significant rulings under gst: story so far and what lies ... · significant rulings under gst:...

Significant rulings under GST: Story so far and what lies ahead The Dbriefs India Spotlight seriesSaloni Roy / Monika Arora12 September 2019

• Overview

• Anti-profiteering: significant rulings

• Advance rulings

• Questions and answers

Agenda

© 2019. For information, contact Deloitte Touche Tohmatsu Limited. 2

© 2019. For information, contact Deloitte Touche Tohmatsu Limited.

Overview

3

Overview

Anti-profiteering

Inception MissionLegal

frameworkPowers of NAA

• Any reduction in rate of tax on any supply or the benefit of Input Tax Credit (ITC) to be passed on to the recipient by way of commensurate reduction in prices

• National Anti-profiteering Authority (NAA) constituted to keep a check on profiteering

Tenure of NAA

• Check unfair profit making activities by the business community pursuant to reduction in tax rate or availability of higher input tax credit

• Anti-profiteering implemented in India’s indirect tax framework for the first timewith GST implementation

• Modeled on mechanism adopted in countries like Malaysia and Australia

• Reduction in prices

• Return amount of benefit not passed on with interest

• Penalty

• Cancellation of registration

• Provisions to remain in force for 4 years from the date of the Chairman of the NAA entering office

• (Original tenure –2 years)


Overview

Advance rulings

• Mechanism to provide certainty and clarification to taxpayers for tax related matters pertaining to current and potential transactions involving supply of goods and services

• Concept of advance ruling under GST expanded to cover not just proposed but also existing transactions undertaken by taxpayers

• Scope restricted to specified issues prescribed in the law

• Advance rulings binding on the applicant and relevant adjudicating authority

• Classification of goods/services

• Applicability of a notification

• Determination of time/value of supply

• Admissibility of input tax credit

• Determination of tax liability

• Requirement of registration

• Qualification of transaction as a supply

• Authorities for Advance Ruling (AAR) and Appellate Authorities for Advance Ruling (AAAR) constituted under respective state GST acts

• Rulings applicable within the jurisdiction of concerned state/union territory (UT)

• Orders passed by AAR may be appealed before respective AAAR

• National Appellate Authority for Advance Rulings (NAAAR) to be constituted to hear appeals against conflicting rulings pronounced on the same issue by AAARs of multiple states/UTs in case of multiple GST registrations

Advance ruling – snapshot


Matters/questions Mechanism Appellate

Statistics

Anti profiteering and advance ruling

74 anti-profiteering rulings pronounced by the NAA up to 5 July 2019

551 advance rulings obtained under GST till 31 May 2019 out of which 79 have been appealed against before appellate authorities



Anti-profiteering

Significant rulings

7

Principles emanating from the ruling

• Benefit may be passed on by way of offering extra grammage

• Credit carried forward in TRAN – 2 under GST regime has to be passed on to the customers

• Cost of packing material write-offs (on account of change in MRP) cannot be allowed as deduction

• Reduction of area based refunds which are proportionate to output taxes not allowed as deduction

• Obligation to pass on the amount of profiteering by the supplier is limited to own supplies

• Benefit given in excess of rate reduction, cannot be claimed as a deduction

• Additional benefit given to one customer cannot be offset against another customer who is denied benefit

• Facts – NAA held the company guilty of having increased base prices post reduction of GST rates on various products from 28% to 18%

• Amount profiteered –INR 534.89 Crores

• Status – stay by the Delhi High Court pending detailed examination. Constitutional validity of anti-profiteering provisions questioned by the company for absence of well defined framework to compute profiteered amount

Hindustan Unilever Ltd.

Anti-profiteering

Significant rulings



• Profiteering amount to be computed on product/SKU level and not entity level, netting off not allowed

• Scope of investigation may be extended to products not mentioned in the complaint

• Price increase in excess of denial of ITC, will be considered as profiteering

• Argument of price increase due to inflation/general policy untenable, on account of the price increase coinciding with rate reduction

• For computing benefits, tax payers to consider actual sales prices (i.e., price after reducing discounts) and not list price/menu price

• Where the pricing strategy of an entity is same across different GST registrations, NAA may not individually compute the benefits

• Facts – company held guilty of increasing base prices of products after reduction in GST rate from 18% to 5%

• Amount profiteered –INR 41.43 Crores

• Status – stay by the Delhi High Court pending detailed examination. Constitutional validity of anti-profiteering provisions questioned on the ground of doctrine of vagueness

Jubilant Food Works Ltd.

Anti-profiteering

Significant rulings (Cont’d)



• Scope of Section 171 is not only restricted to cases where there is a reduction in GST rate but also to cases where there is a rate reduction or increase in quantum of ITC in comparison to the pre-GST regime

• Taxes charged in the supply chain beyond the sale made by the company cannot be included for computing the effective rate of tax in the pre-GST regime in the hands of the manufacturer

• Mere reduction in MRP due to change in rate of tax from 28% to 18%, when base price is increased does not amount to passing of benefit to customers

• Past non-increase in price, cannot be a justified reason to claim allowance in computation of profiteering

• Facts – company held guilty of increasing base prices of products post implementation of GST and post further rationalization of GST rates

• Amount profiteered –INR 96.59 lakhs

• Status – stay by the Delhi High Court pending detailed examination. Constitutional validity of anti-profiteering provisions questioned. Powers of the NAA to extend scope of investigation to products not covered by the complaint also questioned by the Petitioner

Abbott Healthcare Pvt. Ltd.

Anti-profiteering




• The retailer is obligated to pass on the benefits even if, the manufacturer/vendor has not reduced the MRP

• Discount offered on the product as a regular business practice, not to be considered in lieu of tax reduction

• Benefit has to be mandatorily passed on each SKU and not on selective SKUs – law of averages cannot be applied

• Margins cannot be topped up/operational costs can’t be set-off from the tax reduction which is legally required to be passed on to the consumers

• DGAP not required to calculate amounts, the registered person has to undertake all the mathematical calculations to arrive at the profiteered amount

• Facts – base price of product increased after GST rate reduction from 28% to 18% thereby denying passing of benefit to consumers

• Amount profiteered –INR 15,861

Lifestyle International Pvt. Ltd.

Anti-profiteering



NAA orders – emerging principles and conflicting positions

Heavy onus on supplier to prove bonafide’ vis-à-vis the complainant to establish case of profiteering

Increase in base price coinciding with rate reduction, considered as profiteering

1

3

Distributor/retailer responsible for passing benefits regardless of manufacturer’s inability to alter MRP

4

5

Actual sale price (not MRP/ list price) relevant for computing benefits and not list/menu price

6

1

2

Whether additional quantity/grammage is allowed in lieu of price reduction

3

Whether distributors/retailers liable for

profiteering if there is increase in base price or no change in MRP by manufacturer

4

Time period and methodology to test profiteering

and periodicity to pass benefit – inconsistent5

Emerging principles Conflicting positions taken

Increase in base price to the extent of denial of ITC, may not be seen as profiteering

Onus is on supplier to substantiate numbers

Impact of non-GST factors/commercial factors feeding into price to be considered or

not?

Computation of profiteering using pre-discount price or post-discount price

Benefits to be passed at SKU level2


Anti-profiteering

What lies ahead

Need for proactive action by businesses to voluntarily assess and deposit profiteered amounts

Increase in investigations

Enhanced scope Higher costs Inevitable litigation

Legislative amendments

• NAA and DGAP likely to extend scope of investigation to goods or services other than those being complained/ investigated

• Apart from profiteered amount, additional cost of Penalties to the extent of 10% of profiteered amount may need to be borne

• Increase in number of writs with High Courts as no appellate procedure under GST to appeal against order of NAA

• Factual aspects may not be decided?

• Legislative amendments can be expected to cure legal infirmities and to sustain anti-profiteering provisions over a longer period

• Wide group of people who can complain including “tax officers”

• Newer mechanisms to detect profiteering –mock purchases, site visits, etc.


Polling question 1

Have you conducted an anti-profiteering study?

• Yes

• No



Advance rulings

15

Facts

• The company operates a chain of hospitals operating across six states. Separate GST registrations have been obtained in relevant states

• Employees at the corporate office (CO) in Karnataka carry out activities such as accounting, administration, IT maintenance etc. pertaining to units located in other states

Issues

• Whether centralized activities performed by employees at the CO for units located in other states shall be treated as a supply in terms of the CGST Act

M/s Columbia Asia Hospitals Private Limited – Karnataka AAR

Advance rulings


Observations and ruling

• CO and units in other states covered in the definition of related persons. Any supply of goods and services from the CO to other units shall amount to a supply, even without consideration

• Employees employed by the CO are providing services to the CO and hence there is employee-employer relationship only to the extent of the CO. Other offices are distinct persons under the GST regime and employees have no employer-employee relationship with other offices even if they belong to the same legal entity

• Services by employees at the CO, in so far as they benefit the other registered offices, cannot be termed as “employer-employee relationship” and hence, shall be treated as taxable supplies from the CO to the other offices in terms of the CGST Act

• The above ruling of the AAR has been upheld by the Karnataka AAAR holding that the CO is providing a service to other distinct units by way of carrying out activities such as accounting, administrative work etc. Further, since the activities have been carried out using the services of employees working at the CO and the same benefit all other units, such activities are to be treated as taxable supplies in terms of the CGST Act

• A circular to clarify levy of GST on services provided by an office of an organization in one state to another is expected to be issued soon

Further developments

M/s Columbia Asia Hospitals Private Limited – Karnataka AAR (Cont’d)

Advance rulings


Facts

• The applicant is engaged in providing back-office support services to the overseas client. The said services include

–Creation of documentation (invoices, purchase/sale orders) to be exchanged between the client and its customers/suppliers

–Processing payments for the client

–Co-ordination with client's suppliers/customers for execution of purchase/sale contracts

–Liaising with suppliers/customers on behalf of the client

–Arranging transportation of goods between buyers/suppliers

–Payroll processing etc.

Issues

• Whether the above activities qualify as “export of services” in terms of theIGST Act

Vservglobal Private Limited – Maharashtra AAR

Advance rulings


Observations and ruling

• Activities performed by the applicant for the overseas client are in the nature of facilitation of supply of goods/services between the overseas client and its customers/suppliers located in India

• Therefore, the applicant falls in the definition of “intermediary” as laid down in the IGST Act. Further, the said services do not qualify as export of services and are taxable under GST

• The above ruling of the AAR has been upheld by the Maharashtra AAAR on an appeal filed by the applicant. It has been further held by the AAAR that the bundle of services comprising back-office support, administrative and accounting services, liaising services, co-ordination of transportation and shipments etc., qualify as composite supply of services by the applicant, with intermediary services being the principal supply. All other services such as accounting, back-office support etc., are only ancillary to the intermediary services

• The company has challenged the order of the AAAR before the Karnataka High Court contending that the same is contrary to the provisions of the GST law. The matter is currently sub-judice


Vservglobal Private Limited – Maharashtra AAR (Cont’d)

Advance rulings



Case Activities Treatment

I • Supplier supplies ITeSservices on own account

• Supplier shall not fall under the ambit of intermediary, even where ITeS services are supplied to customers of the overseas client

II • Supplier of back-end services arranges/facilitates supply between the overseas client and their customers

• Support services during pre-delivery, delivery, and post-delivery of supply (order placement, delivery and logistical support, transportation of goods, post-sale support, etc.) shall qualify as intermediary services

III • Supplier supplies ITeSservices on own account along with arranging/facilitating various support services

• Treatment to depend on which services qualify as the principal/main supply

• The CBIC has recently issued a circular discussing the scenarios where IT enabled (ITeS) services may be offered by providers in India for and on behalf of overseas clients

Vservglobal Private Limited – Maharashtra AAR (Cont’d)

Advance rulings


Intermediary

Education guide

• Defines the term “intermediary”, lays down 3 factors – nature and value; separation of value; identity and title, for determination of intermediary transaction

AAR (ST) GoDaddy

• GoDaddy India was providing various marketing related activities to GoDaddy US, on its own account. AAR ruled that it is not in the nature of intermediary services

AAR- GSTVSERVEGL-OBAL

• Vservglobal India was providing back office administrative and accounting service to Vidhuka Overseas. AAR ruled out that the services are in nature of intermediary

AAR-GSTMayank

Jain

• Mayank Jain was providing two kinds of service to consultant manager – one of soliciting potential investors in India; and another of handholding services. Consideration of applicant was dependent upon successful investment by customer. AAR ruled that the services are in nature of intermediary

AAAR-GST

Asahi Kasei

• Asahi Kasei India have 2 agreements with Asahi Japan, i.e., one for providing services like accounting, research, etc., and another for marketing services. AAR MH ruled that they are not in nature of intermediary. But revenue filed appeal, and AAAR ruled that these are in nature of mixed supplies but determination of POS is out of scope of AAR

Law

+veruling

-veruling

Openruling

-veruling

Circular 107/26/2019 -GST

• Clarifies taxability in case supply of ITeS services in 3 scenarios – 1) supply of service on own account (not an intermediary); 2) is supply of facilitation service (intermediary), and 3) mix of both services

Law


Challenges

Advance ruling

Pro-revenue rulings

• Majority of rulings pronounced by AARs/AAARs pro-revenue on account of the constitution consisting of only revenue officials

Contradictory rulings

• Divergent views of multiple AARs in case of similar issues thereby increasing ambiguity

Lack of appeal mechanism

• No mechanism to appeal against rulings pronounced by the AAARs in the ordinary course. Proposed appellate forum (NAAAR) only to hear appeals against conflicting rulings pronounced by AAARs of multiple States pertaining to multiple GST registrations under the same PAN

Limited scope

• AARs not empowered to rule on matters outside the purview of the CGST Act such as place of supply, thereby creating scope for more litigation and uncertainty


Polling question 2

Are you cross charging the payroll and other head office cost to branches?

• Only head office cost

• Only payroll cost

• Both payroll and head office cost

• No



Questions and answers

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Contact information

Monika AroraTax PartnerDeloitte Delhi, [email protected]


Saloni RoySenior DirectorDeloitte Delhi, [email protected]


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