OCTOBER 24, 2018

By Vijay Kumar

Is tax a tolerance for the non-performance?

AS per Sl. No. 62 of the Table to Notification No. 12/2017- Central Tax (Rate), dated 28.06.2017,

Services provided by the Central Government, State Government, Union territory or local authority by way of tolerating non-performance of a contract for which consideration in the form of fines or liquidated damages is payable to the Central Government, State Government, Union territory or local authority under such contract.

are exempted from GST. This perhaps implies that such payments to other than Government are liable to GST.

In its FAQ on Government Services, the CBIC elaborately clarified:

Question 18: What is the significance of services provided by Government or a local authority by way of tolerating non-performance of a contract for which consideration in the form of fines or liquidated damages is payable to the Government or the local authority?

Answer: Non-performance of a contract or breach of contract is one of the conditions normally stipulated in the Government contracts for supply of goods or services. The agreement entered into between the parties stipulates that both the service provider and service recipient abide by the terms and conditions of the contract. In case any of the parties breach the contract for any reason including nonperformance of the contract, then such person is liable to pay damages in the form of fines or penalty to the other party. Non-performance of a contract is an activity or transaction which is treated as a supply of service and the person is deemed to have received the consideration in the form of fines or penalty and is, accordingly, required to pay tax on such amount. However non-performance of contract by the supplier of service in case of supplies to Government is covered under the exemption from payment of tax. Thus any consideration received by the Government from any person or supplier for non-performance of contract is exempted from tax. Illustration: Public Works Department of Karnataka entered into an agreement with M/s. ABC, a construction company for construction of office complex for certain amount of consideration. In the agreement dated 10.7.2017, it was agreed by both the parties that M/s. ABC shall complete the construction work and handover the project on or before 31.12.2017. It was further agreed that any breach of the terms of contract by either party would give right to the other party to claim for damages or penalty. Assuming that M/s. ABC does not complete the construction and handover the project by the specified date i.e., on or before 31.12.2017. As per the contract, the department asks for damages/penalty from M/s. ABC and threatened to go to the court if not paid. Assuming that M/s ABC has paid an amount of Rs. 10,00,000/- to the department for non-performance of contract. Such amount paid to department is exempted from payment of tax.

But other service providers do not have this benefit.

In these columns, on 23.05.2018, I noted,

Damages Liquidated?

You  buy a Railway ticket, you pay GST. When you cancel that ticket, the Railways charge you a cancellation fee. Are you supposed to pay GST on the cancellation fee? If yes, will the GST paid on the ticket in the beginning be refunded? You book a marriage hall and later better sense prevailed and you cancelled the marriage and the consequent hall. You enter into an agreement with a contractor to get some work done with a clause that if the work is not done within a stipulated time, you will collect liquidated damages. Are you supposed to pay GST on the liquidated damages?

Yes, according to a recent decision of the Maharashtra AAR reported in -  2018-TIOL-33-AAR-GST.

The AAR held that GST would be applicable on the Liquidated Damages.

The applicant was stating the hard truth and not indulging in wry humour when he stated:

-  There is no explicit agreement between the company and the contractor wherein the company is intending to supply service of tolerance of delay.

-  The delay is neither desired by the company nor by the contractor but to impress upon the contractor to adhere to the timelines, LD clauses are inserted.

As is expected, this case was taken to the Appellate Authority for Advance Ruling and that Authority recently in a 31 page order held, "we do not find any reason to interfere with the ruling given by AAR" - 2018-TIOL-14-AAAR-GST.

While discussing the AAR order, I had referred to an Australian Commissioner's Ruling. Mr. S. Thirumalai, a very knowledgeable tax expert (who was one of the speakers in our Mend and Amend programme) points out a decision of the Australian High Court in Commissioner of Taxation v Reliance Carpet Co Pty Limited. The case briefly as explained by the Australian Tax Office:

The vendor (taxpayer) entered into a contract of sale of commercial property for USD 2,975,000, with a deposit of 10%. The contract of sale was dated 10 January 2002 and was entered into consequent on the exercise of an option to purchase by the purchaser. Both the taxpayer and the purchaser were registered for GST.

The purchaser paid the deposit of USD 297,500 but failed to pay the balance of the purchase price by the settlement date of 10 July 2003.

On 11 July 2003, the taxpayer issued a rescission notice to the purchaser, requiring the purchaser to remedy its default within 14 days. The purchaser failed to remedy its default.

On or about 26 July 2003, the contract was rescinded and the deposit was forfeited to the taxpayer.

The taxpayer was assessed to GST on the forfeited deposit. The taxpayer objected and, following the disallowance of the objection, applied to the Administrative Appeals Tribunal (AAT) for a review of the objection decision (Reliance Carpet Co Pty Ltd and Commissioner of Taxation [2006] AATA 486).

The AAT found against the taxpayer and held that, upon execution of the contract and payment of the deposit by the purchaser, there was a taxable supply and GST was payable on the forfeited deposit.

The taxpayer appealed to the Full Federal Court (Reliance Carpet Company Pty Ltd v. Commissioner of Taxation [2007] FCAFC 99). In finding for the taxpayer, the Court decided:

-  there was no supply of 'interim' obligations at the time of entry into the contract or subsequently;

-  a supply did not take place at forfeiture as a result of the rescission of the contract; and

-  the Commissioner's argument that Division 99 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) deems there to have been a supply, based on the language of section 99-5, was not accepted.

The Commissioner appealed to the High Court. The High Court unanimously allowed the Commissioner's appeal, finding, as contended by the Commissioner, that a vendor of land makes a supply to a purchaser when a contract for sale is entered into and that the deposit paid by the purchaser is consideration for that supply where the deposit is forfeited.

Incidentally this was the FIRST GST case before the Australian High Court.

So, the Indian Authorities for Advance Ruling and Appeal are, after all, right if the Australian High Court decision is a criterion.

Should we also wait till the Supreme Court of India rules on this issue?

The Elephant Test: But do you see a supply and more so a taxable supply in liquidated damages? The Australian Courts follow a concept called the 'The Elephant Test' - it's hard to describe but we all know it when we see it; We really can't describe the elephant as the blind men tried to do, but we can definitely understand that there is an elephant when and if we see one. The hidden tax liability is something like that. In taxation, there is another test called the "The Duck Test" - if it looks like a duck, walks like a duck, swims like a duck and quacks like a duck - then it probably is a duck. The converse is, if it doesn't look like a duck, doesn't walk like a duck, doesn't swim like a duck and doesn't quack like a duck - then it probably isn't a duck. And if it looks like a duck and talks like a duck, it should be taxed like a duck.

The Flight not taken - GST: Suppose you miss your flight and the Airlines does not refund your fare, is the State entitled to GST on that flight not taken? - when no service was provided but some money was collected? Subsequent to the Reliance case, the Australian High Court decided this issue also in favour of the Government in COMMISSIONER OF TAXATION v QANTAS AIRWAYS LIMITED - [2012] HCA 41.

Qantas and its subsidiary Jetstar Airways Pty Limited ("Jetstar") provided domestic airline travel services. These airline travel services have variable fare rules and conditions of carriage. Not all passengers take the flight they book. Whether the fare the passenger has paid is refundable is determined by the applicable fare rules and conditions of carriage. Even if a refund can be claimed, not all passengers who have not taken the booked flight claim the refund. The Commissioner of Taxation assessed a GST liability on the fares received for flights not taken. The Administrative Appeals Tribunal affirmed the assessment. On appeal, the Full Court of the Federal Court held that as actual travel was the sole purpose of the transaction, there was no taxable supply if the travel does not occur. This meant a GST liability was not incurred. By special leave, the Commissioner appealed to the High Court of Australia. The High Court held, by majority, that Qantas made a taxable supply which attracted GST when it received fares whether or not the passenger took the flight that was booked. Flights were sold and bookings taken on the basis that Qantas would use its best endeavours to carry the passenger and baggage, having regard to the circumstances of the business operations of the airline. Consequently, even if the passenger did not actually travel, there was a taxable supply incurring GST liability and Qantas was liable to remit the GST received on fares for unclaimed flights to the Commissioner.

Is Lottery Goods? The Calcutta High Court recently answered this question in the context of GST. - 2018-TIOL-2882-HC-KOL-GST

The questions before the High Court were:

i)  Is lottery a 'goods' or an 'actionable claim'?

ii)  Can lottery be taxed under  Central Goods and Services Tax Act, 2017  and West Bengal Goods and Services Tax Act, 2017?

iii)  If so, is differential levy of tax permissible?

The High Court held:

i)  A lottery is an 'actionable claim' and goods or moveable property. 

ii)  Lotteries come within the scope and ambit of  CGST Act, 2017  and WB GST Act, 2017. Therefore, lottery can be taxed under the  CGST Act, 2017  and WB GST Act, 2017.

iii)  Differential levy of tax is permissible.

No GST Audit by Internal Auditor: The ICAI had in 2008 decided that under the Income Tax, internal auditor of an assesee, whether working with the organization or independently practising Chartered Accountant being an individual chartered accountant or a firm of chartered accountants, cannot be appointed as his Tax auditor (under the Income Tax Act, 1961).

The Council has now decided that based on the conflict in roles as statutory and internal auditor simultaneously, the bar on internal auditor of an entity to accept tax audit (under Income Tax Act, 1961) will also be applicable to GST Audit (under the Central Goods and Service Act, 2017).

GST Portal - A Nightmare: In a letter to the Chairman of the GST Council, the Ahilya Chamber of Commerce and Industry, Indore submitted:

-  It is now around 16 months since GST was first imposed in an extreme hurry without proper dry runs and without giving sufficient time to taxpayers to understand the hugely different new and complex system. The tax payer has not only been patiently waiting for the portal to get stabilized all these months but have been coercively made to pay late fees, interest and penalties for no fault of theirs but due to defective functioning of the portal.

-  Unfortunately, even after 16 months, portal is not stabilized and is turning into a nightmare for Tax payers and Tax consultant.

-  More than 1000 grievance tickets have been logged since October 2017 (Nearly one year) that mapping of GSTR -1 and GSTR - 2A is incorrect on portal.

-  We earnestly request you Sir, to take up the issues strongly with your IT team to understand all problems in details; take a "SHUTDOWN" of portal for 48 to 96 hours if necessary, fix all bugs, conduct exhaustive and vigorous testing of portal, resolve all tickets logged till date and make the system stake holder friendly.

But everything is fine: The FM tweeted,

Falsehood 3: "On GST he mentions that it is flawed and needs to be changed."

THE TRUTH: The country has become one market, all check-points have been abolished, inspectors have disappeared and the returns are now filed online and most assessments will be online. All States, including Congress ruled States have approved the model and the rates.

You know whom he is referring to.

GST on Pollution under Control: Recently the AAR, Goa held that the Activity of issuance of Pollution Under Control Certificate for vehicles issued by the applicant should be taxed @ 18% GST. - 2018-TIOL-217-AAR-GST

The Pollution Under Control Certificate is mandatory certificate as per the Motor Vehicle Act and issued only if the vehicles emission is in alignment with standard pollution norms and are not harmful to the environment.