Frequent Dept. Audit Observations & Responses

Introduction:

In the last few months, the number of departmental audits under GST has skyrocketed. 50,000 notices have been raised after scrutinising 1,00,000 taxpayers for the period ranging between FY 2017 to 2021. This is one more broken promise of trusting the taxpayer with promise of audits %age coming down. This has increased!! The compliant industries need to represent on basis of promissory estoppel.

We of course expected this earlier, a useful and brief article was written and published in the KSCAA journal of May 2022 titled “GST Notices & Possible Solutions” (link - https://kscaa.com/news-bulletin-may-2022/ ). In this article we will speak about specific and repeated issues being raised by the department and possible responses/positions taxpayers could undertake.

Some other common issues raised which can be legally disputed:

1. RCM demand on GTO services  - Specifically exempt vide NN 12/2017-CT(R). Important document – consignment note.
2. General penalty for 9C late filing – Late fee u/s 47(2) not being disputed, although penalty u/s 125 being considered incorrectly. Waiver can be requested based on s.126.
3. Disallowing credits on employee related expenses – Other than specifically ineligible ITC u/s17(5) other eligible credits being disputed incorrectly such as accommodation, travel expenses,  etc..
4. Considering the target-based as service provided by the recipient - Must first satisfy ‘supply’ definition. Schedule II of CGST Act is not applicable as supply cannot be established. Discounts in any form, must not be construed as an income liable to GST. An in-depth research paper written by Hiregange team on ‘Discounts’ -https://www.linkedin.com/feed/update/urn:li:activity:7007578653689618432
5. Denial of ITC availed where such places are not added as additional place of business - Procedural lapse cannot create such liability. Various ST regime cases can be cited as basis under GST.
6. RCM on payment to the Government services – Whether the service provider is falling under 'CG/SG/LA' must first be verified. Various exemptions available under NN 12/2017-CT(R) must first be verified. Other grounds of dispute – whether there is a supply, i.e. can quid pro quo be established.

Reply on Equity held in Subsidiary:

Dept Observation: The activity of holding the equity capital by a Holding Company in a subsidiary company to gain control over the affairs of the subsidiary Company is treated as a supply of services.

Our Comment:

• Equity shares fall under the terminology of securities.
• Securities is specifically excluded from the definition of ‘goods’ and ‘services’ under GST
• The contention that it is a deemed supply under Schedule I also would not hold good as section 7 specifically requires there to be a ‘supply of goods or services or both’.
• Companies Act considers security as movable property (in this case goods) although in GST classification considered is HSN 997171 – Services of holding equity of subsidiary companies. GST is being demanded under RCM which can be disputed that the following service is not specifically listed in the notifications.
• Assuming a 5% of total value as Valuation under GST is inappropriate. As there is no open market value against the same, Value of Supply would fail eventually leading to a lack of ‘supply under GST’.
• Article 265 of the Constitution does not allow the State to make unlawful levy or collecting tax unlawfully.

Appeal on variance b/w GSTR 2A Vs GSTR 3B (July 17 to Sep 2019):

Dept Observation: The ITC claimed in Form GSTR-3B for the period MMM-YYYY to MMM-YYYY is more than ITC in GSTR-2A

Our Comment:

• Dispute the values disclosed in GSTR 2A as per notice and GST portal. Proposed merely based on surmises and assumption and reconciliation from source of an external data, which is not sustainable as per the decision of the Supreme Court in the case of Oudh Sugar Mills v. UOI, 1978 (2) ELT 172 (SC). (Generally, variance detected).
• Dispute applicability of Rule 36(4) itself, which was made effective from 9^th October 2019 prospectively.
• Dispute applicability of Rule without an authorizing Section in the GST Act. Section 16(2)(aa) was introduced w.e.f 1^st January 2022 prospectively.
• Judgements passed by various High Courts stating that a bonafide taxpayer could not be penalized in any way for a default on part of the supplier to remit tax
• Emphasize of availability of valid tax invoices against eligible ITC and proof of payments made to such vendors.
• Circular 183/2022 provides for means of proving the validity of ITC by obtaining declarations and CA certification for certain value of transactions for FY 2017-18 & 2018-19. Although, this Circular can be tested as it does not have a clear basis in the GST Act/Rules.

Appeal on variance b/w GSTR 2A Vs GSTR 3B (Oct 2019 to Dec 2021):

Dept Observation: The ITC claimed in Form GSTR-3B for the period MMM-YYYY to MMM-YYYY is more than ITC in GSTR-2A

Our Comment:

• Dispute the values disclosed in GSTR 2A as per notice and GST portal. Proposed merely based on surmises and assumption and reconciliation from source of an external data, which is not sustainable as per the decision of the Supreme Court in the case of Oudh Sugar Mills v. UOI, 1978 (2) ELT 172 (SC). (Generally, variance detected).
• Emphasize adherence to ITC claimed being within ad-hoc limits allowed. (20%/ 10%/ 5%) prescribed as per Rule 36(4) and availability of valid tax invoices leading to eligible input tax credit.
• Dispute applicability of Rule without an authorizing Section in the GST Act. Section 16(2)(aa) was introduced w.e.f 1^st January 2022 prospectively.
• Maharashtra State Circular [being a central law it is binding on all Dept.’s refer Steel Authority of India Limited vs CC 2000 (115) ELT (SC)] on obtaining CA certification of the supplier certifying the output transactions and tax paid thereon complies with the provision of section 16. One may argue that it cannot be said to be applicable and is also not sound as there are no provisions in the law supporting such clarification from the government.

Grounds for ITC claimed under wrong tax head:

Dept Observation: IGST ITC as disclosed by supplier, incorrectly claimed as CGST & SGST by recipient

Our Comment:

• Rule 92(1A) allows for adjustment of pending demand against eligible refund application.
• Section 77 although pertains to outward supply, similar logic if applied along with above Rule, there would not be a need to follow SCN process.
• Being revenue neutral and will only result in unnecessary utilization of resources of the revenue & yield nothing in return.
• Without enabling IGST credit before demanding tax payments under CGST+SGST would tantamount to double taxation without authority of law. (Article 265 relied upon)
• As there is no unjust enrichment, a demand of this nature would affect the fundamental right to do trade, commerce, or business as per Article 19(1)(g) of the Constitution of India.

Reply against tax demanded under RCM from employee directors:

Dept Observation: CBIC’s Circular No. 140/10/2020 bases RCM liability against those TDS payments made u/s 194J of Income Tax Act, considering it to be a supply of service subject to GST

Our Comment:

• Non-applicability of GST on remuneration paid to whole-time/executive directors as they are employees of the entity as provided in form DIR-12 filed with the MCA. They are not non-executive directors. Sch III clause 1 specifically considers such activity as not a supply of service.
• Non-executive directors not performing in the capacity of a ‘director’ would not be liable to RCM under GST
• Amrish Rameshchandra Shah Vs. UOI 2021-TIOL-583-HC-MUM-ST wherein the Hon’ble HC stayed the show cause notice demanding service tax based on ITR data. The basis for proposing the demand on third party data is not proper and is liable to be set aside
• Alternate plea - in case of Jet airways India Ltd vs Commissioner of Service Tax, Mumbai – 2016 (44) S.T.R.465 (Tri-Mumbai), wherein the entire demand of service tax was set aside on the grounds of revenue neutrality, including the interest and penalty. The said judgement has been affirmed by Hon’ble Supreme Court [2017(7) GSTL J35 (Supreme Court)].

Reply against tax demanded under RCM u/S 9(4):

Dept Observation: RCM unpaid for July to October 2017 u/s 9(4)

Our Comment:

• Section 9(4) was exempted vide Notification 38/2017-CT(Rate). Therefore, the omission of the said exemption, mentioned in the original notification, has been deleted by the amending Notification No. 38/2017, dated 13.10.2017 and is therefore effective from the date of original notification dated 28.6.2017.
• Hon’ble Supreme Court in the case of Vatika Township (2014-TIOL-78-SC-IT-CB) wherein it was held that any beneficial amendment to the statute may be given benefit retrospectively.
• Alternate plea – As ITC would be eligible upon RCM payment, the observations is revenue neutral. Accordingly plead to drop such point.

Some common terminologies that can be considered in replies:

• Specifically deny the allegations and substantiate your claim
• Notice issued does not contain DIN and thereby the notice is not valid.
• Non-speaking order - Jay Jay Mills (India) Pvt Ltd Vs State Tax Officer 2020 (41) GSTL 304(Mad), wherein it was held that the statutory authority is bound to consider the claim made and pass a reasoned order.
• Where pre-consultation is mandated as per CBIC master circular and not followed, this can be highlighted. Reliance can be placed on Gujarat High Court Decision in case of L and T Hydrocarbon Engineering Ltd (TS-146-HC-2022 (GUJ)-EXC)

We hope this article having specific issues would help the taxpayers as a whole and reduce the quantum and issues converting into a show cause notice.

Conclusion

The various issues highlighted above display various methods by which the department officials are unclear of tax laws, and some take it to the level of harassing genuine taxpayers. To ensure this trend does not back “rent seeking”  the criterion for selection need necessarily to have reasonable reason to take up audit of any assessee.

Taxpayers unclear of erstwhile laws and jurisprudence may approach experts for their services to avoid high value SCNs and amounts being blocked through pre-deposits for years to come. Those professionals who understood the basics, may choose to get in depth knowledge to be able to provide valuable – well paid litigation services in GST.

Suggestions or feedback can  be sent to [email protected] or [email protected]

This article (partially amended thereafter) was published in the KSCAA journal of January 2023.