowances are variable in nature; or
• Allowances which are linked to any incentive for production resulting in greater output by an employee; or
• Allowances which are not paid across the board to all employees in a particular category; or
• Allowance which are paid especially to those who avail the opportunity.

This is an important ruling which shall have significant implications for establishment covered under EPF act. The establishments need to revisit and salary and compensation structure in view of aforesaid judgement. It is pertinent to note that employees drawing salary/wages of Rs.15,000 per month are subject to EPF.