Indirect Taxes: - “A Fortnightly review” by Sinewave Computer Services Private Limited
(1st Nov 2019 - 15th Nov 2019)
From the Legal Desk
(Compiled by CA Aumkar S Gadgil and Shri Surendra G Gadgil)
Ref :-Circular No. 118/37/2019-GST. DT the 11th October 2019 F. No. 354/136/2019-TRU
In Brief: -
When testing software in India on the hardware supplied by oversea customer in a composite supply will be export of service, even though section 13 (3) (a) of the IGST Act 2017 provides that in such a case the location of supplier of service will be the place of supply (India)
A composite supply of software/design services related to Electronics Semi-conductor and Design Manufacturing (ESDM) industry and testing the same by using the sample hardware kits provided by the service recipient located in non-taxable territory (outside India) is Export of Service even though the testing is done in India on the hardware kits supplied by recipient and is a part of composite supply and will not disqualify as exports under provision of Section 13 (3 ) (a) of IGST Act 2017. The circular states further:
1. It is stated that several companies that are part of the growing Electronics Semiconductor and Design Manufacturing (ESDM) industry in India are engaged in the process of developing software and designing integrated circuits electronically for customers located overseas. The client/customer electronically provides Indian development and design companies with design requirements and Intellectual Property blocks (“IP blocks”, reusable units of software logic and design layouts that can be combined to form newer designs). Based on these, the Indian company digitally integrates the various IP blocks to develop the software and the silicon or hardware design. These designs are communicated abroad (in industry standard electronic formats) either to the customer or (on behest of the customer) to a manufacturing facility for the manufacture of hardware based on such designs.
2.1 In addition, the software developed is also integrated upon or customized to this hardware. On some occasions, samples of such prototype hardware are then provided back to the Indian development and design companies t*o test and validate the software and design that has been developed to ensure that it is error free.
2.2 The trade has requested clarification on whether provision of hardware prototypes and samples and testing thereon lends these services the character of performance-based services in respect of “goods required to be made physically available by the recipient to the provider”.
3. The provisions relating to determination of place of supply as contained in the Integrated Goods & Services Tax Act, 2017 (hereinafter referred to as “the IGST Act”) have been examined. In order to ensure uniformity in the implementation of the provisions of the law, the Board, in exercise of its powers conferred by sub-section (1) of section 168 of the Central Goods & Services Tax Act, 2017 (hereinafter referred to as “the CGST Act”) clarifies the same as below.
4. In contracts where service provider is involved in a composite supply of software development and design for integrated circuits electronically, testing of software on sample prototype hardware is often an ancillary supply, whereas, chip design/software development is the principal supply of the service provider. The service provider is not involved in software testing alone as a separate service. The testing of software/design is aimed at improving the quality of software/design and is an ancillary activity. The entire activity needs to be viewed as one supply and accordingly treated for the purposes of taxation.
Artificial vivisection of the contract of a composite supply is not provided in law. These cases are fact based and each case should be examined for the nature of supply contracted.
4.1 Therefore, it is clarified that the place of supply of software/design by supplier located in taxable territory to service recipient located in non-taxable territory by using sample prototype hardware / test kits in a composite supply, where such testing is an ancillary supply, is the location of the service recipient as per Section 13(2) of the IGST Act. Provisions of Section 13(3)(a) of IGST Act do not apply separately for determining the place of supply for ancillary supply in such cases.”
Note :-Contracts only for testing the software embedded on hardware kits supplied by recipient in India – will not be export of Software/ Design services.
Ref 2019-TIOL -70 AAAR-GST.
IN THE MAHARASHTRA APPELLATE AUTHORITY FOR ADVANCE RULING GOODS AND SERVICES TAX
Subject:- Input Tax Credit on “Tie in a pipeline” used in transportation of natural gas from FSRU (considered as factory ) to clients under the category of Plant and Machinery not allowed in view of explanation (iii) to section 17 (6 ) and 17 (5) (d)
Issue before the AAR
Western Concessions Pvt Ltd (appellant) are engaged in supply of natural gas to their customers in India. Liquified natural gas (LNG) which is the input for natural gas is imported by ship for which they have their own jetty to dock the ship (tanker). They are setting up LNG re-gasification project. Re-gasification is a process of converting liquefied natural gas (LNG) at minus 162 degrees Centigrade temperature back to natural gas atmospheric temperature. The regasification project consists of two legs, namely –
- i) setting¬¬¬ up of infrastructure facility, i.e., jetty, on-shore receiving facility close to the jetty for enabling Floating Storage Re-gasification Unit (FSRU) to regasify the LNG; and
- ii) connecting the terminal with “Tie “ in pipeline with the cross-country gas pipeline to enable supply of re-gasified LNG to the customer .
In a lay man’s language, a Tie is a connector to a facility or, to other pipeline, or connecting together of different sections of a single pipeline. The applicant approached the AAR seeking clarification on eligibility for ITC on Tie-in pipeline as Plant and Machinery used to supply LNG to the ultimate customers
AAR observed that there are some ships which happen to be categorised as factories in the commercial world and, therefore, it was incorrect to infer that the FSRU is not a factory; that the pipeline could not exist in a vacuum without a factory; that the term pipelines outside the factory signifies that the pipeline is to transport some product from the factory to the end user; that the LNG re-gasified through the pipeline, which is outside the factory, therefore, the pipeline in the present case classifies as' pipeline laid outside the factory'; that the restriction on availment of ITC u/s 17(5)(C) which in our understanding should be explanation (iii) to Section 17 ( 6 )& 17(5)(d) is applicable herein and hence credit is disallowed.
Appeal to AAAR.
Held: The AAAR upheld the decision of AAR on same grounds that FSRU is a factory and the Tie in the 'pipeline is laid outside the factory premises' and accordingly attract the applicability of the exclusion clause i.e. clause (iii) of the Explanation to S.17(5)(c) (should read as 17 (6) ) and s.17(5)(d) of the CGST Act, 2017 - consequently, the tie-in pipeline under question will not be construed as a plant and machinery and hence the appellant will not be entitled to avail ITC of GST paid on goods and services used for construction of Tie-in pipelines, from the FSRU to the National Grid.
Transitional credit of Cesses in case of service providers having centralized registration, allowed.
Decision by Hon HC , Madras
Sutherland Global Services Private Ltd (SGSPL) Vs Asst Commissioner of CGST
In respect of Service Providers having Centralised Registration under the Finance Act 1994 , transitional Credit of Education Cess (EC) , Secondary and Higher Education Cess, (SHES) and Krishi Kalyan Cess (KKC) is allowed to be carried forward and utlised into GST regime through the TRAN-1 declaration.
Sutherland Global Services Private Ltd (SGSPL) Vs Asst Commissioner of CGST and Central Excise.
Hon HC , Madras held that even the Amendment Act 2018 did not restrict the “CENVAT CREDIT” to be transitioned in respect of cases covered under Section 140 ( 8 ) of the CGST Act 2017.
SGSPL is providing Information Technology Enabled Services (ITES) to its worldwide Customers. In the pre-GST era, the petitioner was Centrally registered as a service provider for all its units across India and was availing and utilizing credit on inputs, input Service and Capital Goods in respect of taxes,duties and Cess. SGSPL carried forward the credit availed under the erstwhile service tax regime as per Rule 117 of the CGST Rules-2017. Section 140 of the CGST Act 2017 provided that every person entitled to ITC under the old regime would submit the requisite declaration electronically in Form TRAN-1 within the specified date.
Section 140 (8) of the CGST Act 2017 provides that a person having centralized registration under the existing law shall be allowed to carry forward in his electronic ledger unutilized credit on the date of transition by furnishing the Return TRAN-1. Further it was provided that the respective credit will not be allowed to be carried forward except when the said amount is also admissible under CGST Act. By way of Explanation to Section 140 (1) thru specific duties and taxes were enumerated on which the credits could be carried forward. In the said explanation the Cesses Viz EC, SHEC, KKC are not specified and hence the credit against these cesses was rejected by the department. The rejection was challenged in the Hon HC, Madras. It was contended that Section 140 (8) of the CGST Act 2017 grants the person having centralized registration to carry forward the CENVAT CREDIT in his electronic ledger. EC, SHEC, KKC are credits and hence these can be credited, transited and utilized . For the purpose of C. Excise Act 1944 EC, SHEC, and KKC are credits and hence as per the explanation to Section 140 such amount of credit against EC, SHEC, and KKC would be eligible to be credited, transitioned and utilized. It was contended that section 140 (1) only delineates those circumstances /conditions under which credit availed may not be utilized and there is nothing thereunder, to militate against the availment under Section 140 ( 8). It was further contended that section140 (8) uses the word ‘CENVAT CREDIT” and not eligible duties and taxes. Therefore it becomes evident that the eligible taxes and duties is applicable only to credit sought to be taken after 1-7-2017 in respect of cesses under Section 140 (5).
Order:- the Hon. HC Madras, held that even the retrospective amendment by the CGST Amendment Act 2018 restricting the cesses to be transitioned is applicable only in respect of Section 140 (1) and has no effect in respect of section 140 (8) which allows a registered person having centralized registration under the erstwhile Service Tax regime. Such person can take the amount of “CENVAT CREDIT” carried forward in Return for June 2017.
Safari Retreats Pvt Ltd (SR) Vs CC -GST- Orissa. (SR) (Input Tax Credit allowed in respect of goods and services used in constructing immovable property intended to be used in providing taxable service by way of renting)
SR. are carrying on the business activity of constructing shopping malls for the purpose of letting out the same to numerous tenants and lessees. Their intention is not to sell the constructed property i.e. Mall, but to always rent the same after completion to various small and big traders and service providers. In construction of the mall, they used huge quantities of materials and services. Therefore, they have availed ITC on various inputs, input services and Capital goods for constructing the mall. SR had accumulated ITC of more than 34 Crores, which they were desirous of availing and utilizing the same to discharge and pay CGST and Orissa GTA on the rentals received. Therefore, they approached the Revenue authorities and informed them their intention to utilise the accumulated ITC for paying GST on the rent receivable.
SR was advised by Revenue to deposit the CGST and SGST collected on rents without using the accumulated Input credit in view of restrictions placed as per section 17(5)(d) and was warned of penal consequences if it did not do so, hence the writ petition was filed.
The provisions of Section 17 (5) (d) lay down that credit will not be available in respect of goods and services or both received by a taxable person for construction of immovable property (other than plant and machinery) on his own account including when such services or both are used in the course or furtherance of business.
Either parties argued the matter in detail. After hearing the matter ,the Hon High court of Orissa held that the very purpose of the Act is to make the uniform provision for levy collection of tax, intra state supply of goods and services both central or State and to prevent multi taxation and avoid cascading effect. The Court further held that while considering the provisions of Section 17(5)(d), the narrow construction of interpretation put forward by the Department is frustrating the very objective of the Act, inasmuch as the petitioner in that case has to pay huge amount without any basis. The High Court keeping in mind the language used by the Hon Supreme court in case of Eicher Motors Ltd 2002-TIOL-149-SC-CX-LB (supra), held that 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.
Now the department has filed appeal against the Hon Orissa High Court decision as reported on 2019-TIOL-489-SC-GST. It will be important decision as huge amount of credit is involved and becomes a cost to the business. It will be interesting to see as to what happens if the manufacturer also constructs his factory for producing taxable goods.
(Compiled by CA Aumkar S Gadgil)
Input tax credit is allowed only 20% or full? Analysis of the amendment to CGST Rules.
Ever since the inception of the Goods and Services Tax regime, there have bas been a notable unrest in the industry. Obvious enough it was, as the change in taxation structure was of a substantially high magnitude. Its been now over 2 years since the Goods and Services Tax Laws was introduced. There have been over 100’s of notifications and circulars issued, which have addressed variety of issues. It may be in relation to amending the law, it may be in relation rectifying some lacuna’s in the law or it may be in clarificatory nature. Thus, a phase of a “settled” GST regime is yet to see the light of day. It is reasonable to accept, a continuous wavy structure when it is a new structure, but by now the learning curve should have ideally been reached and the certain and concrete structure should be standing. This “X” factor has really missed to exist and thus the industry has been in some sort of a distress. Let us first analyze the actual process of transaction of supply of goods, tax collection and the passing off of ITC.
Technically speaking, the above is the actual mechanism of tax levy, collection and passing off the ITC. However, it is practically infeasible to have the all above on real time basis. Thus, there is a provision for “provisional ITC” as laid down in the provisions of section 16 of the CGST Act 2017. As a reason of this the ITC availability to the recipient is made on basis of invoices being received, goods or services being received, provisional consideration to the part of the taxes being collected by the supplier have been duly paid to the government and the returns have been filed. As envisaged under the provisions there was supposed to be a complete and integrated matching on basis of monthly returns filing. Also as per the originally mentioned provisions, it was understood that, in the event of a default on the part of return filing or tax payments by the relevant parties involved, an online intimation would be given which would lead to temporary holding back of ITC allowed on provisional basis. The originally laid down system would have proved highly effective to run the transactional flow as pictured above.
However due to some of the technical constraints the system of automation could not be placed fully and there got a gap created whereby the collection of tax, passing on and utilization of ITC. Besides this, there were several cases reported in the GST regime, where it was observed that there has been a bogus claim of ITC by forged documents or by way of passing of credits without actual collection. Also, in some cases the recipient has made a genuine claim of ITC, however the supplier has been a defaulter in making payment of taxes to the government. Ultimately there is a scenario that the industry is in anticipation of better process or tax collections and compliances and reduction of tax rates (in some cases), whereas on the other hand the government (Dept of tax), is looking out for full and complete tax collection in respect of supplies taking place and also passing off ITC only in case of genuine claims. As a part of perceived rightful operation of the process of tax collection and passing off ITC, the government has issued notification 49/2019 Central Tax, dated 9/10/2019. The relevant extract of the said notification is as under.
(..3. In the said rules, in rule 36, after sub-rule (3), the following sub-rule shall be inserted, namely:- “(4) Input tax credit to be availed by a registered person in respect of invoices or debit notes, the details of which have not been uploaded by the suppliers under sub-section (1) of section 37, shall not exceed 20 per cent. of the eligible credit available in respect of invoices or debit notes the details of which have been uploaded by the suppliers under sub-section (1) of section 37…..)
The notification speaks loud and clear regarding the availability of input tax credit for a specific tax period. Over here when we say availability, it means out of the eligible ITC in terms of section 16, how much ITC can be availed for a specific time period. The same can be explained as under. For a tax period, the Input tax credit can be availed in respect of those invoices or debit notes, the details of which have been furnished by the supplier. However, for the said tax period, the Input tax credit in respect of Invoices or debit notes, the details of which have not been uploaded by the suppliers, can be availed maximum up to 20% of the Input tax credit which was available in respect of those invoices or debit notes, the details of which have been uploaded by the supplier.
Eg: If for the month of October 2019, the total eligible (As per section 16 and not blocked as per section 17) ITC availed is Rs 2000. Now, out of the eligible ITC availed, the actual ITC as per supplier’s data appearing in GSTR 2A, for the month of October 2019 is Rs 1400, whereas the details of ITC not appearing in GSTR-2A is Rs 600. In such case, as per the amended rule the maximum ITC, that can be availed for the month of October 2019 would be (Rs 1400+ 20% of Rs 1400), ie (Rs 1400 + Rs 280) ie Rs 1680.
Ever since the inception of the law, there was a very clear idea in terms of the matching concept being the backbone of the GST system. That is to say that the recipient was supposed to get ITC only in respect of those inward supplies which have appeared in the GSTR-2A return of the recipient on the basis of the corresponding entry made by the supplier in his returns of outward supply (GSTR-1). Besides this, it was also necessary that the supplier is required to pay the GST in respect of such outward supply which he has reported in his GSTR-1 return. The system so set would have ensured that the tax in respect of a transaction has been duly received by the Government and then rightfully the ITC would be passed on to the recipient. However, there must be a completeness in this system. It would perhaps be difficult to see the system working holistically where all the stakeholders would not perform their roles as required by the law. Now with this introduced amendment there would be another set of challenges for the registered taxable persons. Firstly, they would need to ensure that they are correctly making the compliance of taxes and ensure that the supplier or the vendor has correctly paid the taxes and done his tax compliance. While this is what already understood with the introduction of GST laws. The notification now in fact gives a further endorsement to this that if the recipient wishes to enjoy hassle free availability of ITC he needs to do the above mentioned function as well. As mentioned in above illustration, if the entire amount of Rs 2000 would have appeared in GSTR-2A, the full ITC is available. Now that sounds a bit unrealistic in following scenario.
Eg: Supplier MrBhisham is a individual having turnover eligible for quarterly filing of GST return. Lets say for the month of July 2019, he has made a supply of services to OM Ltd. Also there is another supplier Q Ltd which has eligible turnover of monthly filing of GST returns. In such case if the GST amount on Invoice issued by MrBhisham is Rs 75,000 and the GST amount on invoice issued by Q Ltd is Rs 30,000. Thus for the month of July when the recipient, M Ltd would file the GST returns what would be the ITC eligibility position?
Assuming that Q Ltd has duly filed his GST return for the month of July 2019, the GST amount of Rs 30,000 would appear in GSTR-2A for the month of July 2019. However MrBhisham is not required to file GST returns on monthly basis, thus the GST amount in respect of his invoice of Rs 75,000, would not appear in GSTR-2A . Thus, at least for the month of July we would say that the maximum ITC which would be allowed would be (Rs 30,000 + 20% of Rs 30,000 ie Rs 6000) that is to say total ITC allowed would be Rs 36,000. MrBhisham may actually file his returns and the entire ITC in respect of supplies received from him can be availed, however, what would be important to note is that MrBhisham would file his GSTR1 returns on quarterly basis. Thus, OM Ltd would be able to see the ITC in respect of supplies received from MrBhisham only in the month of November 2019.
The major issue involved here is, every time when there would be an inward supply received from such a dealer, for whom the GSTR-1 filing is on quarterly basis, then for the time being the recipient of such supplies will have to limit his ITC (on basis of 20% as mentioned above). This would result into blockage of funds (Cash Flow) for the while. In the light of this, the introduction of restrictive availment of ITC, would really result into a troublesome activity for the recipients. Another issue is, if the supplier fails to file his return, the ITC entirely is remaining unavailable. As a result of this a vicious circle is created and which is proving to be a concerning matter. Now the thing is if the registered recipient is adhering to the amendment as per the notification, he would be susceptible to cash blockages as he would have to wait for the supplier (quarterly filer), to upload his returns. Owing to this, there has been some sort of unrest. The registered persons are now in a dilemma as to, whether he should take care of these temporary cash flow issues or to worry on the non-compliance by availing the entire ITC.
Now it is upon every business to see as to how they would be dealing with this issue. Major concern would be for the ones who have many suppliers who are supposed to file their returns on quarterly basis. Wishfully, there must be some change in this newly introduced modus operandi of ITC availment.
Type of supplies under GST
It is by now a well-known fact that the taxable event for the purpose of levy of GST is “supply”. The supply may be of goods or services or both. The taxability of goods or services or both under the GST regime is dependent on few factors, namely.
- a. If there is a supply taken place.
- b. If the supply is of goods or services.
- c. Rate of taxes applicable on such goods or services.
- d. Where such goods or services or both are not wholly or partially exempted.
Based on the above factors, it can be concluded as to what would be impact of taxability in case of specific supply of goods or services or both. However, if the provisions of the GST Laws are further referred to, one can understand that there are certain supplies, which have been defined and which are also relevant from the point of view of reporting in the GST returns and reconciliations. So, lets us try to understand and analyze, various types of supplies under the GST laws and reporting requirements. In respect of supplies being classified under exempted/nil rated/ non-taxable supplies and even in case of “no supply”, there is a specific need to quantify these transactions for every tax period. The reversal of common input tax credits would consider these supplies and their identification and quantification would be pivotal.
a. Taxable supplies: As defined under Section 2(108) of the CGST Act “taxable supply” means a supply of goods or services or both which is leviable to tax under this Act 2017.
Where supply of goods or services or both are liable to tax, and where the rate of tax has been mentioned in the CGST rate notification and where there is no specific exemption notification in respect of such goods or services or both, it shall be said that the said supplies can get classified as taxable supplies.
Eg: Supply of passenger transportation services by railways in first class or air-conditioned class.
b. Exempted supplies: As per Section 2(47) of the CGST Act 2017, “exempt supply” means supply of any goods or services or both which attracts nil rate of tax or which may be wholly exempt from tax under section 11, or under section 6 of the Integrated Goods and Services Tax Act, and includes non-taxable supply.
Supplies of goods or services, which have been exempted, either partially or completely by way of a specific exemption notification, are recognized as exempted supplies. Exempted supplies are by way of an exemption notification thus the basic nature of the goods or services is taxable, however for the time being or till the exemption is applicable if there is a time bound. As per the definition, the connotation of exempted supplies also includes non-taxable supplies.
Eg: Supply of passenger transport services by way of railways, in a class other than first class and airconditioned class, is exempted from GST.
c. Nil rated supplies:
Supplies of goods or services which have been mentioned in rate notification, however the rate of tax against is mentioned as “NIL” or “0”, supplies of goods or services are referred to as nil rated supplies.
d. Non-Taxable supplies: As per Section 2(78) of the CGST Act 2017, “non-taxable supply” means a supply of goods or services or both which is not leviable to tax under this Act or under the Integrated Goods and Services Tax Act.
Referring to provision of Section 9(2) of the CGST Act 2017(……. The central tax on the supply of petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas and aviation turbine fuel shall be levied with effect from such date as may be notified by the Government on the recommendations of the Council……). Thus, it can be said that the supplies on which the tax is yet to be levied would be classified as non-taxable supplies. The non-taxable supplies are envisaged under the “exempted supplies” as per the definition.
e. Non-GST supplies.
To be very precise what is called as a Non-GST supplies means supplies which are not liable for GST and are not envisaged under the purview of the CGST Act 2017. Referring to the provisions of Section 9(1) of the CGST Act 2017, (1) Subject to the provisions of sub-section (2), there shall be levied a tax called the central goods and services tax on all intra-State supplies of goods or services or both, except on the supply of alcoholic liquor for human consumption, on the value determined under section 15 and at such rates, not exceeding twenty per cent……). It would be pertinent to note that there is no definition of Non-GST supplies, however it has to be interpreted that the supplies which have been categorically excluded from the taxability, are regarded as “Non-GST supplies”.
f. No supplies:
Supplies such as “Bond to Bond transfers (first, “Out and Out supplies (A company in Mumbai purchases goods from UAE and sells to Malaysia), High sea sales (first transaction). By way of notification such supplies have been termed as “No supplies”. There is no such definition as no supplies, it has been interpreted as “No supplies”.
Statutory Updates under GST Law
(Compiled by CA Aumkar S Gadgil and Shri Abhinay Soman)
|Notification No and Date of Issue||Particulars|
|52/2019 – Central Tax||Seeks to extend the due date for furnishing FORM GSTR-1 for registered persons in Jammu and Kashmir having aggregate turnover of up to 1.5 crore rupees for the quarter July, 2019 to September, 2019|
|53/2019 – Central Tax||Seeks to extend the due date for furnishing of return in FORM GSTR-1 for registered persons in Jammu and Kashmir having aggregate turnover more than 1.5 crore rupees for the months of July, 2019 to September, 2019|
|54/2019 – Central Tax||Seeks to extend the due date for furnishing of return in FORM GSTR-3B for registered persons in Jammu and Kashmir for the months of July, 2019 to September, 2019|
|55/2019 – Central Tax||Seeks to extend the due date for furnishing of return in FORM GSTR-7 for registered persons in Jammu and Kashmir for the months of July, 2019 to September, 2019|
|56/2019-Central Tax||Seeks to carry out Seventh amendment (2019) in the CGST Rules, 2017. [Primarily related to Simplification of the Annual Return / Reconciliation Statement]|
|Circular No and Date of Issue||Particulars|
|126/45/2019-GST||Subject– Clarification on scope of the notification entry at item (id), related to job work, under heading 9988 of Notification No. 11/2017-Central Tax (Rate) dated 28-06-2017-reg.|
Disclaimer: The views provided above are on the basis of our understanding of the GST Laws, Rules and Regulations. The adjudicating or Judicial Authorities may or may not agree with the views expressed above.
CA Aumkar Surendra Prachi Gadgil